McDonald’s Raising Wages: Bad Timing?

It’s been a long time coming. Not too long after Wal-Mart announced it plans to increase the wages of over 500,000 employees to $10/hour, McDonald’s (NYSE:MCD) followed suit with its own plans to increase wages and boost benefits for employees at the restaurants it operates.

Both companies have been popular targets over the last few years in regards to the low wages they pay their employees. We wrote about the issue a little over a year ago, arguing that McDonald’s, like Wal-Mart, wouldn’t win the low wage battle. At that time, McDonald’s wrote to the Securities and Exchange Commission in a filing that “the impact of (wage) campaigns by labor organizations and activists, including through the use of social media and other communications and applications,” could pose a threat to the global fast food brand and “may impact our future business performance.”

According to the Wall Street Journal report:

“Starting July 1, McDonald’s will pay at least $1 per hour more than the local legal minimum wage for employees at the roughly 1,500 restaurants it owns in the U.S. The increase, which McDonald’s said will apply to some 90,000 workers at all levels of experience and rank, will lift the average hourly rate for its U.S. restaurant employees to $9.90 on July 1 and more than $10 by the end of 2016, from $9.01 currently. McDonald’s also will enable workers after a year of employment to accrue up to five days of paid time-off annually.”

Bad Timing?

While the announcement is a milestone for the low wage movement and a monumental change for the fast food giant, it’s not likely to please investors. During the last year, McDonald’s has struggled to maintain its dominance in the United States, seeing sinking comparable sales throughout 2014. That trend was interrupted in January this year with a 0.4% gain in January, but that was followed up with a 4% decline in February, forcing investors to wonder if the company’s turnaround plans are sustainable.

The fact that McDonald’s is now faced with the added cost of raising its hourly rate by 10% for 90,000 employees and vacation time, what looks like a great step forward could be a major financial setback. Even the dividend may be at riskas the company’s free cash flow is increasingly eaten away.

A Flurry of Changes

However, this isn’t the only change McDonald’s has made since its previous CEO Don Thompson was ousted. The new chief executive, Steve Easterbrook, has ushered in several adaptations to the company’s business plan to increase foot traffic in its US stores. For example, McDonald’s is reducing the use of antibiotics in its chicken. Reports also state the company is toying with the idea of adding kale to its menus.

More recently, in what I would consider the best development, the fast food chain is experimenting with offering its breakfast menu all day. This came just a month after McDonald’s said this on Twitter: “Our grills just aren’t big enough for breakfast and lunch.” How they seem to have figured it out doesn’t really matter. The big thing is that this is something customers have requested for a long time.

The Outlook

Late last year, we felt like McDonald’s would be able to make a full recovery this year. But the company suffered another major setback in Japan that left it reeling. While the changes the new CEO is overseeing are positive, the timing of the wage increase is bad one and will make it so we won’t see the positive effects of these changes for another year or two.