How bad math about Big Macs gives me indigestion
I am fed up with people who do not understand business and try to give unsolicited business advice to support political agendas. The latest atrocity was enacted upon McDonald's.
A University of Kansas research assistant named Arnobio Morelix apparently decided to do some "analysis" on McDonald's pay under the guise of supporting a "fair wage" argument, resulting in a bevy of viral headlines about how you only need to pay 68 cents more for a Big Mac to double workers' wages. Here is an excerpt from the original Huffington Post article about his research (to its credit, the HuffPo later retracted the piece):
"Morelix looked at McDonald's 2012 annual report and discovered that only 17.1 percent of the fast-food giant's revenue goes toward salaries and benefits. In other words, for every dollar McDonald's earns, a little more than 17 cents goes toward the income and benefits of its more than 500,000 U.S. employees."
Now, before the story was retracted, I decided to do some digging. As someone who has raised capital for dozens of publicly-traded restaurant companies in my former investment banking career, I wondered where that 17.1 percent labor number came from and how a researcher could only use an annual report to evaluate McDonald's' model? So, I went to McDonald's' annual report and tried to re-create the calculation.
It turns out, Morelix took a reported 2012 payroll and benefits number of $4.7 billion and divided it into 2012 total corporate revenues of $27.6 billion, giving you approximately 17.1 percent as he cited. Click here to see the report.
But, here's the problem in using these numbers to figure out labor costs and make the claims above; he used using apples and oranges, or in this case, burgers and fries.
As anyone who follows restaurants knows, McDonald's has a hybrid business model. Per the very same annual report, of all the McDonald's stores in the world, about $70 billion in sales were made at franchised stores and just $18.6 billion came from stores that the company owns and operates itself. For the franchised stores, McDonald's takes a franchise fee, reported as "Revenues from franchised restaurants", as you can see above. But none of the employee costs for those stores are reported in McDonald's consolidated statement of income, because they are costs of the franchisee, not McDonald's. The payroll and benefits numbers reported by McDonald's would only include payroll that McDonald's pays for its employees at headquarters and/or in its company-operated stores, depending on where you look.
In English, this means that Morelix's analysis tells you exactly nothing. It's meaningless because it takes company-operated store labor costs and divides it into company-owned store revenue plus franchise fee revenue.
If you look at the $4.7 billion payroll and benefits number Morelix used, it was that of company-operated stores only as you can clearly see by the heading in the annual report. Dividing that into the company-operated store revenue of $18.6 billion would give McDonald's a store-level payroll cost of 25.3 percent, which means McDonald's has 48 percent higher labor costs than the 17.1 percent Morelix claimed through using the wrong numbers. That percentage is also generally in-line with that of other quick service restaurant companies.
This illustrates what happens when people try to take a political statement and layer it on top of capitalism. You get a bunch of gibberish supported by supposed "analysis" that doesn't work.
It's the same issue with those calling for a rise in prices in Big Macs and Dollar Menu items to support higher wages. The argument is that if you just increased the pricing of some items, workers could get more pay. Even if Morelix's analysis had been meaningful, these individuals are using assumptions that unit volumes of sales aren't price sensitive in a competitive market—that somehow raising the price of an item has no real world effect on how many items are sold. If that were the case, I am sure that McDonald's and their many competitors would have raised prices a long time ago.
Despite the math being incorrect, many media outlets jumped on the McDonald's story because of the juicy headline and the social commentary it would spur. Now they have had to retract these stories, but that could have been avoided altogether with a quick look at the annual report.
There's far too much information and political rhetoric being passed around as fact these days to further political and social agendas that may have good intentions behind them, but are based on faulty information and assumptions. I urge you to be skeptical of what you read. Do the math yourself and fact check, or else you may end up comparing burgers and fries.
—Carol Roth is a CNBC contributor, the host of WGN radio's "The Noon Show" and best-selling author of "The Entrepreneur Equation." Follow her on Twitter: @CarolJSRoth.