30 years ago McDonalds and other fast food outlets were starter jobs. That was when we still had a manufacturing based economy. Today we have a service based economy and service jobs are no longer starter jobs. It's just that simple. Education and skills and 'Grumpy Old Walter' mentalities have nothing to do with it. There are plenty of college graduates and older, highly skilled people working these so-called starter jobs.
Regardless of what you think of these worthless, unskilled, uneducated burger-flippers, do keep in mind that it's honest work for an honest dollar. If faced with the choice of living on welfare or earning honest money as a burger-flipper, I'll take flipping burgers every time.
In the restaurant industry the physical costs (building, insurance, utilities, etc.) and government intrusions do not make or break the bottom line. They are almost afterthoughts. The only thing that really matters are the Prime Costs. The Prime Costs are the combination of Food Costs and Labor Costs. If the Prime Costs are not in line, nothing else matters. And if they are properly in line, likewise nothing else matters.
The Prime Costs are figured as a percentage of total sales. If total sales for the week is $20,000 and the total cost of food and beverage is $7,000 for that week, the total food cost is considered to be 35 percent. If, at the same restaurant, labor (including payroll taxes and benefits) equal $5,000 for the week, then the labor cost is 25 percent. Total Prime Costs are 60 percent in this example, and 60 percent is in the typical range for the industry.
Luxury and sit-down restaurants will typically have higher Prime Costs, with food being as high as 38 percent and labor being as high as 30-35 percent, while fast food Prime Costs can be as low 20 percent for labor (McDonald's is typically 25 percent) and food costs being as low as 30 percent (McDonald's is typically 35 percent).
It's the total Prime Cost percentage that matters. Your labor cost can be high, but if your food cost is low, and the total Prime Cost is in line of 60-65 percent, you're good to go. If your Prime Costs are consistently at 70 percent or higher, or 55 percent or lower, there is no escaping the fact that you're going out of business sooner rather than later.
If the base rate of pay in a restaurant is $7.50 and it gets doubled to $15 an hour, running the labor cost from 25 percent to 50 percent, there is simply no way that the restaurant can stay in business. Can't happen.
On a side note, those who see restaurant owners driving nice cars and living in nice houses and think that that somehow equates to them making money hand over fist, that's at the very least short-sighted, considering the norm for Americans is to drive cars and live in houses they cannot afford and are beyond their means. A restaurant owner makes 5-10 percent of sales. That's it. One restaurant and it's closer to 5 percent (sometimes lower), three or more restaurants and it's closer to 10 percent, depending on the restaurant and whether there are franchise fees involved.
Burger King charges its franchisees 4.5% of sales in addition to a $50,000 annual franchise fee, and Dunkin' Donuts has its franchisees cough up 5.9% of sales each year in addition to a franchise fee that can range anywhere from $40,000 to $80,000, depending upon the location. McDonald's has the highest franchise fees in the industry, 12.5% of annual sales, plus an annual $45,000 franchise fee (standard contract length is 20 years, which automatically renews annually after that). Depending on the cost of the property and the location, McDonald's startup fees range from $500,000 to $1.6 million.
But wait, it gets better. In order to maintain consistency among their offerings at every location, most franchises insist that their franchisees buy raw materials (food mainly, but also building and marketing materials) directly from them or from a supplier with which they have a "special" relationship, meaning that the franchisors receive rebates on what the franchisees order. In any case, the prices that they charge for these materials (either the company or the supplier) are often much higher than what the materials would be sold for elsewhere on the free market.
It's not uncommon for some fast-food franchisees to pay 5-10% above prevailing market value for a box of lettuce or tomatoes, or other produce that could easily be bought elsewhere. But, produce is produce, right? It's fairly consistent from vendor to vendor. The point is that over a year's time, the premium that a franchisee may have to pay for raw materials can equate to serious money off the bottom line, money that keeps a food cost 5-10% higher than it could be (as with, say, a wholly-owned restaurant where the chef goes to the farmer's market each day to buy the menu for that day).
If the franchisee does decide to go elsewhere for its raw materials and it violate the contract, the franchise will usually terminate the relationship and, more often than not, the franchisee loses his entire investment.
Subtract the Prime Costs of payroll and food costs, and taxes - in addition to these royalties - and it's easy to see why life as a franchisee may not be the life of luxury you imagine.
