Fast-food workers’ strike demanding higher wages seems to be gaining momentum. Almost two years after workers reportedly staged their first strike in New York City, hundreds of fast food workers in more than 100 U.S. cities staged protests through strikes, rallies and acts of civil disobedience, reportedly, leading to some arrests.
The workers joined labor and union activists seeking wages of $15 an hour, more than double the current $7.25 and the right to union representation without reprisal. These strikes come at a time when U.S. Democrats are highlighting income inequality as a dominant problem ahead of this year's mid-term elections and are pushing to raise the federal minimum wage.
The minimum wage has been a factor of considerable debate in the recent past. In fact, President Obama sought to raise the federal minimum wage to $10.10 per hour from the current $7.25 in 2015. However, this directive is reportedly being intensely debated against by the Republicans in Congress.
However, a number of states have minimum wages above the federal minimum, which include 23 states and Washington, DC. In fact, Seattle and Chicago have raised their respective minimum wages to $15 and $13 an hour, which will be implemented by 2018, while San Diego raised it to $11.50 effective by 2017.
With the U.S. fast food industry already facing the brunt of intensifying competition and traffic slowdown due to tepid consumer spending trends, we list three stocks that would be most affected by the strikes:
McDonald's Corp. (MCD) has around 35,683 restaurants in 119 countries as of Jun 30, 2014. Among these, more than 80% were licensed to franchisees. Most of these franchises reportedly pay around $7-$8 per hour to their employees and the company stated that it does not set wages for its franchisees in the U.S.
Despite wages, which were far below $15 per hour, for the six months ended Jun 30, 2014, McDonald's paid 26% of its revenues as payroll & employee benefits. We believe McDonald's will be most affected by a hike in the minimum wage due to its elevated employee compensation expenses.
Another restaurant stock likely to face the brunt is Kentucky-based Yum! Brands, Inc. (YUM). For the first half of 2014, the company paid almost 19% of its revenues to payroll and employee benefits. Like McDonald's, almost 80% of Yum! Brands’ restaurants are franchised.
A hike in the minimum wage would make it difficult for Yum! Brands to reap profits. This might prompt big price increases on their menus, which in turn might lead to lower comps. For, Yum! Brands, which is already facing dwindling comps in its U.S. segment for the past few quarters, this is really bad news.
Among other fast food chains, The Wendy's Company (WEN), which operated 6,545 restaurants as of Jun 29, will also be significantly impacted by these strikes. The company’s restaurant labor costs accounted for 28% of its total sales in the second quarter of 2014 and will rise if the minimum wage is raised by the authorities.
We believe a $15 an hour wage would lead to a price hike at many fast-food chains. For the U.S. restaurant sector which is already battling increased commodity prices, a raise in wages will further stifle margins. This might force these operators to raise menu prices exorbitantly. If a wage hike takes place, restaurants might also cut down on the workforce and invest more in technology.
For an industry which depends more on students, immigrants and casual workers and less on skilled labor, a minimum wage hike might add to their already compounding problems.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment