Wednesday, August 19, 2015

$15 an hour meets basic math.

$15 an hour!!! $15 an hour!!! $15 an hour!!!  That is the new mantra for restaurant workers.  Well, time to splash some cold reality on their fantasies as Wendy's CEO Emil Brolick and other company officers told the truth about what will happen if the minimum wage is raised to $15 an hour on a recent quarterly earnings conference call:

Todd A. Penegor - Chief Financial Officer & Senior Vice President
Yeah. So we continue to see pressure on wages two fronts, one is minimum wages at the state level continue to increase, and as there is a war on talent to make sure that we're competitive in certain markets. So we've made some adjustments to that starting wage in certain markets. The impact hasn't been material at the moment, but we continue to look at initiatives on how we do work to offset any impact to future wage inflation through technology initiatives, whether that's customer self-order kiosks, whether that's automating more in the back of the house in the restaurant, and you'll see a lot more coming on that front later this year from us.

John William Ivankoe - JPMorgan Securities LLC
Okay, understood. I mean there is obviously a lot of discussion of wage prices, wage costs and that there would be increased pricing at the franchise level to offset those increased wages, especially in markets like New York for example that are going to see some very severe increases in wage costs. So can you juxtapose the franchisees' desire and/or need to take pricing at the store level with what sounds like an increased focus overall for the brand on value, can those two things be achieved simultaneously?

Emil J. Brolick - President, Chief Executive Officer & Director
Yeah, John, this is Emil. And our franchisees, I find them to be very astute business people, and they have a great sense of their trade areas where their restaurants are and a great I think understanding of what the competitive environment is in terms of their capacity to price. I think the reality is that what you will see in like some of these markets, the New Yorks, where there is these very significant increases, is that they will be – our franchisee will slightly likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and any other cost reduction opportunities, not just price. There are some people out there who naively say that these wages can simply be passed along in terms of price increases. I don't think that the average franchisee believes that, and there will have to be other consequences, which is why we have pointed out that unfortunately we believe the some of these increases will clearly end up hurting the people that they are intended to help.

The Wall Street Journal editorial page said: 

Last week the Wendy’s Company did a public service on its second-quarter earnings call by explaining how mandated wage hikes will lead to fewer jobs for the low-skill workers that progressives claim to be helping.

First, CFO Todd Penegor talked about the pressure to pay higher wages and said that “we continue to look at initiatives and how we work to offset any impacts of future wage inflation through technology initiatives, whether that’s customer self-order kiosks, whether that’s automating more in the back of the house in the restaurant. And you’ll see a lot more coming on that front later this year from us.”

So the company will now use machines to do jobs that used to be done by people who have become too expensive to employ. We keep hearing that these minimum-wage laws benefit restaurant workers. But since many will no longer be working in restaurants at all, the reasonable conclusion is that the activist campaigns to raise the minimum wage are mainly intended to benefit the unions that back them.

On last week’s call with securities analysts, Wendy’s CEO Emil Brolick was asked how the franchisees who own and operate Wendy’s locations could raise prices to offset the higher wage costs in places like New York. He replied that “our franchisees will likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and any other cost reduction opportunities, not just price. You know there are some people out there who naively say that these wages can simply be passed along in terms of price increases. I don’t think that the average franchisee believes that.”

Mr. Brolick elaborated that “we believe that some of these increases will clearly end up hurting the people that they are intended to help. And we continue to believe that one of the great opportunities you have in a business like ours is that an entry-level person, in a very short period of time, can rise to become a manager in a restaurant, and have an income above the median household income in the United States of America.”

We see here again the vast gulf between progressive claims and progressive reality. Remember last year when McDonald’s then-CEO Don Thompson, amid protests over entry-level wages, agreed to President Obama’s idea for a wage hike? Then came news of new automation plans at McDonald’s. Just what struggling low-wage workers need. Another law that prices them out of a job. Editorial

Numbers? It is all about the numbers.  Forbes crunched some numbers:

It’s also true that Wendy’s can’t actually cover from profits the sort of minimum wage rises being talked about in this manner. Profits are around $120 million for a year, there’s 37,000 employees, if they all work 2,000 hours a year then the profits can pay for a $1.62 an hour pay rise and no more. Sure, play around with those numbers. But there really isn’t enough money in those profits to cover a $7.25 to $15 an hour rise, is there?

So, it will be shorter hours, more automation and some measure of price rises: all of which will reduce the amount of labor employed.

Yep, as we’ve been saying, a rise in the minimum wage leads to job losses. Rest of column.

Sno' nuff. 


Messick said...

