Rising Minimum Wages Will Benefit Company Financials

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Includes: AMZN, MCD, WMT
by: B&B Market
Summary

Having remained the same since 2009, the federal minimum wage is overdue for a raise according to some.  In response, state legislatures around the country have constructed their own standards.

With buying power for the minimum standard of living in the country having declined by 27% since 1968, maybe an increase is on the horizon.

Companies, especially restaurants and retailers, will see labor costs go through the roof and margins will contract.

Fueled by pressures in the short-term, technological improvements will reduce the need for human labor and as a result margins should be expected to improve in the long-term.

Everyone remembers working their first jobs for next to nothing per hour. Heck, I'm in my twenties and the minimum wage is already more than double what I worked for in my state. This is not an argument for or against the minimum wage; Merely an analysis as to how the drastic increases that some legislatures are pushing for can affect the markets.

Analyzing the effects of a minimum wage is difficult. There are the evident results that you can measure, and then there are the invisible consequences that become subjective. However, it is always important to remember, "There is no such thing as free lunch." We can already see evidence of this through the vary effects around the country.

Rooted in a Problem

The current issue with a minimum wage is not whether or not we should have one, but how quickly it should rise. Pre-1968, the federal minimum would grow at roughly the same pace as national productivity. Had this trend continued, the wage would be $19.33 per hour.

Source: EPI

Since then, the buying power of the minimum wage has been steadily decreasing (down 27% since 1968). In response, state legislatures have decided to craft their own wage laws. One example, New York, is scheduled to increase the minimum by $0.70 per year (this is higher in NYC) until 2020. After, the wage will continue to adjust upwards to compensate for inflation until reaching a final price of $15 per hour.

The problem here is that these are pre-determined rates. While the rate has lost buying power over the years and productivity has continued to increase, a sudden doubling of the minimum wage can be debilitating to most companies, many of which are less than 100 people in size. In fact, 50% of all minimum wage workers are employed by a company this size or smaller. Even McDonald's (MCD) restaurants may not be able to support this increase. This is because over 80% of McDonald's restaurants are owned and operated by franchisees. It will not be the top executives of the company who have to compensate the workers.

Consequences

With the increase of a minimum wage, we would see both good and bad consequences, but would the good out-way the bad. Hard to say, as some of the consequences will be 'invisible'.

A good consequence would be that millions of workers, not just those on the minimum wage, would see wage increases. For example, pay a dishwasher $15 per hour and the chef is going to demand a pay raise to keep the hierarchy. However, this is only good for those who see the raise. In order to supply a company-wide raise, more than likely some workers will need to be let go.

Another consequence will be a change in competition. Increasing the minimum wage eliminates the 'cost advantage' that low-skilled workers have, and in turn, increases the amount of competition between those who need the work the most. If the wage goes up, companies will not be willing to hire unskilled or young labor as it will be too expensive. This can hinder the future of these people as they will remain unskilled when applying to other jobs.

However, for skilled laborers or those part of a union, competition will decrease. Milton Friedman pointed this out on the 1980 minimum wage hike. The American Federation of Labor (AFL-CIO) has historically been in support of minimum wage hikes for decades. A closer look will show that the average union worker will not benefit directly from a wage hike as shown from the Bureau of Labor Statistics (BLS) union member summary. The summary for 2017 showed that:

"Among full-time wage and salary workers, union members had median usual weekly earnings of $1,041 in 2017, while those who were not union members had median weekly earnings of $829."

A minimum wage hike will make lower workers more expensive and less likely to be hired. This causes more job security for union members as they are incredibly difficult to layoff.

Business Benefits

It is important to realize that the benefits are opposite for consumers and businesses. Consumers may benefit in the short-term from a wage hike while a business suffers, but in the long-term the roles will reverse. Once the wage is hiked, a chain reaction will occur as businesses begin to layoff workers and raise prices in order to save margins and profits. However, the incentive for technological innovation is multiplied and this is where the main benefit will be.

Amazon (AMZN) and McDonalds (MCD) are just two examples of businesses pushing for automation. Their projects are focused on replacing starting jobs such as cashiers. However, this is just the start, companies are likely to push it as far as consumers are willing to deal with it. A robot is better than a human in almost every aspect, lacking only in emotion and interaction. Otherwise, robots are cheaper, more efficient, are not restricted by labor laws, and can work 24/7/365.

Source: Amazon

Amazon debuted a first of its kind, cashier-less grocery store earlier this year. The store operates in Seattle, notorious for having one of the highest minimum wages in the country, reaching $15 per hour in 2018. Eventually, the retail giant plans on adapting the newly acquired Whole Foods with this technology. Already, we are seeing more retailers follow suite.

In China, Alibaba (BABA) and JD.com (JD), among others, are already pushing for automated store. Alibaba has ~35 "Hema" stores that center around technology for an enhanced experience. Every product has a barcode that customers scan with the stores app. Along with this, express delivery is also becoming popular with the likes of Walmart (WMT) and Alibaba.

The World Economic Forum reported:

"...30-50 per cent of the world’s retail jobs could be at risk once technologies such as automated checkout were fully embraced."

As of 2016, there were ~870,000 cashier jobs at grocery stores in the US. Cashier-less technology would wipe all of these jobs away, as the human employee is becoming to expensive for the job role. Whether or not this is a direct result of a minimum wage increase, the hikes do incentivize more automation in other areas. As an example, Walmart's Bossa Nova robots. These robots will patrol aisles and scan for out of place inventory, freeing up employees time and eventually leading to a reduced need.

Source: YouTube

McDonalds is also pursuing automation inside its restaurants. Since the movement began country-wide for a $15 minimum wage, fast-food joints have been at the center of the protests. The problem is, it is not very feasible to up the wage rate and expect the same number of jobs to be available in this industry.

Over 80% of McDonalds locations are owned and operated by a franchisee. After rent, labor costs, inventory, etc. a franchisee owner sees about a 6% profit margin on average. Increasing labor costs crunches this even further. There are not many options available to combat this either. Customers are very price sensitive in this industry, making it near-impossible to recoup the increased labor costs through raising prices. As a result, there is a focus on automation. Late-2016, McDonalds announced it wanted to implement their self-order kiosks nationwide. This reduces the need for cashiers and also allows more data analytics for the company.

This opens up the pursuit of more automation within the kitchen, further reducing employees needed. A California burger chain has experimented with a burger flipping robot, appropriately named "Flippy". Flippy can grill 150 burgers per hour, every hour, no break needed. California also has one of the highest minimum wages in the country at $11. However, some cities within are higher, such as San Francisco at $14. When raising the rate, Governor Brown stated:

"Economically, minimum wages may not make sense. Morally and socially and politically, they make every sense..."

Conclusion

As the minimum wage continues to increase, low-skilled workers will continue to become too expensive for the work they do. This does nothing but incentivize companies to find ways around the need to hire. In the short-term increased wages is good for the worker, but once prices rise, job opportunities diminish, and humans are replaced by robots there is nothing but harm to the worker who needed it the most.

Amazon, McDonalds, Alibaba, Walmart and plenty of other companies are staying on the forefront of technology and reducing their need for employees. As a result, in the long-term we will see these companies reduce their labor costs and improve their margins. The companies that can do this will succeed not only with investors, but with the consumers as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.