April 15th, 2024
Graph: https://fred.stlouisfed.org/graph/?g=1kcNS
Prices for fast food have risen quickly. At the same time the wages for fast food workers has also skyrocketed. Surprisingly, the profit rates have remained the same. This is an unequivocal win for poverty wage workers.
Calculating fast food profit rates are tricky. The franchise model means that the corporate data do not include all of the costs and revenues associated with running a restaurant.
The official profit rate as reported here, indicate increasing margins over the past decade. But, this is only at the corporate level, and does not include the direct revenues from product sales nor does it include labor, paper, and food input costs.
Unfortunately, the franchise cost and revenue data is private. They are separate firms. Luckily, for our purposes, today McDonald’s own around 5% of their stores. And they do indeed report their costs and revenues specifically tied to those stores. In fact, despite only comprising 5% of all stores, they account for 57% of all operating costs and 63% of their revenues! (100*$2,074.7/$3,604.3 & 100*$2,474.1/$3,868.6)
What does explain the rise in the corporate margins around 2018 or so? That year, the company sold off half their company owned stores and turned them into franchises. This means all of the input costs from labor, paper, and food are no longer included in the corporate McDonald’s costs and revenues. The corporate margins went up that year, not because McDonald’s changed the productivity of an individual restaurant or paid workers less, but because of changes in accounting.
For our purposes, we care about the profit rate of doing the entire business. Are the price rises from fast food going to shareholders or to labor? Let’s calculate the profit rate for company owned stores. This will give the entire production costs and revenues for selling you a Hamburger.
To get our best estimate, there are a few steps we need to take. First, take the total sales for company-owned restaurants in 2023 ($9.742B). Then we need to get an estimate for the costs. Total company-owned restaurant direct expenses are $8.224B. However, there are some overhead administrative costs (such as corporate advertising campaigns) that need to be divided among all the restaurants. In 2023, the owner-operated share of restaurants was 5%. So, the total overhead, $2.916B multiplied by 0.05 gives us an additional $145.8M in costs.
The company-owned restaurant profit rate is 100*((9.742 – 8.370)/9.742) = 14.1%. I do this same exercise for every year going back a decade and find that the profit rate has remained rather stable. While profit-driven inflation may certainly be a part of what happened over the past three years, at least in the case of the fast food industry, we’re not seeing it.
Rather, we’re seeing a rise in wages that has exceeded price growth. It’s important for the middle class to realize that some of the services they enjoy were previously dependent on the existence of an under class earning poverty wages. It’s a good thing to see these poverty wages disappear and all of the accompanying price effects along with it.
The excel file with all of the data and calculations so you can replicate (or double check and let me know if I have made any errors) is found here.
Econ Chris Clarke 