The Economics of the Fast Food Industry
Huge Profits and Salaries for the Owners
In order to best maximize their profits, the big fast-food giants created the franchise system. This system allows the companies to maintain overall control of the product and gives them a guaranteed rate of return, while at the same time allowing local owners to create a low-wage workforce best suited to local conditions. For us, as workers, that means our immediate employers are often small business owners and franchise owners who plead poverty when we demand higher wages.
At present, 2,708 of Pizza Hut’s 4,496 stores are franchises. The rest are run directly by corporate headquarters. In Western Washington, the franchise for Pizza Hut has been given to Emerald City.
Pizza Hut is the world’s largest pizza chain, with over 7,500 stores in the U.S. alone. The parent company, Yum! Brands, Inc., (previously Tricon Global Restaurants) also owns A&W, Kentucky Fried Chicken, Long John Silver's, and Taco Bell. According to a company press release, it is “the world’s largest restaurant company in terms of units, with approximately 33,000 restaurants in more than 100 countries and territories.”
In 2003 Yum! Brands, Inc.’s gross earnings on U.S. operations were $5.6 billion dollars, and its U.S. profits were $812 million. In the first 6 months of 2004 they opened 537 new stores.
The CEO of Yum! Brands, Inc. is David C. Novak. In 2002, he earned a salary of $996,154. But that was not all. In that year, he also received a bonus of $2,625,000, other compensation of $427,500, and stock options worth $4,029,534. That’s a total of over $8 million for one year’s work.
If that money were used to increase the current wages of the roughly one thousand workers employed in the 61 stores in Western Washington, it would be enough to pay them $15.16 an hour, 20 hours a week, for a full year! If the company’s $812 million in profits were redirected in a similar way, the same would hold true for over 100,000 workers.
According to a 1997 survey in Nation’s Restaurant News, the average corporate executive bonus (not salary) was $131,000. In 1995, at McDonald’s the annual take-home pay for a manager was $150,000 a year for each restaurant owned. This was seven times the earnings of a crew member working full-time at minimum wage.
Under a scheme set up through the Work Opportunity Tax Credit, the fast-food chains have for years claimed a tax credit of up to $2,400 for each new low-income worker they hire. It was supposedly an incentive to give young workers on-the-job experience. This brazen example of corporate welfare has continued despite an investigation by the U.S. Department of Labor in 1996 which concluded that 92% of these workers would have been hired anyway.
Fast-food chains spend about $3 billion each year on television advertising – enough money to pay 75,000 workers $40,000 a year to build hospitals, schools, or any number of productive activities that would actually benefit society.
Low Wages, Few Benefits for Workers
The fast-food industry hires around 3.5 million workers and pays minimum wage to a higher percentage of its employees than any other industry in the U.S. The only group that earns a lower hourly rate is migrant farm workers.
Roughly 90% of the nation's fast-food workers receive no benefits and are scheduled to work only as needed. There are few, if any, possibilities for advancement. Assistant managers – a misname designed to entrap workers who are looking to build a career at these chains – are also exploited, often forced to work 50, 60, or 70 hours a week, sometimes off the clock, with no serious opportunities for promotion. Of the 20 or so assistant managers I worked with in my two years at Pizza Hut, only one was promoted. All of them were diligent workers who, in many cases, performed the duties of our store manager – if not more – yet received little more than minimum wage.
In 1998, employee benefits accounted for a miserable 2.5% of total expenses (Sacks, 2000). Employee benefits are only 8.6% of total compensation. The national average for employees was 27.5% in 1999. Even among service workers, it was 26.2% (stats from Labor Relations in the Global Fast Food Industry, edited by Tony Royle).
Answering Company Arguments Against Higher Pay
During our organizing drive, management repeatedly tried to justify the poverty-level wages we earn. Below are the most common arguments and how to refute them.
Though we will focus exclusively on the claims made by Emerald City during our campaign, most of the pizza and other fast-food franchises will use similar tactics. These responses can help workers combat corporate propaganda justifying the low wages and few benefits we are paid.
“Pizza Hut doesn’t have money for raises and we simply can’t compensate you for the cost of delivering our products”.
This is the most common argument made by company executives and owners when workers demand better compensation for their work. The problem is: This is just an assertion, but they expect us to believe it. We need to ask: Where’s the evidence? We want to see financial records, including all payments to the directors and shareholders and to the multinationals. When a union organizer asked an executive of Emerald City to provide this evidence, he refused.
The executive then claimed that he, too drove a “used car” and that he was “just like the rest of us.” Anticipating this kind of argument, organizers had paid a visit to his listed address only a week earlier and taken photographs of his vast home. Apparently, this executive must have believed that “the rest of us” also live in multimillion dollar homes in an exclusive neighborhood just north of Seattle.
