Are there reasons to be skeptical about who, in fact, took to the streets in front of McDonald's (MCD) and airports across the country on Tuesday? Yes, as Fight for $15 reportedly busses people in who don't work in low-wage industries to help protest. But the reality is that there are tons of workers in low-wage industries such as restaurants and retail taking part in these protests in the hopes of earning a liveable wage for their families.
It's this populist outcry that should concern investors in retail and restaurants. Each sector has built their business models -- and vast shareholder wealth -- through the years on the backs of paying people absurdly low hourly wages while selling cheaply made stuff.
Look at off-price retailer TJ Maxx (TJX) . The company's very business model is predicated on finding incredibly discounted closeout merchandise that is put on racks by people making close to the minimum wage. If the minimum wage rises, it undermines a key plank in the investment thesis for TJ Maxx.
In the fourth quarter, TJ Maxx already estimates earnings will be hurt by a whopping 3% due to investments in employee wages. In years' past when the issue wasn't as front and center (and there was no Twitter to get the message out there with regard to worker rights) that 3% would have been plowed into: (1) structural business investments to set up the company for long-term success; (2) lower product prices for consumers in the hopes of driving more sales; and (3) share repurchases that could support the stock. So clearly the investment dynamics are changing.
And all of this will come to a head starting in 2017 for many companies.
-- Last September, the State of New York approved a measure to increase the minimum wage for employees of fast-food chain restaurants to $15 an hour over the next few years. The law gradually raises the minimum wage to $15 in New York City by the end of 2018. On Long Island and in Westchester County, the wage would rise to $15 by the end of 2021. The minimum wage only would rise to $12.50 in the rest of the state by 2020, with further increases tied to inflation and other economic indicators.
-- Earlier this year, California Gov. Jerry Brown signed a law raising the state's minimum wage to $15 by 2022. The statewide minimum wage will increase from $10 to $10.50 an hour on Jan. 1, 2017, then to $11 an hour on Jan. 1, 2018. From there it will increase by $1 annually until reaching $15 an hour on Jan. 1, 2022.
-- This past election, voters in Washington State passed a bill that will hike the minimum wage to at least $13.50 an hour by 2020.
These looming wage increases could have a profound impact across retail and restaurants. According to a study by Purdue University's School of Hospitality and Tourism Management, 1.54 million people working in food preparation and serving related occupations make at or below the federal minimum wage of $7.25 per hour. Raising their hourly wages to $15 -- a 107% increase -- would cause prices to rise an estimated 4.3%. That means a $3.99 Big Mac would cost around $4.16, and an average fast-food meal costing $7.00 would go up in price to $7.31.
If fast-food workers received $22 per hour (an epic 203% pay raise) -- which is the average wage for Americans in the private industry, according to the Bureau of Labor Statistics -- restaurant prices would rise 25%.
Although some price increases for a strong brand are often the Holy Grail for earnings, these` types of minimum wage-driven exorbitant hikes will likely cause consumers to adjust their spending. That may be further fueled by restaurants and retailers being forced to take quality out of their products or service experiences to offset higher worker wages. In turn, that will likely cause a re-rating for even the best-in-class players in their respective spaces.
In the end, the Fight for $15 -- while controversial -- certainly highlights real risks to many businesses as we enter 2017. Pay attention now, or you will probably be served up a side of losses later.