Labor’s victories in hiking minimum wages stand to “eat into” restaurant profitability, warned Moody’s Investors Service Thursday, confirming the fears of investors.
Profit margins of U.S. restaurants could be hit by up to four percentage points over the next few years – a brutal hit to an industry that already sports thin profit margins. That hit could be “considerably higher” if the trend to boost minimum wages even further to $15 an hour takes hold, Moody’s says. This is a significant potential bite to profits: Publicly-traded restaurants reported operating profit margins of just 6.5% over the past five years on average, says Reuters. Operating profit is how much of revenue companies keep after paying direct and overhead costs. Some restaurants have higher operating profit margins, like McDonald’s (MCD) at more than 20%.
Investors in companies that rely on large numbers of workers who earn minimum wage are nervously watching the the trend taking hold to increase pay. The City of Los Angeles Wednesday was the latest major city, following San Francisco and Seattle, to push a plan to increase the minimum wage to $15 an hour.