Unless management gives us unfettered access to all the necessary records, we have no evidence to believe what they say. We should not put off our goal of proper and decent compensation for our labor due to pleas of poverty from local franchise owners. The reality is that their cries of destitution are an attempt to distract us.
Our Labor: The Source of Their Wealth
What we know is that the fast-food industry is massively profitable. It has created huge multinational corporations, which have made massive profits for their shareholders and executives. The corporate records we quoted in our chapter on the economics of the fast-food industry confirm this. The questions we must ask are: How did they amass all that wealth? and: How is it that all the workers who make the pizzas and deliver them are stuck making minimum wage?
The owners will attempt to argue that it is their "entrepreneurial" skill that has created the wealth and that we are lucky to have any kind of job at all. They argue that we workers need to follow their example, save our dollars, and become businesspeople if we want to get ahead.
Children may believe in these fairytales, but those of us who work for a living know otherwise. When you have bills to pay, saving up for a small business that will only be swallowed by the Wal-Marts of this world is impossible. No one gets ahead on a part-time, minimum wage job. That is not how it works.
We, the workers, are the ones who make pizzas and deliver them. It's our sweat in the hot kitchens that creates the product. We are the ones who suffer cuts and burns on our fingers from table blades and hot pans. It’s our car that breaks down from years of abuse and extreme road conditions.
Much of this is true for all fast-food workers. It's also true in every other area of the economy. Every teacher, plumber, computer programmer, or Boeing worker is part of the process of creating the wealth in our society. It’s our labor – not the bosses’ – that produces the necessary products that keep the world moving.
The reason why they are getting rich and we aren’t is because we don’t control the wealth realized by the sale of these products. Under the wage system, the boss owns the product, and he takes the proceeds from its sale.
Profit is The Unpaid Labor of Workers
The way owners achieve their wealth is not immediately apparent, but it can be easily understood. When we start working at a job, we basically agree to a contract which says we are going to be paid a set amount of money for working a set amount of time.
Hypothetically, lets assume that our job pays $7.50 an hour and our boss wants us to work for twenty hours. At $7.50 an hour for twenty hours, that’s a total of $150. In that same period of time, however, the work we do will probably make $300, $400, or $1000 worth of pizza. That’s the trick.
What does this mean? Just for arguments sake, lets assume we only create $300 worth of pizza. After our boss gives us $150 for our week’s worth of work – meaning our own labor essentially pays our wage – he is left with an additional $150 that he did not work for. Taking the rest of the crew into consideration, this adds up to thousands of dollars. By the end of the year, there will be hundreds of thousands or even millions of dollars our fellow workers and ourselves generated – but will never see.
If someone took $150 from your wallet on the street, you would demand it back. But in this system, this theft of $150 worth of value created by our labor is legal. This exploitation of our labor is at the heart of how the owner of a company can accumulate wealth while we slave away and have barely enough to live on, with no decent health care, no paid vacations, no pensions, and no security.
The factories that build society’s machinery, the land that grows our food, and the restaurants where that food is cooked – economists call all of these things “the means of production.” These “means of production” are the “tools” which help produce the goods that are necessary to keep society functioning.
Think about this. The people who use these “tools” don’t own them. The people who own these “tools” don’t use them.
We are told America is composed of one great middle class. The reality is that it has been polarized into two main groups of people.
The first class, which accounts for about 80% of the population, makes their living, like us, by working for a wage or salary in some kind of non-managerial capacity. The ranks of this class are filled by those of us who don’t own our own multimillion dollar company and have little to sell but our own labor, be it mental or physical.
The other main class, however, does not have to work for a living. This group basically represents the richest 1% of America and owns more wealth than the bottom 95% of the country. Because of their privileged circumstances, they do not need to live on their own labor.
Instead, they live on the labor of others. Despite what conventional wisdom tells us, you don’t get rich by working hard; you get rich by getting people to work hard for you. This possessing class pays the working class for their labor and simply lives on the profits that labor creates.
One class lives by working; the other lives by owning.
In ancient times, inequality was maintained through force. Someone with a sword or a whip would beat you into servitude. Today, this isn’t necessary. Robbery is committed on a grand scale and it is done with the blessing of the law. An economy powered by large, privately owned entities gives the possessing class power over the non-possessing class: you. It enables those who own not only to live without working, but also to determine whether the non-owners shall work and under what conditions. It establishes a master-and-servant relationship, with the capitalist class in the position of giving orders and you in the position of obeying them.
