Starbucks and McDonald’s Hit Hard with $20 Minimum Wage Rollout

Fast-food giants, Starbucks and McDonald’s are facing a challenging year in stock performance. The Starbucks Corp. stock has plummeted 17%. While McDonald’s Corp. stock dropped 6%.

In the same year, the S&P 500 is up 27%. Considering both companies are the frontiers in their market, these sell-offs can be attributed to inflation.

Challenges With Diversification

Diversification would have been a reasonable go-to option to combat the present financial hit. But as it stands, Starbucks and McDonald’s cannot easily expand the variety of offerings on their menu. This is due to logistical and operational complexities.

Also, there is the issue of skyrocketing prices of ingredients. Bringing more menu options to the table means a significant increase in operational costs, posing financial challenges to the establishments. 

Coffee As A Case Study

The cost of coffee is a classic example of the sharp rise in the prices of ingredients. Earlier in the year, the price fell from a hike in 2021 and 2022. It’s on its way back to the upside again, from $154 per pound in January to $213 now.

In the end, adaptation to their menus will demand proper planning. This will involve strategic adjustments to address the price surge, while equally meeting and satisfying the needs of consumers.

Beef Price Surge

Data provided by the Federal Reserve of St. Louis has an insight into the price progression of beef. The prices have also shot up considerably, reaching a new peak in more than 30 years.

At the beginning of 2021, the cost per pound was $4.00. However, at the time of writing, it is $5.15. This is an insane price compared to the $1.5 or under that people paid in the ‘90s to get a pound of ground beef.

Starbucks Hit With A Mug Recall

Recently, Starbucks was forced to recall over 400,000 holiday mugs. They were partly made of metals and could melt in microwaves, causing burns. This is among the recent setbacks the coffee giant faces.

Prior to the recall, the U.S. Consumer Product Safety Commission reported that 12 mugs broke, injuring 10 individuals. The different gift sets were sold from November last year until January 2024. Buyers were instructed to return them to retailers and request a refund.

Starbucks Recent Bad Publicity

Starbucks has kept its immaculate image until it tainted it lately with how it treated its workers. It was charged with violating the rights of union members. And the corporation pays its frontline workers as little as $15 per hour.

Coincidentally, this bad PR happened when Starbucks lost its position as a growth stock. Investors have had to battle with a stock decline of 9% while the market has shot up by 30%.

America’s Wage Increase Demand

At McDonald’s and Starbucks, most expenses have fixed prices. This also includes their hourly wages. However, there is a rising demand for increased wages among hourly workers in America.

California has enacted new rules in that direction. This new law ensures that factory workers are paid $20 per hour. However, employers say having to pay their workers more will depend on the customers. In other words, they’ll raise their menu prices to meet up with the pay demands.

San Diego’s Remarks

NBC’s San Diego says fast food workers earn a minimum of $16.60 hourly. But the state has increased that to $20.00. California’s minimum wage of $15.50 per hour is among the highest in the United States.

NBC also clarifies further that “The new $20 minimum wage is just a starting point. The law creates a Fast Food Council that has the power to increase that wage each year through 2029 by 3.5% or the change in averages for the U.S. Consumer Price Index for urban wage earners and clerical workers, whichever is lower.”

Food Companies To Increase Price In The Face Of Increasing Minimum Wage

Following the new law in some states, large food chains are set to follow suit with an increase in menu prices. Companies like McDonald’s, Starbucks, and Chipotle will need to do this to compensate for the new development.

Meanwhile, other food business owners have relayed to do the same to keep up. However, in California, there is an exception. For a fast-food spot to be required to give the raise, it must be active in at least 60 locations in the country.

Skepticism With Large Food Chains As Investment Options

Starbucks and McDonald’s are less catchy options for investments for savvy business minds. Not because of their revenue streams. Their escalating costs at present and in the future prompt skepticism.

Some of the surging operational expenses include ingredient and labor costs. Ultimately, these pose challenges to profitability. And oftentimes, investors scrutinize these factors to evaluate long-term viability and potential ROI.

A Look At McDonald’s ROI And Operating Margin

Return on investment capital (ROIC) hints at how a company allocates its funds to profitable projects. McDonald’s ROIC has been above 15% and continues to trend higher since 2015. Presently, it is 22% and quite higher than that of Starbucks.

McDonald’s operating margin is presently at 41%. It has also been an upward trend since 2010’s 30%. The pandemic had a significant impact on the company’s revenue growth. However, it experienced a bounce back post-pandemic as sales jumped 20%.

Starbuck’s Stock Slip

Around late December 2023, Starbucks’s shares declined almost daily for two weeks. According to experts, this has not happened since the store’s first public offering in 1992.

This event affected its long-term stock performance. It has also knocked $10 billion off the market cap of Starbucks since the start of December 2023.

The Challenge With Overbuilt Chains

One of the estimates concerning Starbucks’s sales slump since late last year is the decline in same-store sales. This has kept the company’s stock crawling behind its rival, McDonald’s.

Meanwhile, the problem might be that the company’s strength is built solely on endless expansion. Starbucks has over 20,000 stores in 2023 and has been assumed to have overbuilt in the United States.

How Big Of An Issue Is Inflation Still?

Even though different data report the cooling of inflation, food prices seem to be rigid. Inflation has come down from its 2022 crazy high, yet many Americans are being hit hard at the grocery store.

Food outlets also complain bitterly about inflation. However, experts endorse the minimum wage increase as a way to allow workers to get more money to deal with their expenses.