The SEIU has long been a major backer of this. Even if they only get a fraction of the fast food employees in cities like NY and Seattle on their membership rolls, they'll view it as a victory regardless of widespread layoffs.

Anonymous said...

Well, this leaves out that McDonald's CEO received $9.5 million before profits which was down $4 million from the previous year. And, that decrease was largely because of the threat of making public the portion of executive compensation to wages paid to the workers.

Wendy's top 2 executives received $21 million in 2011.

I can't think why the profit figure quoted is so low given the gross profits of $500 million after operating expenses in 2011 which have continued to increase ( source Vanguard).

Even with the threat of exposure, some CEOs seem to have a very inflated view of their actual worth especially when they aren't working " 2000 hours". And, I'm more than a little shocked by how much they " need" to maintain their lifestyle.

But, the bottom line to me is that , like the kings and czars in days of old, they care more about themselves than the economic health of the country or its people and imagine they could live as they do without those who wipe their royal asses or fight their royal wars to keep their asses on the throne.

Speaking of royals, the Queen of England manages on less income per year!

Anonymous said...

As a matter of empirical data --laying aside ideology-- living wage laws are a wash at best. The most common pattern is three people make a little more money, while two people lose their jobs entirely. That ratio will get worse as technology progresses.

That said ... eventually 75% of the jobs in our economy will be automated. And there's no reason to believe that, this time, lots of new human jobs will rise to replace them. Sure, Amazon-style drones may make it cheaper to deliver artisanal bread from your online store, but we'll never need even 1% as many artisanal bakers as delivery truck drivers.

So we're going to have to start thinking about what a guaranteed minimum income would look like. That, or start stocking up on food and bullets for when the riots start.

Anonymous said...

I agree with 8:51, in a free market economy the government should force businesses to only pay a certain percentage to management above what regular workers get. They don't need that much money and vacation and hardly do any kind of manual labor.

Anonymous said...

8:50 AM said, "the government should force businesses to only pay a certain percentage to management above what regular workers get."

If you believe that you probably need to move to a communist country. The government there will force you to do whatever they want to.

We were all born ignorant but, you have to work at being stupid.

pittpanther said...

KF, do you believe that automation would not happen without the most recent raises in minimum wages? They will automate as soon as the technology is feasible, whether minimum wage is $1 or $100.

Don't become a stooge of the corporate CEOs, parroting their lies. They will automate no matter what the minimum wage is, but will of course do and say whatever they need to, to hold down wages until that upcoming automation is possible.

Anonymous said...

Executive compensation at national companies such as McDonalds's and Wendy's is a story in itself. I am the owner of a franchise restaurant and have 30 years in the business. I make a comfortable living, but have invested (risked) my resources for land, building, equipment, etc. I treat my employees with respect and expect that in return. Finding good employees, however, is becoming harder with this new generation. Too many just want a paycheck and show up when they feel like it, not when they are scheduled. I hear the grumblings about $15 per hour. I pay a minimum starting of $9 with raises that top out about $13.50. My top manager makes $35,000. That's all I can afford. Margins in the restaurant industry are small and there has to be volume. I was recently approached by two very new hires. They said if they couldn't get $15 an hour they didn't want the job. My response: "Have a nice day. We'll mail your final (only) check."

Anonymous said...

Every time the minimum wage is established or raised, these types holler that it will reduce jobs or ruin profits. Every time.

It's like the stories about "we can't hire enough people in ___ field." Then you take a look, and it means "we can't hire them for what we paid them in 1996."

If companies won't pay a living wage, then even people working 40+ hours a week will need gov't assistance. I.e., support from the taxpayers. While, as noted above, the corporation and its officers continue to make record profits.

Messick said...

But who defines "living wage"?
The Feds? State legislatures? The SEIU or another union?

Anonymous said...

"the government should force businesses to only pay a certain percentage to management above what regular workers get"

The easier and time-tested way to achieve something along these lines is raising rates in high brackets. America somehow managed to succeed in the 1940s and 1950s without CEOs etc. making such inflated salaries. Reagan's tax cuts made it possible. Bring back Eisenhower's tax brackets.

Kingfish said...

And the unemployment rate among black youths is what?

Anonymous said...

Correctional Prison Facility LPN in Mississippi $24,000 ($11.54/hr)
Long Term Care LPN in Mississippi $28,000 ($13.47/hr)
Medical Assistant Family Practice in Mississippi $30,000 ($14.43/hr)
CNA Medical Surgical in Mississippi $28,000 ($13.47/hr)
Correctional Officer (less than $12.00/hr)
Bank Teller in MS ($11-$12/hr)
Pre-School Teacher in MS (avg $10-$12/hr)


Anonymous said...

