Because most philosophies that frown on reproduction don't survive.

Friday, November 21, 2014

Wages and Hamburgers, A Pricing History

In the world of social media, articles can have a curiously restless afterlife, suddenly being passed around again for no apparent reason well after their original publication. In one of these, people starting passing around a chart on Twitter as "one of the most important charts you'll see about the minimum wage" which proved to be from a Mother Jones post from December, 2013 claiming to explain why fast food workers are striking for a higher minimum wage.

This caught my eye because of the fast food association. I have an intellectual interest in the politics and economics of the minimum wage, but fast food I actually know a bit about as I ran pricing analytics for one of the big three hamburger chains for two years. So this allegedly so important chart got me thinking: How has the price of the hamburgers that fast food workers prepare changed over the last 40-50 years compared to the minimum wage? (Note: Contrary to popular belief, a lot of fast food workers make more than minimum wage. Around here, the advertised starting wage at major fast food chains tends to be $0.50 to $1.00 more than the minimum wage. However, the minimum is easy to track so it's what tends to come up in these conversations.)

It took a little research to pull together, and the results are not as complete as the minimum wage data series, but I was able to find enough references to the price of the basic McDonald's hamburger to track its price from when it debuted in 1955 for $0.15 to the present day, where it tends to be an unlisted element of the Dollar Menu. Here's the result, which I think is interesting, though I don't insist that you call it "the most important chart you'll see about fast food pricing and the minimum wage" (though I do welcome such flattery!)

Now, how these percentages work out has a lot to do which which year you pick as your baseline. However, I think this does a pretty good job of showing that basic fast food prices have risen at a rate at or slower than the rate of low wage growth.

However, there's an even more interesting story as you dig into fast food menu dynamics. As I said, the original McDonald's hamburger isn't even listed on the dollar menu these days, though it tends to retail for a dollar. (There's some variation due to regionalization of pricing and the fact that franchisees get to set their own pricing within certain agreed bounds.) The fact that the original hamburger, with its roughly 1/8lb patty, ketchup, mustard and pickles isn't even listed on the menu anymore at McDonald's underlines how the fast food industry has developed over time. The best deals on the menu are mostly contained on the Dollar Menu. The best deal is the McDouble, which consists of two 1.7oz patties (and thus the same amount of meat that's in a Big Mac), one slice of cheese, a bun, mustard, ketchup and pickles. This sandwich(with twice the meat of the original McDonald's hamburger) retails for around $1.19. The food cost (the percentage of the retail price which it takes to cover the cost of the food) is probably around 70% at this point. If you simply need fast food calories for the minimum amount of money, buy a McDouble.

The Dollar Menu (and its equivalents at Wendy's and Burger King) represent the fast food industry's own way of dealing with (and struggling with) inequality. Dollar menu items are much less profitable than the main menu sandwiches. A full size hamburger like the Big Mac, which retails for around $3.99 if you get just the sandwich rather than the fry and drink combo, probably has a food cost of around 30%. However, more than half of the people who go through a McDonald's drive through (excluding breakfast) are going to come away with at least some dollar menu on their ticket. The dollar menu sales are low margin, and the solid majority of tickets include at least some non-dollar menu items, but the dollar menu is a huge element of how fast food chains stay affordable for their working class to middle class customers -- the most loyal of whom are driving through a fast food chain 1-2 times a week (usually to pick up lunch.)

Since dollar menu consumers are motivated primarily by price, it's really hard to extract any extra money at all from them. As beef prices increase, fast food chains are gradually increasing the price of value products, which is why dollar menu is now the "Dollar Menu & More" with items ranging up to $2.00

However, the larger sandwiches are where it's possible to take significantly more price, which is why the Big Mac which was 2.5x the price of a basic hamburger back in 1979 is now basically 4x the price.

Using 1979 (before Reagan was elected and ended what in the mind of pundits like Paul Krugman was the '50s and '60s economic miracle) as the baseline, it's interesting to compare the growth of the minimum wage, and the income of the 90th percentile of households (people making more than 90% of other Americans) to the prices of the basic hamburger and the Big Mac.

As you can see, large hamburgers have increased in price at a rate similar to that of the richest 10% of Americans (who I venture to say don't actually eat that much at fast food restaurants) while value hamburgers have increased in price at a rate similar to that of the minimum wage (and slower than the rates of increase for both the 20th Percentile and the cost of ground beef.)

In order to continue to feed the full range of Americans who are eager to pick up a quick bite on the run, fast food companies effectively have a progressive system of pricing. Value products increase in price at rates lower than their increase in cost and provide a low cost option for budget conscious customers, while up-menu prices have grown at a significantly higher rate in order to keep fast food companies profitable.

What does all this have to say about minimum wage? Not necessarily anything definitive. It's true that fast food companies can absorb modest increases the minimum wage and get by. It's also true that very, very few heads of household make minimum wage. However, when fast food companies appear jumpy about their chances of dealing with a cost increase in the form of a wage increase (they're already dealing with steady meat cost increases, it's in part because they have limited pricing power on a significant portion of their sales volume, the value products, which they are effectively subsidizing with higher priced product sales in order to remain relevant to the lower income consumer.


Brandon said...

This was a fun read. I imagine this kind of subsidy structure would be fairly widespread among products and services that are easily accessible: a base of value versions that are necessary collectively but also difficult to keep sustainable, and another structure of higher end versions that actually maintain profitability.

bearing said...

My generally lower-income urban neighborhood is about to get a food co-op next fall. Co-ops around here tend to carry a lot of things at premium prices: organic produce, local items, etc. One of the selling points that helped them get the necessary permissions was a pledge to sell at least one brand of a range of kitchen staples at low prices, to be subsidized by the higher prices paid for the bigger-ticket items. So, for instance, there is supposed to always be one inexpensive brand of peanut butter, rice, beans, packaged bread, chicken breasts, ground beef, canned tomatoes, etc., there.

I think this is a great principle, personally, for a business or a nonprofit to serve a diverse community through a sort of dual pricing scheme: offer a set of "basic" goods and services at low profit (or possibly even as free services!), subsidized by "boutique" services offered at a higher margin. I wonder how many kinds of organizations could operate this way.

Jenny said...

The post provided much conversation last night as we sat in the car eating our fast food hamburgers.

Darwin said...

offer a set of "basic" goods and services at low profit (or possibly even as free services!), subsidized by "boutique" services offered at a higher margin. I wonder how many kinds of organizations could operate this way.

At the employer I had before working in fast food, we did the same thing with computers. Laptops sold for less than $500 or so were all sold at a loss, while the real money was made on laptops that retailed above $800.

Blogger said...

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