Essay:The finances of a fast-food giant

You work at McDonalds. You do your shift, during which you take X dollars worth of raw materials, fry 'em, dress 'em, and wrap 'em, and the company sells them for Y dollars. The difference, Y - X, is new value that you created with your labor.

A question that has come up a lot since the fast-food strikes in the U.S. have started, is: how much of the value does the company return to you as wages, and how much does it keep for itself, as profit.

According to some ethical systems, the rewards of an activity should be given to the people who deserve them; and in the case of labor, the fruits of that labor are the reward and the people who deserve them are the people who did the work – not others such as bosses, shareholders, etc., who did not do the work but take some of the product based on paper ownership claims. It may be argued that the bosses, shareholders, etc. did work in the past to get the money to buy their ownership shares, and thus deserve the proceeds from them, but this confuses two issues. The owners deserved to be paid for the labor they did in the past, yes; but, according to this ethical view, they do not deserve to be paid additional money now, when they do no labor. (If the boss does some necessary work in organizing the activity of the restaurant, that is different: she deserves to be paid for that labor, but not simply on the basis of an ownership claim.)

If one accepts this ethical view, then the proportion in which the new value created by an employee is split into wages and profit is interesting: it tells us the degree of unethicalness in the way the product of her labor is being distributed.

Another reason for being curious about the ratio of wages to profit is that it gives us a sense of how much the company could afford to give in additional wages, without having to take a loss or raise its menu prices. If, for instance, the new value goes half to the workers as wages and half to the capitalists (which by the way, is a fairly typical ratio in the economy as a whole) workers' wages could be doubled without bankrupting the company or raising the price of a burger. (That is, by taking everything that is now profit and, instead, adding it to the workers' wages. The company would then make zero profit, but it would not be making a loss either: it would be breaking even.) There is, however, the problem that if the company's profits are reduced below a level that investors consider attractive, then the company's shareholders will abandon it and it will die that way – even though it is still making some profit. This is one of the reasons I am a radical, revolutionary, communist, not a gradualist or reformer: an individual publicly-traded company cannot pay its workers what they deserve, even if its executive officers and management want to, because it exists within a system that holds it to the imperative: exploit or die. Therefore, education of the executives and managers, or appeals to their goodwill, are of no use. It is the system that is the problem, and the system must be tackled as a whole. One can not change the world by reforming one company after another, because to reform a company is to kill it, unless one reforms all of its competitors at the same time (whether they are in the same industry or not – all companies compete for investment). [Incidentally, I believe that a similar logic applies to countries of the world as the above logic that applies to companies in an economy. A country can not allow its citizens to live a life of pleasure and ease (producing only enough to satisfy themselves) instead of working them to the bone, because if it does, it will not be able to produce, or buy, as much military apparatus for itself as other countries that work their people harder. As a result, within not too long a time, it will be conquered, or at least dominated, and its kind policies and happy people will be a thing of the past. You can't change government by changing one government at a time. The movement to improve the lives of the common people has to occurr in all countries at once, or at least in a large number of the most powerful ones simultaneously or in quick succession. [One of the problems experienced by the main "actually-existing socialisms" so far (Soviet Russia and Maoist China) is that they existed in a world full of capitalist countries that exploit their people and work them very hard. To survive the inevitable military and economic competition with those countries, the Russian and Chinese leaders also had to work their people very hard – and take a large chunk of their product for military spending and policing – which made actually-existing socialism look rather unsocialistic sometimes. (I nevertheless defend the record of the Soviet Union and Maoist China: overall they did more good than harm for their people.)] So, to conclude this note, I'll just say (not very originally): "The condition for the free development of one is the free development of all."

Without further ado, then, let's take a look at the books of a fast-food giant (I've chosen McDonalds because it is the biggest) to see where the money goes.

Most of the following information is from McDonalds 2012 Annual Report, which is available free on the web.

The 34,480 McDonalds restaurants in the world are controlled by McDonalds Corporation, of Oak Brook Illinois, USA. There are McDonalds's in 119 countries. 6,598 of the restaurants are directly owned and operated by the Corporation. The other 27,882 are franchises; that is, they are owned and operated by outside parties under a license agreement with McDonalds Corporation that requires them to follow the Corporation's rules and pay fees to the Corporation. In 2012, the Corporation-operated restaurants had sales of $18,603 million; the franchises had sales of $69,687 million, out of which they paid the Corporation $8,964 million in fees.

Since the Corporation does not operate the franchise restaurants iself, its Annual Report does not contain much information on their budgets – not enough for us to detrmine the wage or profit amounts in the franchises. However, the Corporation-operated restaurants are covered in the Annual Report; for them we can get good estimates of wages, profits, and other interesting data, and so they are our main focus in the rest of this article.

Essentially the entire income (revenue) of the Corporation-operated restaurants comes from food sales, which, as mentioned above, were $18,603 million in 2012. The operating expenses of the Corporation-operated restaurants are given in the Annual Report  as:

(Dollars in millions) Food and paper               6,318 Payroll and employee benefits 4,710 Occupancy and other expenses 4,195 --- Total operating expenses    15,224

Subtracted from their sales of $ 18,603 million, this gave the Corportaion-operated restaurants a "margin" of $3,379 million.

Already we can get a rough estimate of the wages vs. profit ratio in McDonalds Corporation-operated restaurants. "Payroll and employee benefits" are the wages, and the margin is the profit. So the ratio:

Profits    3,379 --- =  -  =  71.7 %  Wages      4,710

Or, to put it another way: of the new value created, 41.8 % goes to profit, and 58.2 % goes to wages.

