Fast food industry readying for next month’s minimum wage hike

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Only July 24, the federal minimum wage will increase 11 percent to $7.25. And even though more than half the states in the country have a minimum wage that’s higher than that, fast food restaurants are worried it will mean the end of profits.

As a restaurant economist tells CNN Money, even in normal times “profit margins for an average fast-food company stand around 4 percent before tax.”

And these aren’t normal times. Although fast food restaurants have stayed busy during the recession, the move towards value menus has cut those 4 percent margins even thinner. The fact is there’s virtually no money to be made off of selling two hamburger patties, a bun and cheese for 99 cents. According to the CNN article, “while food prices have abated in recent months, analysts expect commodity

inflation to return, putting additional pressure on margins.”

So far McDonald’s and Burger King have remained mum about how they plan to counteract higher costs. Raising prices seems out of the question, lest consumers go to the cheaper competitor. Instead, McDonald’s is experimenting with “higher-efficiency soda fountains.”

Neither should follow Sonic Drive-In’s route. When profit-margins fell at the Oklahoma City-based chain (for which a Kansas City advertising firm handles the commercials), it didn’t raise prices but instead screwed over employees — the same ones higher minimum wages were supposed to help. From the Wall Street Journal yesterday: “To cut costs, Sonic last fall started paying newly hired carhops at a

tip-wage rate, rather than the minimum wage, at its majority-owned

locations.” Federal tip-rate is $2.13 per hour and does not go up with the regular minimum wage hike.

Things aren’t much better at the state level for the next six months. Kansas workers who do not qualify for federal minimum wage (either because of age, number of hours worked or disability) can continue to be paid a paltry $2.65 per hour. Even though legislators passed a law bringing the state’s minimum wage up to federal level, it doesn’t go into effect until January 1, 2010. Missouri’s minimum wage is currently $7.05 per hour.

Categories: Dining, Food & Drink