What McDonald’s minimum wage raise says about fast-food franchise future

For Tom Locke, his tipping point on staff wages came back in March, during a conversation with a tired store manager, Heidi, in Coventry Township just outside Akron, Ohio.

Earlier that week, the McDonald’s location she managed for his family business, TomTreyCo, had seen a record-breaking $18,000 in sales in a single day, but as he sat talking with her at a booth, Locke realized that despite her decade-long dedication to his business, staffing shortages at the tail-end of the Covid-19 pandemic were really taking a toll. 

She described working a 12-hour shift, sleeping three hours in her car rather than driving the half hour home, followed by a further full day on her feet. “I could see the stress in Heidi’s face,” Locke recalled recently. And so he decided to make a change at the 45 McDonald’s locations that form part of his franchise business in towns and cities across Pennsylvania, West Virginia and northeastern Ohio — he raised workers’ wages.

The most junior staff would earn a minimum of $13 an hour, and for managers that would move up to $20 an hour, well above what other local competitors were offering. 

“We were in a pretty strong financial position,” Locke said of the April decision, made after consultations with his senior team and an extensive review of models examining the cost and margin implications. “I felt if at any time we were able to do this, increase all of our associates’ pay, it would be now.” he said.

Pay levels for fast-food workers have come under significant scrutiny in the past decade, with help from pro-labor policymakers and well-organized advocacy groups like ‘Fight for 15,’ which argues for a $15 per hour minimum wage.

McDonald’s, perhaps more than any brand, has been caught in the center of that criticism and controversy, even though its franchise model means the vast majority of restaurant locations are actually operated by independent franchisees, like Locke’s TomTreyCo, rather than the franchisor — McDonald’s itself. But thanks to the intensely interwoven nature of the relationship between franchisor and franchisee, a decision to raise wages on either side of the franchise equation can have complex implications. 

In May, McDonald’s, just months after other fractious disputes with franchisees over tuition programs and technology fee payments, announced that workers at McDonald’s 650 company-owned locations will see pay raises of an average of 10% by the end of June — entry-level employees will make $11 to $17 per hour, and shift managers will make $15 to $20 an hour, based on location. The company says that means the average wage for employees at company-owned restaurants will be $15 per hour by 2024.

While the wage increases only take effect at the locations that McDonald’s corporation owns and operates, the company encouraged franchisees that manage the 13,000 or so other restaurants to do the same for their roughly 800,000 employees, provoking anger and consternation among some franchise owners. The fast-food giant franchises 95% of its U.S. restaurants.

McDonald’s is among restaurant chains to emerge from the pandemic in a strong financial position, similar to Chipotle, which recently raised wages — as well as in its case, menu prices by 4%. And it has been trying to send a message of financial support to independent restaurant operators.

In a recent interview at the CNBC Evolve Global Summit, McDonald’s CEO Chris Kempczinski said the company’s decision to inject roughly $1 billion of liquidity into its system earlier this year after the worst of the pandemic had passed — and on top of several years of balance sheet growth in the U.S. — was part of an effort to move the franchisee mindset away from worrying about, “am I going to be able to pay, you know, my mortgage or pay my loan that’s due this month? … it’s this mindset switch from being, you know, one of defensive to really being much more aggressive.”

While he didn’t want to comment on a raised federal minimum wage, the McDonald’s CEO said, “there’s no doubt that $7.25 in this day and age is not what you should be paying or need to be paying to be competitive in the marketplace. … wages are going up because the economy is strong.”

Labor experts say McDonald’s move will pressure its franchisees.

“This will create a lot of public pressure on on franchisees to do the same thing,” said Laura Padin, a senior staff attorney at labor advocacy group the National Employment Law Project. ”When that campaign started in 2011 or 2012,” said Padin, in reference to “Fight for 15,” a $15 minimum wage was, “considered this ‘pie in the sky’ type of goal.”

The recent McDonald’s announcement is, Padin insists, proof of its efficacy. ”That companies themselves are taking that initiative just shows you how much the movement has changed the narrative around what an acceptable minimum wage should be,” she said. 

The franchise industry has made its position clear — wage floors and ceilings should be set by individual restaurant operators. “Franchisees are best situated to make wage decisions in their local communities,” said Matt Hauer, senior vice president of government relations at the International Franchise Association. He highlighted the cost differentials between high-priced metropolitan zip codes and more rural locations. 

The current focus on wage levels, he says, comes courtesy of a “union-driven campaign” to achieve specific organizational or political outcomes by persuading the public that the franchise business model is in fact a corporate one. In terms of public perception, he says, this is designed to “turn a company like McDonald’s, or Dunkin Donuts, or Hilton Hotels, into one company rather than a collection of lots of small businesses doing business under a common brand.” 

The McDonald’s corporate view catches franchisees in the crosshairs of a battle being fought with massive competitors on a broader low-wage worker landscape.

“I think what’s happening is that you’re seeing that a great economy is very helpful to growing employee wages. And I think many of the changes that are happening from a wage standpoint are happening because of companies like McDonald’s needing to compete for the best talent,” Kempczinski said. “When you have Walmart and Amazon, Target … all moving to $15, certainly that’s a talent pool that we’re competing with.”

Among the workers arguing for higher wages, a distinction between McDonald’s corporate or franchisee can feel semantic. 

“We don’t care about whether or not we work at a franchise or a corporate store,” says Cristian Cardona, a 21-year-old who began working at a McDonald’s-operated restaurant in Orlando three years ago. “We all wear the McDonald’s uniform, and we all deserve a living wage.” 

Cardona was first employed at $9.25 an hour, only a dollar more than the minimum wage in Florida at the time. Then after a year he became a manager and moved up to $11, before McDonald’s recently moved him to $13. “If McDonald’s corporate can control how franchises make their Big Macs and how they market, I know that they can figure out how to pay every single worker a living wage of at least $15.” he said.

For Locke, the franchise operator in Ohio, the introduction of higher wages was ultimately a business decision more than a moral one. “I’ll be honest with you,” he said during a recent phone interview. “If there wasn’t a huge shortage of labor, we might not have taken the action.” 

At the start of the year, Locke had scaled down his menu choices, helping his margins, but he was still struggling with staffing shortages. Every month around 250 employees would leave and the same number need training. In the restaurant industry, turnover of over 100% is common.

“We were just a virtual hamster on the hamster wheel; we weren’t going anywhere,” he says. “The hardest part is hiring, retaining and training great people.”

But since his pay rise, introduced independently of the McDonald’s announcement the following month, retention levels have shot up. 

To offset the higher costs, he did raise prices slightly, but thinks customers “expected” this, since his team publicly communicated the higher wages for its workers. “It’s a long-term look at the business versus a very short-term look at the business,” Locke said. “I think it’s a much better business model.”

That’s an approach that shows agreement rather than friction between McDonald’s corporate and independent owners and echoes the McDonald’s CEO view.

“We’re going to be transparent … We are absolutely going to be making decisions for the long term so, let’s not get caught up in the short term here and now,” Kempczinski told CNBC.