The source of profit is buying our labor for a lower price than the value that we produce. That’s because our labor can create new wealth. Other costs of production like dough, tomato sauce, and rent can’t create new wealth. An owner of a company cannot make profit off these items alone. So, they are transferred at their cost price into the value of the pizza pie. They do not affect his profit. It’s your labor that lays the golden egg for management.
A simple proof of this can be seen by the fact that if we all stop work, then the boss makes no profit. The whole labor movement is based on the fact that by withdrawing our labor, the owner is denied any profit.
This shows how important our labor is. The bosses couldn’t make any profit and support their affluent lifestyle without having us work. Their whole aim is to hire more and more workers, so THEY can live off the surplus we produce, but which THEY can legally take.
Just think if workers took home all the wealth we created. We would be able to immediately improve our living standards.
Owners definitely need us, but do we need owners?
How Do They Get Away With This?
The owners of society need a legal system to defend this system of large-scale theft, so they use part of their profits to finance the two pro-corporate political parties, the Republicans and the Democrats. They raise funds to ensure that politicians who defend their interests get elected. These politicians pass legislation which restricts our right as workers, makes it almost impossible to form a union, sets the minimum wage below the poverty line, and fails to provide funds for a universal public health care system and an affordable quality child care program.
By lobbying Congress, the fast-food industry and other industries that employ low-paid workers ensured that the real value of the minimum wage fell by almost 40% between 1968 and 1990. Today, it is still 27% below its level of the late 1960s.
That piece of paper you signed when you took the job? That was where they won your consent for the exploitation of your labor. That cheerful smile from the manager or the corporate executive is designed to make that theft seem more palatable to you.
In Fast Food Nation, Eric Schlosser describes it this way: “Local fast food franchises have little ability to reduce their fixed costs: their lease payments, franchise fees, and purchases from company approved suppliers. Franchises do, however, have some control over wage rates and try to keep them as low as possible. The labor structure of the fast food industry demands a steady supply of young and unskilled workers. The immediate needs of the chains and the longtime needs of teenagers are fundamentally at odds.”
“If we pay higher wages and better benefits, it will make our product uncompetitive. We will lose our customers and you will lose your jobs”.
So now let us see whether there is a basis for a pay raise based on our best possible estimate of Emerald City finances. Since they are not a public company, they do not publish their financial figures. As we mentioned earlier, they also refused to give us this data when we politely asked if we could see it.
Pizza Hut, on the other hand, is a public company. Unfortunately, because it is owned by Yum! Brands, Inc. (which owns several different chain restaurants) its financial figures are mixed with those of other companies. Therefore, we will need to look at comparable published statistics to see how the company makes its money.
Fast food operations – though highly profitable – are extremely mechanized, with large overhead costs: great expenditures in real estate, transportation, and advertising. The percentage of total cost represented by our labor is actually very small. In a review of McDonald’s finances, a survey done by Lee and O’Roark Research called "The Impact of Minimum Wage Increases" showed that a $1 increase in the minimum wage would add only 2 cents to the cost of a food hamburger (Fast Food Nation, p. 73). This shows how little wages figure into the cost of the final product. One can expect to see fairly similar statistics for other areas of fast food.
Another source of valuable information is the pizza industry website pizzamarketplace.com, where managers of Domino's have posted many articles describing their business costs.
They state that, on average, labor comprises about 20% of the value of a pizza, not including the manager’s salary. With the close competition between the major brands, we can assume this is pretty close for all pizza companies, and the limited data we managed to acquire from ECP only confirms this.
So let’s say the workers in a store get a raise of $2 an hour. Since labor is only around 20% of the price of a pizza, then this would increase the price of a pizza by around 40 cents ($2 times 20%). A $2 an hour wage raise would be a huge step forward for us as workers. And yet the Emerald City executives say they can’t afford it, because it would drive our customers away.
But if that was the case, how come the company recently increased the price of nearly every product by about $1? Management will probably argue that this is because the price of cheese went up, but notice when their money is at stake nothing is mentioned about high prices driving customers away.
Also, what about the fact that management has increased the delivery charge to $1.60? They weren’t afraid of customers fleeing from Pizza Hut then, unless they expected the customer to balance that out by reducing our tips.
This whole argument leaves one important item out of the picture: profits. We are not interested in increasing the price of food for working-class people. The wage increases we propose can easily be achieved by a cut in ECP’s profit margins and, in a worst-case scenario, a small increase in menu prices. However, the majority of that money should come out of company profits and executive bonuses.
“The Pizza industry has low-wage jobs. You knew that when you took the job. We are paying the rate we hired you at.”
What choice do we have? We’ll starve if we don’t work! That doesn’t mean we accept these wages and conditions as fair.
