'Labor Organizer' Pretends That McDonald's Has 'Plenty of Money' to Raise Wages to $15/Hr.

It must be nice to blithely talk about how you would spend somebody else's money without thinking through the consequences.

Kendall Fells, the organizing director of Fast Food Forward in New York, told Yahoo Finance's Bernice Napatch at its Daily Ticker site that "McDonald’s made $5.5 billion in profits and there’s plenty of money to pay the workers who work there and new hires without firing anyone.” As was the case with a Detroit protester's claim that "McDonald’s made like $500 billion last year" noted earlier today, Napatch did not challenge Fells's fallacy. After the jump, we'll come up with a better estimate showing that the company and its franchisees couldn't pay their employees $15 an hour even if they burned through all of their current restaurant operating income in trying.

Here's enough of the Yahoo story to provide context (bolds are mine):

McDonald’s Should Share Billions in Profits With Fast Food Workers: Labor Organizer

When 250,000 people marched on the National Mall 50 years ago they demanded among other things a hike in the minimum wage from $1.25 to $2 an hour. Today thousands of fast food workers are holding a one-day strike in cities across the country, demanding a wage of $15 an hour. That's equivalent to the $2 an hour protestors called for in 1963, after adjusting for inflation.

Organizers report that workers have walked off their jobs in 60 U.S. cities today, including New York City where 500 striking workers took over a McDonald's at 5th Avenue near 34th Street, and the Empire State Building.

In addition to a $15-an-hour wage, protestors want the right to form a union without intimidation or retaliation from their employer.

Kendall Fells, the organizing director of Fast Food Forward, which is overseeing the New York City campaign, tells The Daily Ticker that these workers are not demanding that Congress raise the minimum wage but that the companies that employ them pay a living wage.

“You used to have fast-food industry where teenagers were trying to get Jordans and jeans,” says Fells, referring to the high-top sneakers named for basketball great Michael Jordan. "Now the average age is 28 years old. Most of the workers are women…They have children. They have rent. They need clothing. They need shelter.” But they usually make the minimum wage of $7.25 when they need more than $20 an hour in New York City just to survive, says Fells.

He blames fast food companies for these low wages and says they can afford to pay workers more. “These corporations are seeing record profits…with CEOs receiving record pay,” says Fells. “It’s time to put the brakes on that gravy train…and share those profits with the people who made them,” says Fells. "McDonald’s (MCD) made $5.5 billion in profits and there’s plenty of money to pay the workers who work there and new hires without firing anyone.”

Three quick questions.

First, even if it's true (if so, where's the list?), why should we be impressed that workers walked off the job at maybe one or two McDonald's (and some other brands') locations in 60 cities? We're talking 200 stores at most. Three years ago, McDonald's alone had 14,000 stores.

Second, why ask for something ("the right to form a union without intimidation or retaliation from their employer") which is already the law, and pretend that it isn't?

Third, why is Fells only going for $15 an hour if you need $20 an hour in New York City "just to survive"? The answer to this question is probably: Because he would just be starting if he ever got the $15.

Now to the matter of profits.

The $5.5 billion Fells cited is McDonald's worldwide profit, of which, based on store counts, at least half probably comes from outside the U.S. Does Fells really want to take the company's profits from the rest of the world just so U.S. workers can get paid? How imperialistic of him.

Since a likely answer to that question is that the poor man doesn't know what he doesn't know, I'll help him out.

Based on reviewing the company's 2012 Form 10-K filed with the SEC, gross restaurant sales at company and franchised stores in the U.S. were $35.6 billion last year. McDonald's reports that its operating margin before interest and taxes for its own stores was 17.8% of sales. Assuming that franchisees' experience is the same (it could very well be lower, but that's not disclosed, as the franchisees are separate entities), all McDonald's stores had operating income last year of $$6.34 billion ($35.6 billion times .178).

McDonald's web site says it still has about 14,000 stores nationwide. The average store apparently has a total of 50 employees. Once you spread the $6.34 billion around over roughly 700,000 U.S. restaurant employees (14,000 times 50) averaging 1,500 hours per year, that would enable the company and its franchisees to pay each employee another $6.04 per hour ($6.34 billion divided by 700,000, further divided by 1,500). Right?

No. At best, the company and its franchisees might be able to pay out 85% of that, after factoring in the employer's side of Social Security and Medicare (7.65% by itself), unemployment compensation taxes, worker's comp premiums or taxes, and other employement-related costs tied to earnings. So that $6.04 per hour is now $5.13 (or less).

That $5.13 would far short of the $7.75 an hour needed to get every employee to $15 an hour, even after you factor in the employees earning more than the minimum and each crew's management membership — naively assuming that they wouldn't demand to earn more than the $15 per hour the newbies are getting.

So the money isn't there, Kendall, even if you take every dollar of operating income. Sorry.

And look who would suffer if the company and its franchisees consumed all of their current operating income.

The franchisees would receive nothing on their investment, which, according to Entrpreneur Magazine, is currently between $1.03 million and $2.18 million. In many cases, franchisees borrow a significant portion of that initial investment, and would have no money to pay the banks. McDonald's Corp. would have no money to pay its own interest costs, which amounted to over $500 million last year.

McDonald's shareholders would be badly scarred, as the company, which had increased its dividend in each of the past 36 years, would have far lower cash flow. (In theory, it would still make money on the franchisees, assuming any of them could afford to stay in business.)

Oh, and there's one other entity which would get far less: Government. Remember, we had McDonald's and its franchisees pay out all of their operating income before interest and taxes. Zero profit means zero income taxes. McDonald's and its franchisees pay billions in federal, state, and local income taxes every year. Because of "progressive" taxation, relatively little of that would be made up from income taxes on the employees' higher wages. (Again in theory, government might collect some taxes on McDonald's income from franchising, again assuming any of the franchises could afford to stay in business.)

Many will certinaly note that entities not getting paid will insist on trying to get paid. The only remaning outlet for doing that would be raising prices, which would make McDonald's less competitive, lead to lower revenue, and cause operating profit to go down.

And of course, if all of this happened, McDonald's stock would head into penny-stock land, and most of its current market value of over $90 billion would evaporate. That damage would amount to roughly 15 times the annual operating profit at all U.S. company and franchised stores.

The first commenter at the Yahoo article has a suggestion: "If it's so easy to pay more, the union should create a new business to compete with Mcdonalds that pays their employees twice what Mcdonalds pays, and see how that works out for them."

Exactly. So get on with it, Mr. Fells.

Cross-posted at BizzyBlog.com.

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