The latest pressure to raise employee wages arrives at an inopportune time for McDonald's (NYSE:MCD) and its legion of franchisees. Fast-casual chains like Chipotle Mexican Grill are increasingly threatening the company's business, and all is not well within the kingdom of the Golden Arches. Relations are tense between the corporate base and its independently owned restaurants, with franchisees dissatisfied by low margins on an increasingly complex menu, an abundance of promotional expenditures, and renovation costs.
A corporate-dictated increase of wages at McDonald's restaurants would almost certainly put additional burdens on franchisees. The company could offer owner-operators a financial cushion during a transitional period, but this strategy might prove damaging to McDonald's financials and its stock.
These complications, and others, give McDonald's and its franchisees plenty of incentive to take a wait-and-see approach on the wage issue, but the company might also have strong reasons to get out in front of the mounting controversy and raise employee pay ahead of anything federal or state governments might do.
The federal minimum wage was last raised in 2009 -- putting it at $7.25 per hour -- and in the State of the Union address in January, President Obama called on Congress to raise the national minimum wage to $10.10 an hour. Twenty-three states and the District of Columbia have minimum wages higher than the federal minimum.
Let's look at what McDonald's might gain by getting out in front of a federal mandate and raising wages for its employees.
Proactive wage raises would be good for McDonald's image
It's no secret that McDonald's has an image problem. The company faces an increasingly health-conscious public, and controversies surrounding its employment practices often generate more press than additions to its menu or modifications on its advertising and branding fronts. The wage issue is bound to receive increasing political attention, and it's heating up quickly at the state level, with 34 states in the last year considering bills that would raise the minimum wage within their borders.
McDonald's' employment structure and brand visibility guarantee it will remain at the center of this heated debate, and ongoing protests targeting the company have the potential to do lasting damage to its image.
Chipotle has scored major victories against McDonald's on the battlefield of public opinion by presenting a socially and environmentally conscious image that gels with current cultural trends and sentiments. The fast-casual chain and its peers are succeeding, in part, because they recognize that the choice between restaurants is largely determined by how a given experience makes the consumer feel, physically and psychologically.
Becoming a proactive force in the push to raise the nation's wages would allow McDonald's to add an important, albeit partially symbolic, asset to its vast real estate holdings: the moral high ground.
Better employees could improve customer satisfaction
Recent declines in same-store sales would seem to give franchisees an obvious and well-founded reason to bristle at the prospect of headquarters dictating a wage increase. McDonald's said August sales at its global locations dipped 3.7%, with sales at U.S. stores down 2.8%. This isn't the type of announcement that would typically be followed by an increase in low-level employee wages, but the question of why sales are falling is central when examining whether such a move would be valuable.
Last year saw a McDonald's executive acknowledge "broken" customer service, with rude employees being cited as a major reason for customer dissatisfaction. A recent report from the American Consumer Satisfaction Index ranking the company dead last in customer satisfaction suggests the company has a ways to go. .
Offering higher wages should allow the company to attract and retain better employees. Making this move ahead of government schedules would not only enable the fast-food chain to strengthen its workforce relative to competitors, it would fundamentally change what it means to work at a McDonald's.
Raising wages at its own pace could allow McDonald's to better manage price increases
There's been no shortage of studies that aim to model what wage hikes at McDonald's would mean for its menu prices or bottom line. Many have made projections based on isolated increases to the company's labor costs, without accounting for possible cost increases earlier in the food production chain or inflation that might occur as a result of a new U.S. minimum wage. Accurately modeling the effects of a significant federal minimum wage increase on a store's pricing involves variables that can be fairly described as unknowable.
However, without major advances in automation, increases in employee wages can reasonably be expected to correlate with increased menu pricing. Raising its prices ahead of state and national curves could afford McDonald's better positioning as it sets its own pace. The company's offerings are decidedly price-sensitive, and smaller, staggered increases to menu costs would look better to consumers than big jumps.
With American wealth inequality at record levels, and the wage debate receiving increasing media focus, it's reasonable to expect a significant increase to the national minimum wage within the next several years. If such an increase can be taken as likely within the next five years, McDonald's corporate management should weigh whether the short-term expenses and difficulties created by raising employee wages prior to government mandates outweigh the potential benefits of such a move. Facing identity issues that threaten its long-term future, McDonald's has surprisingly strong incentives to raise its wages ahead of government action.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. 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.