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How higher minimum wages will impact McDonald's

The impact of higher minimum wages

With minimum-wage increases being considered around the country, one fast food giant could suffer some negative ramifications from higher labor costs.

Higher minimum wages would have a "mildly negative" impact on McDonald's, according to Stephens restaurant analyst William Slabaugh.

McDonald's doesn't actually operate most of its U.S. restaurants, and Slabaugh explains that McDonald's reliance on franchisees provides "a bit of a buffer" from wage increases.

However, he added that forced wage hikes "could impact the health of the franchisees and therefore the health of the business," as franchisees could feel pressure to increase prices, which could cut into their traffic growth, and thus degrade the perception of McDonald's business among investors.

"Overall, it's a bad thing," he told CNBC on Thursday by phone.

Sterne Agee CRT restaurant analyst Lynne Collier said that while the wage impact is deleterious, "the other impact is a slight positive on the demand front, where the lower-income consumer gets a pay raise — and that is McDonald's customer base."

On the whole, she said, higher minimum wages are "neutral to slightly negative," and certainly not a major headwind.

Some fast-food operators see higher minimum wages as a major positive.

"Our business is great, and our business is better since the minimum wage went up," Wetzel's Pretzels CEO Bill Phelps said Thursday on CNBC's "Squawk Box."

A coalition of workers, businesspeople and civic leaders rally outside Los Angeles City Hall on Friday, Jan. 30, 2015, to urge the city council to act without delay to increase the minimum wage and improve the lives of nearly 800,000 L.A. residents.
Minimum wage hikes actually boosted my sales: CEO

The CEO of the California-based fast-food chain said that when California raised the minimum wage from $8 to $9, its same-store sales rose 8 percent in the next six months. Two years later, after California raised the wage from $9 to $10, same-store sales were up 7 percent.

"You've got low income people who get a 10-11 percent increase, and probably a 30 percent increase in disposable income, so it's just great for our business," he said.

Similarly, Buffalo Wild Wings CEO Sally Smith told "Squawk Box" that pricing and productivity do become a factor when the minimum wage is increased, but overall, "I do think that there is an opportunity for that consumer to have more discretionary dollars."

California is on track to become the first state to move toward a minimum wage of $15, after Gov. Jerry Brown and state legislators reached a deal on Monday that would gradually raise the state's minimum wage from the current $10 to $15 by 2022 for large businesses and 2023 for small ones.

New York Gov. Andrew Cuomo isn't far behind. He's also proposed a plan for New York City to raise the minimum wage to $15 in 2019 and the rest of the state by 2021. That plan is part of the governor's proposed state budget.

Some believe that raising the minimum wage in California and New York will set a precedent for the rest of the country. The national minimum wage has remained at $7.25 since 2009.

"You haven't had an increase in the minimum wage for seven years. It's crazy," Phelps said. "I think the minimum wage should be increased more than every seven years, that's just my opinion."

S&P credit analyst Robert Schulz said that from a purely economic perspective, higher wages appear likely.

"I think if we step back and look at what's happening with wages generally, wage growth has been pretty stagnant in the last few years and our economists do feel like the slack is coming out of the labor markets," Schultz said Wednesday on CNBC's "Trading Nation."

Schultz also said that one of the biggest beneficiaries of increased wages could be small-ticket retailers.

"Higher wages could have a positive effect on consumer spending and we look at potentially higher wages or wage growth as one of the potential main catalysts for retail, small ticket spending," he said.

Schultz also said that overall, the "wage pie" in America has not really grown. And consumers' relatively fixed amount of income has been increasingly spent on autos and experiences rather than retail products.

"There hasn't been that much left over for, say, visiting the malls and the apparel sector," Schulz said.

McDonald's, meanwhile, didn't immediately respond to CNBC's request for comment.