Who Can Withstand the 'Unhappy Meal' Strike?

 | Aug 30, 2013 | 10:30 AM EDT
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The "Unhappy Meal" fast-food-worker strike is gaining momentum. This isn't surprising, as it is getting increasingly difficult to get by on wages of $7 per hour, at least in the U.S. (It would work in China or Africa.)

It is not news that real wages have been declining for the bottom 95%. The chart below illustrates that a generational trend of reduced wages is -- as one would expect -- coexisting with a generational trend of increasing corporate profitability. Ironically, only the great recession interrupted the trend in wage declines -- but the trend then resumed, along with increased joblessness. Sigh.

Corporate Profits vs. Wages as Percentage of GDP, 2000-2012
Source: U.S. Bureau of Economic Analysis

It's no surprise that wage earners are going to eventually want a share of the wealth being created at the corporate level. The strikers are asking for a real raise, in fact. The minimum wage, when adjusted for inflation, peaked at about $10 -- so the bottom rung is far worse off now than it was 40 years ago. Worst-case scenario, they'll probably want to get back to even at $10.

Real Value of Federal Minimum Wage vs. Nominal Value, 1938-2010
Source: U.S. Labor Department and Bureau of Labor Statistics

For management, the question is whether to acquiesce to the demands and, if so, what the company can afford. For us shareholders, a similar question arises: To what extent margins will be impacted by increases in compensation? We want to know who can most absorb it, and who should be avoided.

The table below represents an attempt to analyze the landscape. The 136 publicly traded restaurant companies are sorted by sales per employee and profitability, which is the starting point for understanding "affordability" of labor.

Profitability and Sales per Employee, Select Restaurant Companies
Source: FactSet

The key thing to understand is that restaurant operators employ huge numbers of people, so the room to maneuver is often not large. For instance, Yum! Brands (YUM) employs a half-million people and generates only $26,000 of sales per person. They cannot afford an average wage of $31,000 a year! (Obviously these numbers are skewed by the large employment in China, but you get the point.)

McDonald's (MCD) sales per employee is only $62,000, a function of the large base of corporate-owned stores. Most McDonald's restaurant employees would need to be paid this raise by the franchisees.

In contrast, Sonic (SONC) has a small corporate staff, with all employment pushed out to the franchisees, so their financials look amazing. Naturally, then, this company would be a target for franchisees to demand a royalty reduction to "share the pain" of any labor-cost increase.

In general, restaurant businesses are highly profitable, and that makes them a target for employee strikes. Take a look at the column that shows operating earnings before interest, taxes, depreciation and amortization. That is a good-looking industry.

But, again, the sales-per-employee number that generates those profits leaves less maneuvering room. My expectation is that many operators will offer token raises in an effort to reduce the agitation level. The companies at the bottom of this list are most at risk if that happens. Due to the wage and corporate profit trends I cited earlier, however, I think we are in for an extended period of general labor strife, not unlike what occurred in the first half of the 20th century.

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