If you subscribe to the desert-based ethics described earlier, these numbers indicate a not-overly-ethical distribution of the fruits of McDonalds' employees labor: forty percent of it goes to people who just sat on the sidelines with their ownership claims.

As to the question of how much the employees' wages could be raised, we see that if the company were willing to forego all profit – that is, if all of what is presently taken as profit were given to the workers as wages – then the workers' wages would go up by 72 percent: say from $9 an hour to $15 an hour.

But this profits-to-wages ratio is a rough estimate only; by considering some additional detail we can work out a better estimate. The rough estimate has at least three sources of error:  The margin is not in fact pure profit for the capitalist: she must pay taxes and some administrative and other expenses out of it. (This tends to make the rough estimate to high.) The "occupancy and other operating expenses" are not in fact all necessary costs to the capitalist class. They include rent, which goes to capitalists, and advertising, which is a form of waste peculiar to capitalism. (This tends to make the rough estimate too low.) The workers recieve more than just the payroll and benefits; they also recieve, indirectly, a portion of the money that the Corporation pays in income tax, because the government spends some of its tax revenue on programs that benefit the working class. (This tends to make the rough estimate too high.)  The table below summarizes a more detailed calculation that eliminates some of these errors. Each of the entries used in the rough calculation is broken into components, and each component is assigned to one of four categories: "to capitalists" (TC), "to workers" (L), "necessary expenses" (E), and "capitalist waste" (CW). The ratio we are interested in is then the sum of TC and CW, divided by L.

TC + CW exploitation ratio =  - L

The category, capitalist waste, requires some explanation. This category comprises kinds of waste that are characteristic of capitalism, and could be eliminated if we switched to a non-capitalistic economic system. Most advertising falls into this category (the amount of advertising that is truly informative, rather than manipulative, is small). Also in this category are administrative activities of a purely competitive nature; eg., time spent by management considering questions such as "Burger King just introduced a new Whopper bonus package that is eating into our market share, how do we counter that challenge?" or "How should we invest our pension fund so as to obtain a better-than-normal return; ie., so as to 'beat the market'?" I lump capitalist waste together with "to capitalists" (the moneys actually received by capitalists) because they are both deductions from the value produced by workers that could be eliminated. Under a different economic system, the money that now goes to those two items could go instead to the workers.

McDonalds Revenue, Expenses and Margin |                                  Item                              |  Amount  | Category | ($ M) Revenue                                                               18,602.5 Food and paper                                                       6,318.2      E                     |  Advertising (1)                                    787.5      CW   Occupancy and     | other operating -|  Rent                                               720.1      TC   expenses          | | Necessary occupancy and | other operating expenses                         2,687.6      E   Payroll and employee benefits                                                    4,710.3      L                                               | To working-class          445.4      L                     |  Tax         --        -| |                        | To capitalists            445.4      TC                     | |                     |                         | Advertising (2)            23.9      CW                     |  Selling, general,      | | and administrative    -| Wasteful administration   246.7      CW   Margin    --     -|  expenses               | |                        | Necessary administration  246.7      E                     | |                    |                         | Wasteful other expenses     1.8      CW                     |  Other expenses        -| |                        | Necessary other expenses    1.8      E                     | |                    |  Remaining margin                                 1,967.3      TC

The total in the TC category is: $ 3132.8 million. The total in the CW category is: $ 1059.9 million. The total in the L category is: $ 5155.7 million. The total in the E category is: $ 9254.3 million.

The exploitation ratio is:

TC + CW     3132.8 + 1059.9     4192.7 exploitation ratio =  -  =  ---  =  --  =  81.3 % L            5155.7          5155.7

This is slightly higher than our earlier rough estimate of 71.7 percent.

The reader may wonder where I got the amounts listed in the above table. Some have been discussed earlier in this paper. Two others, Rent, and Advertising (1), are taken directly from the Annual Report, pages 39 and 33, respectively. "Necessary occupancy and other operating expenses" is simply the "Occupancy and other operating expenses" stated in the Report, minus Rent and Advertising (1). Next we come to the items subsumed under "margin". Here matters are not so simple. The first problem is that the Report does not state these items for the Corporation-operated restaurants alone, but only as "consolidated" amounts for the Corporation-operated restaurants and franchises together. To get amounts for the Corporation-operated restaurants alone, I have had to use a method of estimation: I multiply the consolidated expenses by a fraction representing the relative size of the Corporation-operated restaurants in the total business. I have chosen sales as the measure of size, and thus, using the Corporation's stated sales figures of $18,603 million for the Corporation-operated restaurants and $69,687 million for the the franchised restaurants, obtain a figure of 21.07 percent for the Corporation-operated restaurants' share of total activity. (See footnote for the list of entries in the Annual Report that were treated this way. )

-- To be continued -- But for now I'll just quickly sum up the rest: I use McDonalds' effective income tax rate of 32.4 percent to calculate the income tax on the Corp-op restaurants. I assume that half of the income tax money received by the government goes to benefit the working class, and half to the capitalist class. I assume half of McDonalds Corporation's central administrative expenses are necessary and half are capitalist waste.

It appears that a communist revolution might enable McDonalds' workers wages to be raised 82 percent without affecting the price of a burger. But lesser reforms, eg., that leave McDonalds paying rent, and interest, and taxes that go to capitalists, and leave McDonalds with the necessity of making a "normal" amount of profit so that it can attract investors, are unlikely to result in nearly that large a raise for workers.