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McDonalds: The Price of Falling Asleep

By Shlomo  Maital


McDonalds, the $87 b. global fast food chain, is in trouble.  The world has changed and its senior management team missed the bus.  The price for this is heavy.  The newly appointed CEO Steve Easterbrook, an accountant, will have to deal with slumping sales and falling stock price.    For years consumers have been opting for healthier food.  McDonalds simply failed to meet or recognize the trend.

   Here is how Bloomberg Businessweek describes McDonalds’ decline under its previous CEO:     “The rocky two-and-a-half-year tenure of Don Thompson, Mr Easterbrook’s predecessor, was marked by flagging sales as the company’s key low-income customers continued to struggle in the wake of the financial crisis. It also coincided with the rise of upmarket burger chains such as Five Guys and Smashburger, and the explosive growth of fast-casual restaurants such as Chipotle.      …. Last year, McDonald’s recorded its first annual decline in global same-store sales in a dozen years.   The US, where McDonald’s is the target of criticism for its contribution to the obesity epidemic and wage inequality, is not its only tough market. Operations in Germany, Japan, Russia and China are also struggling.   Consumers are no longer interested in food that is simply fast — they need to be convinced that it is, among other things, healthy, fresh and natural.”

    McDonalds is an exceptionally arrogant organization, I am told.  The global economic downturn began early in 2008; McDonalds could have seen that its customers would be pinched and less able to dine out.  The trend toward healthy fresh fast food has been ongoing for years;  Wendy’s and Subway have leveraged it with great success.   People simply get tired of the same Big Mac. 

   To me, McDonalds proves a core dilemma in management.  McDonalds has great operational discipline in its franchises; it has to, to survive.  But the same discipline destroys creativity, flexibility and innovation.  Somehow, McDonalds has to revive its agility, its ideation,  without ruining its fabled discipline and cost management. 

     Let’s see if Steve Easterbrook, who played cricket in a British private school, will adopt a strategy that isn’t precisely “cricket”.     




 Raise the Minimum Wage — Now!

By Shlomo  Maital

         Mcdonalds workers

   America and Israel both have a chronic poverty problem.  President Obama now speaks of “a relentlessly growing deficit of opportunity” in the U.S.   In Israel, three end-of-year poverty reports reveal a bitter picture of hungry children, a fifth of the population under the poverty line and persisting lack of mobility across income classes.    Most distressing is the working poor.  Many of those in poverty, in America and in Israel, are hard-working, with jobs. But they still can’t make a living, because they are not paid living wages.

   A simple solution?  Raise the minimum wage.   Economist disagree on this.  Some studies show it would hurt employment and actually hurt the working poor. Some studies show it would help.  And of course, you can use econometrics and statistics to show anything you wish.

   Two Princeton Univ. researchers, Alan B. Krueger and David Card,  found a ‘natural experiment’ that helped resolve this issue.  Some 20 years ago, notes Annie Lowrey in her New York Times column, during the 1990/1 recession,  New Jersey raised its minimum wage to $5.05 an hour, from $4.25, while neighboring Pennsylvania chose not to.  Card and Krueger surveyed fast-food restaurants along the NJ-Penn. Border and surveyed them twice, during 11 months, to see how many they employed.  Economic theory says, when labor gets more expensive, you buy less.  But to their surprise, there was no change in employment in the N.J. restaurants, relative to the Pennsylvania ones.  Low-wage work went up in price, but demand for it stayed the same.  McDonalds workers today earn $7.25 an hour, the federal minimum.  Their real wage has gone down since 1992. 

    Despite this study, economists still disagree.  A survey shows that a third of economists thinks raising the minimum wage to $9/hr. would make it harder for low-skilled workers to get a job, a third thinks it wouldn’t, and a quarter don’t have a clue.  So – forget the economists. Do the right thing.  Listen to Card and Krueger.  Raise the minimum wage to $10.  It’s the right thing to do.   

  For the 9 months ending Sept. 30/2013, McDonalds had $21 b. in worldwide revenue,  $6.6 b. in operating profit and $4.2 b. in net income.  Yes, that’s a 20% net margin!   They can afford a small rise in the minimum wage.   And don’t let them tell you they will fire any workers as a result. 

* D. Card, A. B. Krueger, “Minimum wages and employment: a case study of the fast food industry in NJ and Pennsylvania”,  NBER working paper, no. 4509, Oct. 1993.

You Are Subsidizing McDonald’s – Why?

By Shlomo Maital

     Big Mac

  You may be unaware, but – Huffington Post (Oct. 15) informs us, citing a study by the National Employment Law Project (NELP), that “Taxpayers are shelling out $1.2 billion a year to help pay workers at McDonald’s”. 

   McDonald’s is a highly profitable company, with 2012 revenues of $27.6 b. and net income (profit) of $5.5 b.   Why should taxpayers subsidize McDonald’s workers? 

   And it’s not only McDonald’s.  The government subsidizes the entire fast food industry to the tune of  about $3.8 billion per year, according to a a study by University of California-Berkeley and University of Illinois at Urbana-Champaign.

    How does this work?  McDonald’s Wendy’s, KFC and other companies pay very low wages, close to minimum wage.  Workers then apply for public assistance, and receive food stamps.  They can survive on McDonald’s jobs, only if they get help from the government.  McDonald’s can pay rock bottom wages only because their workers are on food stamps – a program that costs the US about $78 b. a year.   Half of food industry workers are on public assistance, compared with one worker in four for the whole US economy.  According to the experts, “in many cases, it’s not just teenagers working fast food jobs for some extra cash. These low-wage workers are often older — and in many cases are the breadwinners for their families.”

   Fast food companies say they operate on slim margins. Really?  $5 b. in profit on $28 b. in revenue?   About 18 per cent net margin?    SLIM?????  That $1.2 b. subsidy goes directly to the shareholders’ pockets.

   How could this be fixed?  Raise the minimum wage.  Make companies pay living wages.      

   McDonald’s says it provides hundreds of thousands of jobs.   This is true – however, the jobs are largely part-time, low-paying and even though those who have such a job are employed, hence not part of the unemployment statistics, they struggle to make a living. 

   Add that $3.8 b. fast-food subsidy to the enormous costs that fast food impose on health care, through obesity, diabetes, etc., and you have a strange system in which our taxpayer money is used to subsidize an industry that causes health problems that use even more taxpayer money. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital