You'll Never Guess Which Sector Could Be a Big Winner in the Minimum Wage Debate

The minimum wage debate in Seattle has ruffled the feathers of big business, but this sector could wind up coming out a big winner when all is said and done.

Jun 21, 2014 at 3:05PM

If you thought the Affordable Care Act, known better as Obamacare, was a touchy subject, then wait till you feast your eyes on the minimum wage debate unfolding in Seattle.

As a resident of the very outer suburbs of Seattle, I've been keeping a keen eye on the events as they've unfolded over the past couple of months, because what happens in Seattle could serve as a precursor for the rest of the country.

As you might imagine, the minimum wage debate has huge implications for workers and businesses throughout the country. Two weeks ago I weighed in with how the soon-to-be-phased-in law could be both a positive and a negative for businesses.

Images

Source: Grant Baldwin, Flickr.

The minimum wage debate bifurcation
In the plus column, the $15 minimum wage that was voted in unanimously by the Seattle City Council two weeks ago could instill a higher sense of pride in currently sub-$15 workers, creating a more cohesive team of workers for businesses and reducing turnover. Less turnover means less training, which can actually improve efficiency and save companies money over the long run.

Also, higher wages could mean the possibility of more disposable income for Seattle-based minimum wage workers. Since consumer spending is the basis for GDP growth in the U.S., this could wind up being great news for Seattle businesses.

However, I also saw plenty of paths the new minimum wage law may take Seattle's minimum wage workers and businesses that I wasn't particularly fond of. To begin with, a higher minimum wage could push prices up for all businesses, hurting nearly all levels of consumers and potentially deterring tourists from visiting the city.

The second point is that higher wages may just deter new businesses from setting up shop in Seattle altogether. Seattle, just like any major city, needs new and innovative businesses to drive job growth, and this new law may wind up having the opposite effect.

Most important, though, a $15 minimum wage for all workers, which is more than double the current federal minimum wage of $7.25 per hour, would likely kill the drive of most minimum wage workers to learn new skills that higher-paying businesses are looking for. Once again, it could reduce innovation, and that's a key intangible factor that'll help determine the ultimate success or failure of this law.

But what a deeper dive into this debate has shown me is that there could be a really sneaky winner hiding right under our noses.

This sector could be a big winner
Much of the minimum wage debate (at least in the mainstream media) in recent months has centered specifically around the fast-food industry and workers at restaurant chains like McDonald's (NYSE:MCD) that are itching to earn a living wage. On one hand you can't help but empathize with these workers, as a living wage should be available to all citizens willing to work hard for a living. On the other hand, simply handing out $15 per hour, more than double the federal average, could wreak havoc on fast-food costs and push prices at McDonald's and a number of other Seattle fast-food chains markedly higher. 

So my question is this:

Will consumers really opt to continue heading to McDonald's and other fast-food establishments when they can get higher-quality food and an entertaining experience for just a fraction more in price?

Without beating around the bush any longer, I'd surmise that casual-dining restaurants such as Applebee's, owned by DineEquity (NYSE:DIN), and Chili's Bar & Grill, owned by Brinker International (NYSE:EAT), could see an incredible surge in business within a few years created by the ensuing hike in the minimum wage.

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Source: Author. 

Now let's get a few things out of the way right off the bat. Fast-food does serve its purpose of providing fast and convenient food because, let's face it, we don't all have an hour to sit down and grab a bite to eat. Therefore, it's not as if a minimum wage phase-in hike to $15 is magically going to cripple the fast-food industry.

However, we also have to consider the starting point for our price basis when factoring in minimum wage price hikes. By comparison and perception, fast-food restaurants offer us a cheaper meal, which is often one of its greatest draws fast-food restaurants use to drive traffic into stores. However, an increasing minimum wage could make price increases in these traditional value strongholds very noticeable whereas price increase at casual-dining chains may not be as noticeable. If consumers are suddenly faced with the perceived sticker shock of rapidly rising meal prices at fast-food restaurants, they may be less likely to head to these establishments, which for a company like McDonald's would be bad news. You might refer to this as a shrinking price gap of perception, but I call it a viable reason that casual dining could shine. 

I've also considered in my analysis the opinion of those who oppose this law who have claimed that they would refuse to tip a server who's suddenly making $15 per hour. Having worked in the service industry for a decade, and as a customer who regularly dines out at casual-dining restaurants (code for "can't cook"!), I understand that one of the greatest objections over and/or dilemmas of dining out for consumers is doling out a tip to their server. Personally, having worked for near minimum wage previously in a service sector job, I enjoy tipping well; however, that's not the case for some consumers.

A minimum wage boost may wind up alleviating this burden for certain consumers and encourage them to dine out more often with the assumption that they simply don't have to tip as much. In other words, you can equate this to paying $15 for an item and $5 for shipping or $20 for an item and free shipping. Although the cost is the same, the allure of "free" shipping often draws in consumers. By a similar token, the ability to get a free pass on tipping might encourage consumers to flock into Seattle-based casual food chains.

Presto Table Top

Presto tablet for Applebee's. Source: E la Carte.

Perhaps another overlooked point here is that both Applebee's and Chili's are on the precipice of introducing consumer-facing tablets in their restaurants. While not targeted at replacing servers, these tablets should help facilitate drink, appetizer, and dessert orders while also expediting customers' ability to pay their bill. The end result should be a more satisfied customer and more rapid table turnover, which is better for both parent companies, DineEquity and Brinker International.

Yet even more so, the improved efficiencies created by these tablets can be used to offset the higher costs of paying their employees, allowing Applebee's, Chili's, and other casual-dining chains to keep their prices relatively unchanged compared to fast-food restaurants, whose prices could soar.

Time will tell the tale
Of course, as I said two weeks ago, these opinions are merely based on my perspective as a Seattle suburbanite and the fact that I've worked on both ends of the pay scale. The truth of the matter is that only time is going to determine if any of my projections come true and whether the $15 minimum wage phase-in is going to be good or bad for business.

What I can say for certain is that with a $10.10-per-hour federal minimum wage proposal stalled out in Congress, the eyes of the nation are squarely on Seattle. What happens in the immediate future could shape minimum wage rules in multiple states throughout the country and have critical business and socioeconomic indications.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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