I was unaware that CEO pay had anything to do with what a CEO needs to support a certain lifestyle. I thought it had more to do with what you have to pay, in the marketplace, to someone who has the skills to run a particular company. Same thing with all levels of employees in a company. You pay what you have to in order to produce good returns and attract and retain the employees you need to produce those returns. Labor is a commodity.

Anonymous said...

It would be much easier to communicate with a robot than the typical fast food worker.

Anonymous said...

@10:07 - You are exactly right!

Anonymous said...

If you could pass along the wage increase to customers, only two things happen; you lose customers or your customers pay the higher price but demand more pay from their employers and the increase is fed through the entire market. Overtime, the fast food worker is at the bottom of the pay scale regardless if they make $8.00/hr or $80.00 per hour. The whole minimum wage push is a vote buying scheme for ignorant voters who are unable to logically follow basic economic concepts.

Anonymous said...

10:58 My thoughts exactly...

A minimum wage employee with minimum wage skill sets will have a minimum wage lifestyle. The bottom will rise to meet them.

If you go from $7.25 to $15.00, what happens to the men and women who were already making $15.00? Is their pay going to double as well? No, they're going to find themselves living a minimum wage lifestyle.

A minimum wage increase is a pay cut for everyone else.

Kingfish said...

The Eisenhower rates were loaded with tax deductions. Go look up effective tax rate. Reagan came in and lowered the tax rates but removed many of the deductions.

Bill Dees said...

@pittpanther is right. In addition, if raising wages is going to reduce employment, why don't we REDUCE the minimum wage to $1.25, and then we can have full employment!! Happy days are here again, the sky above is clear agian...

Bill Dees said...

@pittpanther is right. In addition, if raising wages is going to reduce employment, why don't we REDUCE the minimum wage to $1.25, and then we can have full employment!! Happy days are here again, the sky above is clear agian...

pittpanther said...

10:04, instead of complaining about the "burger flipper" trying to get more, why aren't you appalled at some the salaries you quoted? Nurses and other health care workers earning less than $30,000? And these are jobs that require at least a 4 year college degree. We ought to be ashamed of ourselves, offering salaries like this with a straight face. I'm actually surprised that anyone bothers to work in this state for such low salaries - I would be on the first thing moving for a major city, where I could get a real salary and support my family.

Anonymous said...

Right on 10:04! Minimum wage jobs are minimum skill jobs with no real consequence of failure. Paying the moron at [enter name of fast food joint here] $15 an hour is an insult to self-motivated individuals who have a desire to succeed. There are plenty of job training programs which can propel you into a career. Get some training, find a work ethic and EARN your way above minimum wage - I'm so tired of this handout mentality...

Anonymous said...


do you really support the notion that, in a supposedly free country, a person should lose the majority of their income to the government... the more successful people... the achievers and doers... the smarter and more driven.

Currently, nearly half of my income is lost to some sort of government tax or fee. Half of the U.S. does not pay federal income taxes, yet federal tax revenues are the highest they have ever been. The minimum wage worker will never start a new business, like they did in the past. Middle class innovation will not just stay stagnant, it will decline.

All of this is due to motivation, the lack of. The notions that the successful should be punished for being successful and the path to success is mined with fees, red tape, taxes, bureaucracy, etc. has not been balanced. The progressive march that this country has been on since the early 1900s is mired with corruptive practices and aborted constitutional ideas because they are justified by the successes.

Instead of liberty and justice for all, we improved liberty for those who didn't have it while removing portions for the ones that did. The U.S. does not support liberty and justice for all, it's just changes of protected classes.

Avery Wiseman said...

If you think about it $15/hr is really an arbitrary amount and it's not that much money. That being the case, consider how much happier the lives of minimum wage employees would be if we set the rate at $100/hr. They'd be able to spend way more money and, thus, grow the economy. Everybody wins! Time to make me king of this place.

Anonymous said...

@2:48 - I am appalled at the low wages those workers get. My point was that the burger flippers feel that they are "entitled" to wages higher than many people that really WORK.

Anonymous said...

I just don't believe the theory that they are going to start lowering hours, but at the same time his franchisees are great business people. No matter what the minimum wage is a business is there to make profit. A reasonable business is always going to try to lower the number of workers or hours needed to the lowest because the business is not there to employ people, but rather its sole purpose is to be profitable. So any reasonable business has already lowered the number of employees and/or hours to the minimum to make the most profit anyway. Raising the employees pay should not make an employer lower hours or employees if the employer is reasonable to begin with. Moreover, this is not the first time in history that the minimum wage has been raised, and there is no corresponding data to support such a claim.

