The Magical World Where McDonald's Pays $15 an Hour? It's Australia
Even in countries with a high minimum wage, the golden arches manage to turn a profit. Here's how.
Jordan Weissmann
Aug 5 2013, 2:26 PM ET
Last week, fast-food workers around the United States yet again walked off the job to protest their low pay and demand a wage hike to $15 an hour, about double what many of them earn today. In doing so, they added another symbolic chapter to an eight-month-old campaign of one-day strikes that, so far, has yielded lots of news coverage, but not much in terms of tangible results.
So there's a certain irony that in Australia, where the minimum wage for full-time adult workers already comes out to about $14.50 an hour, McDonald's staffers were busy scoring an actual raise. On July 24, the country's Fair Work Commission approved a new labor agreement between the company and its employees guaranteeing them up to a 15 percent pay increase by 2017.
And here's the kicker: Many Australian McDonald's workers were already making more than the minimum to begin with.
The land down under is, of course, not the only high-wage country in the world where McDonald's does lucrative business. The company actually earns more revenue out of Europe than than it does from the United States. France, with its roughly $12.00 hourly minimum, has more than 1,200 locations. (Australia has about 900).
So how exactly do McDonald's and other chains manage to turn a profit abroad while paying an hourly wage their American workers can only fantasize about while picketing? Part of the answer, as you might expect, boils down to higher prices. Academic estimates have suggested that, worldwide, worker pay accounts for at least 45 percent of a Big Mac's cost. In the United States, industry analysts tend to peg the figure a bit lower -- labor might make up anywhere from about a quarter of all expenses at your average franchise to about a third.* But generally speaking, in countries where pay is higher, so is the cost of two all beef patties, as shown in the chart below by Princeton economist Orley Ashenfelter. Note Western Europe way up there in the upper-right hand corner, with its high McWages and high Big Mac prices.
That said, not every extra dollar of worker compensation seems to get passed onto the consumer. Again, take Australia. According to the The Economist, Aussies have paid anywhere from 6 cents to 70 cents extra for their Big Macs compared to Americans over the past two years, a 1 percent to 17 percent premium. If you were to simply double the cost of labor at your average U.S. Mickey D's and tack it onto the price of a sandwich, you'd expect customers to be paying at least a dollar more.
Why don't they?
To start, some Australians actually make less than the adult minimum wage. The country allows lower pay for teenagers, and the labor deal McDonald's struck with its employees currently pays 16-year-olds roughly US$8-an-hour, not altogether different from what they'd make in the states. In an email, Greg Bamber, a professor at Australia's Monash University who has studied labor relations in the country's fast food industry, told me that as a result, McDonald's relies heavily on young workers in Australia. It's a specific quirk of the country's wage system. But it goes to show that even in generally high-pay countries, restaurants try to save on labor where they can.
It's also possible that McDonald's keeps its prices down overseas by squeezing more productivity out of its workers. Researchers studying the impact of minimum wage increases on American fast food chains in the Deep South have foundthat while restaurants mostly cope by their raising prices, they also respond by handing their employees more responsibility. It stands to reason that in places like Europe and Australia, managers have found ways to get more mileage out of their staff as well.
Or if not, they've at least managed to replace a few of them with computers. As Michael Schaefer, an analyst with Euromonitor International, told me, fast food franchises in Europe have been some of the earliest adopters of touchscreen kiosks that let customers order without a cashier. As always, the peril of making employees more expensive is that machines become cheaper in comparison.
Finally, McDonald's has also helped its bottom line abroad by experimenting with higher margin menu items while trying to court more affluent customers. Way back in 1993, for instance, Australia became home to the first McCafe coffee shops, which sell highly profitable espresso drinks. During the last decade, meanwhile, the company gave its European restaurants a designer make-over and began offering more localized menus meant to draw a higher spending crowd.
So if President Obama waved a magic wand tomorrow and raised the minimum wage to $10 or $15, does this all mean that U.S. fast food chains would be able to cope? "Were that to happen overnight, it would be a hugely traumatic process," Schaefer told me. After all, virtually every fast food franchise in the country would have to rethink its business model as their profits evaporated. But as the international market shows, the models are out there. It would certainly mean more expensive burgers. It would almost definitely mean fewer workers, as restaurants found ways to streamline their staffs, either through better management or technology. And it might mean fewer chains catering to the bottom of the market.
But in some people's eyes, it might also be worth it.
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*Ron I'm Not Him Paul, president of the food industry consulting firm Technomic, told me that as a rule of thumb fast food franchises assume labor will make up 30-to-35 percent of their expenses. As Columbia Journalism Review's Ryan Chittum noted last week, McDonald' s reports that worker pay makes up about 30 percent of expenses at its corporate-owned restaurants. He also dug up a handy chart from Janney Capital Markets, which estimates that labor makes up 26 percent of all expenses for an average McDonald's franchisee.
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