The Higher Minimum Wage is Killing Off Smaller McDonald's Franchisees

Tim Worstall reports:

The effects of a rise in the minimum wage can be subtle, most subtle.... here’s one which I think most people haven’t even imagined yet. That rising minimum wage is behind McDonald's looking to have fewer small scale franchisees and rather more restaurants operated by large scale franchisees...

The story itself:

[smaller] owners are not, for example, capable of paying the approximately $1.9 million in renovations required to install touchscreen kiosks, update back-of-house equipment, or integrate their systems with the company’s mobile app.

Since 2014, the number of franchise owners has dropped by 2.6 percent, while the number of actual franchises has grown by 1.2 percent — meaning that fewer owners are running more stores...

[C]onsider a stylised model. One in which we have low capital costs of entry (I’ve gone into this business once with $50,000 to have a fully operating deli – you’ll not get a franchise for that sort of money, that’s an order of magnitude too low) but labour costs are a large portion of total costs. The other variation in our model is much higher capital costs but labour costs are a lower portion of revenue. This makes logical sense – more machinery costs more capital but requires less labour to operate it all.

Now we change the relative costs of capital and labour. Depending upon how we specify our elasticities (how much things change in response to price changes) and apply the actual numbers to that model we could have two different outcomes. One in which both sectors shed labour as a result of the higher cost. Or one in which the capital light, labour heavy, sector is much more affected than the capital heavy, labour light, one. To the point that the Mom and Pops all (OK, many of them) go out of business...

Smaller operators don’t have access to the same capital that larger do. This is our difference between the Mom and Pop operation and the franchise in the first place all over again. And the capital requirement to be a franchisee is getting larger – those touchscreens and no doubt soon enough the robot fryers and hamburger makers.

So there we have it. The rising minimum wage is leading to more automation. More automation means higher capital requirements. That means that McDonald’s is looking for franchisees with deeper pockets, more access to capital – to larger organisations in short.