4 Threats That Could Spell The End Of Cheap Fast Food
Is cheap fast food wrong?
For decades, it seemed like a good deal all around — diners got a quick, affordable hamburger at Carl’s Jr. or the Golden Arches, while teens earned the minimum wage, put away a little money for college, and learned responsibility.
Then the economy tanked, and more fast-food jobs were taken by adults. We started eating out more, too — the restaurant industry’s share of our food dollar soared from 25 cents in 1955 to 47 cents today, the National Restaurant Association reports. The number of people employed in restaurants also grew, to roughly 13.5 million.
Now, there’s opposition in many quarters to the cheap-labor model that restaurant chains have long used to deliver quick service and low-cost meals. The drive for a better standard of living for restaurant workers is clashing with restaurant owners’ needs to stay competitive, and diners’ love of a bargain.
The franchise business model essentially built America’s fast-food culture as we know it today, where it’s not unusual to see a McDonald's MCD +0.41%, Burger King, and Jack in the Box occupying three corners of the same busy intersection. Yet the franchise model has been especially targeted by unions, lawmakers, and regulators in recent months.
What are the threats to the cheap burger? Here’s a look at four recent developments that could change the restaurant landscape — and raise the price of eating out:
1. National labor activism — Workers walked out on strike and protested at fast-food restaurants in over 100 cities last week, as part of the Service Employees International Union (SEIU)’s growing campaign for a $15-an-hour national minimum wage.
In some states, this would double what restaurant owners have to pay minimum-wage workers. These protests have been picking up steam — there have been seven such national strike events over the past two years.
2. National minimum-wage laws — President Obama has been calling for a higher national minimum wage for years, most recently proposing that it be raised from the current $7.25 an hour to $10.10. Our national minimum wage hasn’t changed in seven years, and polls have consistently shown over 60% of voters agree it’s time for a hike.
Even a change to this more modest hike would raise the minimum wage in every state. Action on this issue could come soon: Currently, a 2013 House bill proposing a two-year plan to phase in a $10.10 minimum wage needs just a few more signatures to make it out of committee and to the House floor.
3. Changes in local laws — While the national minimum-wage debate drags on, some states and cities are taking matters into their own hands. One of the hottest fast-food battles is in Seattle, where a phased-in $15 minimum wage law was passed in June. The International Franchise Association is currently fighting a provision of the Seattle law that classifies franchised restaurants as big businesses, and thereby requires them to adopt the higher wage sooner than independently owned restaurants, due to their affiliation with a national chain.
Another major franchise controversy has broken out in California, where aproposed law would give more leeway to individual franchise owners to pay workers more or offer them additional benefits if they choose. The law weakens franchisors’ ability to terminate franchise contracts if local owners deviate from the national chain’s operating standards.
4. An unprecedented federal ruling — Franchise restaurants have also been singled out by the National Labor Relations Board. In a ruling this summer that sent shock waves through the franchise industry, the NLRB held that McDonald’s is a “joint employer” with its franchise owners, and could be held responsible for their hiring and firing practices.
This one’s a stunner, since the whole premise of franchising is that a company teaches franchise owners their system, and then basically leaves them alone to operate their local businesses independently. The International Franchise Association has said the NLRB’s ruling, should it be acted on by lawmakers, “puts the franchise business model at risk.”
Translation: This ruling — which flies in the face of decades of legal rulings that franchise owners should be treated as separate businesses from their franchisor — could spell the end of rapid growth forhot restaurant concepts. Most restaurants these days use franchising to grow quickly without needing a big mountain of capital for building new stores. We might see franchising fall out of favor and companies return to slower growth funded by the restaurant’s cash flow.
Fewer restaurants, of course, means less competition…and an environment in which prices might rise.
Here’s the problem with the NLRB ruling: No corporate McDonald’s executives are currently involved in reviewing resumes or deciding to layoff or fire workers at individual franchised stores. If McDonald’s is now to be legally on the hook for any hiring missteps a local owner makes, that’s a tricky situation for the Golden Arches.
Franchisors such as McDonald’s could charge more in fees to cover this new liability. At the least, they’d need to invest in additional training for their franchisees. Or — franchisees will shudder at this idea — franchisors might get more involved in franchise owners’ day-to-day hiring processes. But most franchise owners would object strenuously to any of these approaches.
Is it fair for franchised restaurants to have to play by different rules than independently owned ones? No, it’s not.
Do fast-food workers deserve higher pay for the relatively unskilled but repetitive and tiresome labor they render? After seven long years without a raise, they do. But raising wages — especially to a rate that would represent a 40% hike in some states — would be tough for many restaurant owners to absorb.
What could happen
Restaurants operate on razor-thin margins in most cases, so owners would have to make hard choices to cope with a drastically higher minimum wage. They might hire fewer workers, thereby taking the “fast” out of fast food — which is a big problem, because consumers want fast service.
The other option would be for restaurants to raise prices, which is always a tough decision in such a highly competitive sector. Or a bit of both could happen, higher prices and labor cutbacks.
In turn, diners might decide to eat out less, leading to more restaurant closures.
Days of wage hikes past
Of course, the restaurant industry has cried that the sky was falling when past minimum-wage hikes came in, too. But there’s no sign the industry has floundered since the last rate hike.
The attacks on the franchise model are likely an even bigger threat to our tradition of cheap, plentiful fast food, as so many restaurants at this point are franchised.
While Americans love to say they’re concerned about our country’s growing gap between rich and poor, do they care enough to pay more for that drive-through burger? We may soon find out.
Will one chain claim the high ground?
Here’s my forecast: Look for at least one smart chain that emphasizes positive social values — organic, locally sourced food, for instance — to get out in front of the minimum-wage trend now and pay workers more. Then, they’ll use it as a marketing angle with socially conscious diners to build customer loyalty. Driving more sales volume could help salve the sting of higher wages for restaurant owners.
It’s happened before, as when some restaurant chains began posting the calories in their menu items before a new law requiring they do so went into effect.
Starbucks SBUX -0.87% might be a likely candidate. They broke ground offering healthcare to part-timers, and more recently college scholarships to longtime employees. And, of course, they’re based in Seattle, which has been one of the epicenters of wage-hike activism.
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