Anonymous said...

Raising the employees pay should not make an employer lower hours or employees if the employer is reasonable to begin with.

You are a lame brain. Do you think lame brain that $6 or $7 is "reasonable" for a Big Mac? Just the sandwich? So what will the "reasonable" employers do when no one is purchasing their unreasonably priced offerings?

Just give up. Capitulate. YOU ARE CLUELESS.

... and there is no corresponding data to support such a claim.

Earth-to-lame brain, Earth-to-lame brain. HOW MANY jobs did the AutoWorker's Unions help automate through robotics with their "reasonable' wage and benefits demands?

Watch For It said...

Will the (you) progressives ever realize it's none of their (your) damned business what company executives make? The income equality crowd are running a needle through that record.

Secondly, there is no such thing (at this time) as 'a living wage law', so quit referring to it. You might as well be referring to an abortion industry as 'Planned Parenthood'.

Lastly; If you are intelligent enough to pull up to a lighted menu board, press the brake, look at some pictures and tell a speaker what you want to eat, then you're probably intelligent enough to press a couple of 'select now' buttons that will transfer your hunger choices to a machine that puts your order in a sack at the second window.

Anonymous said...

Can some of you folks talk about this and other economic subjects without resorting to name-calling?

Anonymous said...

Just an observation, but the "business math" in articles like the one quoted by KF always seem to be wrong. The Forbes blurb indicates Wendy's profit is 120 millio and they have 37,000, so the profit will support a raise of $1.62 _*for each employee_*. This average is meaningless because it assumes that every one of the 37,000 employees would require a raise to $15.00 an hour. Clearly incorrect. There some number of these employees who are salaried and some number who already make $15.00 or more, so they would not count in a $15.00 minimum wage situation.

About the only thing that can be determined from the info in the Forbes piece is that about 7742 workers who currently make $7.25 an hour could be paid $15.00 an hour, assuming they all work exactly 2000 hours annually, or that about 15,482,870 manhours could be increased from $7.25 to $15.00, assuming it were a prudent business decision to use every penny of profit to do it : $120,000,000 / $7.75 (additional per hour) = 15,483,871 (hours) / 2000 (hours) = 7742 workers with the raise (and that's just the pure math - once the additional percentage-based "government payments," like unemployment, etc. get figured into it, the 7742 number will decrease).

Such a scenario - using all profit to increase worker wages - has several negative effects, including a now-profitless company and the fact that now, the company has an additional $120,000,000 in wage costs that it must make in subsequent years.

Moreover, the article does not indicate whether those 37,000 workers are employed by Wendy's, the corporation, or the total employed by both the corp and franchises. The profit of the corp is not the profit of the franchises. Obviously, each franchise's profit is different and once that is figured into the mix, things get really complicated. Even if it were prudent business for the corp to subsidize franchise employee raises (it isn't), there is no effective way to implement such a subsidy, but even if there were, it still brings about the problem of a profitless company with a $120,000,000 increase in costs.

And then, consider the reason for the increase - ostensibly, it is to provide the "lowest rung" workers with the ability to afford the basics of life - food, shelter, etc. Why not force providers of such things to reduce their prices? If reasonable shelter now costs, for example, $600.00 a month, which would require 40 hours at 15.00 an hour to pay for, why not force the providers of that shelter to charge only $300.00 per month. That way, you could reduce the $15.00 an hour minimum to $13.25 (15.00 * 172 = 2580.00 - 300.00 = 2280 / 172 = 13.25 and hour). Similarly, if you force food sellers to price food so as to save minimum wage workers another $300 a month, you could reduce the minimum wage required to $11.50 (similar math).

But what if it were discovered that the minimum wage workers were buying "extras" - unlimited data plans on their phones, cable TV, recreational expenses be it booze or drugs to going out to eat, clothing beyond the most reasonably-priced, cars beyond the absolute minimum of reliable transportation (or in areas with ready public transportation, having a vehicle at all), etc.? Should those workers be forced to give that up, or, should the providers be forced to reduce prices so as to be able lower the minimum wage?

And then, what about the minimum wage workers at the groceries, etc., whose employers are not only forced to increase their own employee wages, but also forced to reduce prices to subsidize the employees of others?

See, once you start forcing one price/wage model on certain sectors, things get complicated and then, untenable, fast because as any competent businessperson can tell you, whether they run a mom-n-pop or they are Warren Buffett, basic math will rule out all sorts of pie-in-the-sky notions that pure emotion might make seem a noble idea.

Anonymous said...

If this thread were a war of attrition, I'd be the first to declare 8:15 the victor.

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