How Minimum Wage Increases Affect Some Franchises

It started in Seattle, overtook California, and it seems to be imminently-nationwide phenomenon: the $15 minimum wage. And while economic data out of Sea-Tac airport and the Seattle metro area is showing that it’s probably not the massive economic catastrophe that some predicted, there are definitely some sectors that are seeing challenges in the near future as wage floors rise. Many of those sectors are prime territory for franchises — the most obvious of all, fast food, or otherwise known as quick-service restaurants (QSRs).

McJobs and McWages

The QSR sector is one of the most competitive in the food industries, with slim margins. The average McDonalds runs about a 6% profit margin; Papa Johns is 9%…on the other hand, the average Blimpies just barely lands in the black at 1%, and the average Quizno’s runs a 0% profit margin. Yep, signing up to Quizno’s is basically flipping a coin where one side means insolvency.

Keeping in mind that McDonalds’ typical labor cost is 20% of its gross income, and the vast majority of those employees work for the minimum wage, if the wage floor rises to any meaningful degree, the profitability of running a McDonalds franchise is going to start to compare unfavorably to Quizno’s. The same logic applies to any and every franchise that relies on a plethora of quick-to-train, high-turnover minimum-wage employees in their workforce.

Riding the Minimum Wage Wave

Some will come back with the “new economics” logic that says “won’t the people making all that new minimum wage money be able to spend a little more to buy your burgers, then?” But that’s not how it works — because McDonalds, Subway, and similar QSRs have spent millions of marketing dollars over the last decades establishing themselves as the cheap, fast option. To try to sell their audience on the kind of across-the-board price increase they would need to make to stay pleasantly profitable would be a tough gig.

That doesn’t mean the “new economics” reasoning is flawed, however — it’s just not likely to benefit McDonalds and their direct competition. It totally will benefit franchises that are offering products and services geared toward college students, young families, and in fact anyone in the lower half or so of wage earners, as a raise in the wage floor will see a ‘ripple effect’ nudging wages upward for a good number of people.

Franchises That Benefit From a Higher Minimum Wage

The easiest way to benefit from that ripple is to sell to the people who are enjoying their increased wage and/or avoid having minimum-wage employees. Home-based, single-employee franchises such as home inspection services, cleaning, and senior care services that hire over-minimum-wage employees are great franchise opportunities in the new economy; find one that sells to the newly-$15/hour crowd, and you can reap the benefits while skipping out on the pain. If you’re wondering where that kind of deal can be found, talk to a franchise broker — they’ll have that data and much more handy, and they can provide free unlimited consulting services to help match you to a franchise opportunity that works.

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