McDonald's CEO: Chain will do 'just fine' with higher wages

McDonald's CEO Chris Kempczinski told investors during its Q4 earnings call Thursday that the company is doing "just fine" in the 29 states that have increased minimum wage rates beyond the federal level of $7.25. This comes on the heels of the reintroduction of the Raise the Wage Act and President Joe Biden’s indication that he will boost the federal minimum wage to $15 an hour by 2025.

Kempczinski's comments reflect a four-year analysis by a team of economists that found higher McDonald's wages in applicable markets have not led to closures, job loss or increased automation, according to MarketWatch. From 2016 to 2020, many McDonald’s restaurants paid slightly above the new minimum wage to retain employees.

The study also found the company passed those higher labor costs onto consumers by increasing the price of its signature Big Mac. Specifically, researchers estimated a 10% minimum wage increase led to a 1.4% increase in the price of a Big Mac. Per the research, customers did not eat significantly fewer Big Macs as a result of the price hike.

Kempczinski said McDonald's is able to balance between "judicious pricing on the menu … and productivity savings" to manage minimum wage increases. He pointed to Canada as an example, which increased its minimum wage by nearly 11% from 2017 to late 2019. Franchisees passed those costs onto the menu and "through pricing, through productivity."

"Our view is the minimum wage is most likely going to be increasing whether that's federally or at the state level as I referenced. And so long as it's done … in a staged way and in a way that is equitable for everybody, McDonald's will do just fine through that," he said.

Prices at McDonald's, which is almost 95% franchised in the U.S., are set by individual owner/operators, so passing higher labor costs onto customers is an effective way for them to be less impacted waves of wage increases. McDonald’s stopped its lobbying efforts against minimum wage increases in 2019.

Public sentiment is also leaning toward greater pay. A majority of Americans — Republicans, Democrats and Independents — either strongly or somewhat support a federal minimum wage increase, according to a recent survey from Public Agenda, USA Today and Ipsos Hidden Common Ground. This sentiment is even stronger now than it was in 2019, when 59% of Americans supported a higher minimum wage. The support for $15 an hour increases with younger demographics, according to AlixPartners research.

"While it’s picked up with the change in the administration at [the] federal level... it's been going on at the state level for the last several years," Kempczinski said during the Q4 call. "So... as this has been rolling into the states, we have seen and developed quite a bit of experience with how this works out."

Still, a higher-menu-price solution could be a challenge for independent restaurants navigating rising wages. Mom-and-pop operators don't have the scale and resources of McDonald's, and may need to increase prices more dramatically to offset new labor costs. The National Restaurant Association released a statement earlier this week arguing against raising the federal minimum wage during the COVID-19 crisis.

"The Raise the Wage Act imposes an impossible challenge for the restaurant industry … Our industry runs on a 3-5% pre-tax profit margin in a good year — during a pandemic is not the time to impose a triple-digit increase in labor costs," the association wrote.