“Fast food is a low-pay industry; go look for a different job if you want a better wage.”
The fast food industry tells its workers that these jobs are just a stopping place on the road to a better job. This is used as a way of justifying low wages and no benefits. There was a time when fast food hired almost exclusively teenage labor but, as we know, that has all changed. We have to ask: What other real choices are out there? Most of the higher-paid jobs have been disappearing during the 1980s and 1990s due to closures and layoffs. The average salary of jobs being lost is $34,000, or $16 an hour. The average salary of jobs being created is $19,000, or $9 an hour (MSN News, 10/27/03). Close to nine million are unemployed, with five million who would prefer full-time jobs forced into part-time jobs.
Unemployment in Washington State is very high. There are no real options. Companies like yours are the reason for low wages. You have gotten rich out of this, while we face poverty-wage jobs with no rights. That’s why we need to make this job a living-wage job.
“We are just a small franchise. We understand how hard it is to live on these wages, but we just can’t pay any more”
That’s what Emerald City told us. Below, we list many sources of income that are available to pay for higher wages:
• Opening Up New Stores
Emerald City opened two new stores last year at a cost of around $300,000 each – $600,000 in that year. Management might argue that this comes out of profits but, as we have already explained, profits are the unpaid labor of us workers. Management might, instead, argue that they borrowed the money from the bank. However, the bank will need to be repaid and, again, the money to pay that will come out of profits which, again, represents money that we should receive as wages.
Certainly, management doesn’t need to build new stores to survive. This is simply another way for them to accumulate wealth at our expense. It comes out of the wealth we created and was siphoned off as profits. If this money was redirected toward us workers, it could help improve our wages and benefits. In fact, according to figures supplied by Terry Hopkins in a memo put out in April of 2004, $600,000 would be enough to increase driver reimbursement by around 20 cents per delivery – meaning about an 80 cent to $1 an hour raise for every driver in Western Washington.
• Profits and Earning of Owners and Executives
Executives and owners of Emerald City are used to enjoying a fine lifestyle. Their profits, bonuses, stock options, and dividends are the source of that wealth. Certainly, they don’t live on minimum wage without decent health benefits or paid vacations. Company President Terry Hopkins admitted at a meeting of Pizza Hut workers that his salary alone is $150,00 a year. We do not know what other executives make.
Every dollar that goes toward Emerald City’s profits comes out of our pockets. This poses the question: What role does Emerald City play? Essentially, they are subcontractors for Yum! Brands, Inc., who attempt to keep labor costs low. For that service, they take their profits.
• Payment to Yum! Brands Inc for the Pizza Hut Franchise
We know that Yum! Brands is the biggest, most profitable fast-food company in the world – at least they say so on their website. If they are indeed this successful, they could certainly do with a little less, so we can at least scrape our way out of poverty. Just think that the whole expansion of these fast-food giants into an international empire was only possible due to the exploitation of workers in the U.S. for the past 40-50 years. It seems a drastic reordering of priorities is in order.
• Giving Back the Delivery Charge
One of the victories, admitted in private by an Emerald City executive, of the organizing drive was to increase the compensation for delivery drivers from 60 cents to 65 cents. Of course this does not compensate for the huge spike in gasoline prices, but it is still a step forward and small victory.
At first, the company told a meeting of workers that they made no money off the increase in the delivery charge from $1.50 to $1.60. Then, company President Terry Hopkins wrote an announcement to drivers saying that the new five-cent reimbursement “will cost our company about $156,000 per year in profits.” According to that very figure – which openly admits the company is making profits off of the delivery charge – if Emerald City makes $156,000 per year for every five cents of the delivery charge, taking into account the sixty cents that went to drivers last year (leaving a remaining one dollar which contains 20 five-cent increments), that means the company made $3,120,000 off of the delivery charge (20 x $156,000) and will still make $2,964,000 this year (19 x $156,000) with the five-cent increase. Drivers, not Pizza Hut, pay for the costs of delivery. That money belongs to drivers. Here is another excellent source of money to improve the situation of workers.
• Money Spent Trying to Lower Our Wages
In case no one noticed, the company was willing to pay thousands upon thousands of dollars organizing mandatory meeting for workers to listen to their anti-union campaign during the summer of 2004. This meant renting out expensive convention halls over the course of several weeks, food for the meetings, door prizes, and paying the wages of a large section of its workforce to watch these twisted and deceptive videos. It also meant expensive consultation fees from the union–busting company which supplied the films. That was certainly money that could have been spent on better wages for us workers.
We also know that the restaurant industry has spent a lot of money to push a bill in the Washington State legislature to create a sub-minimum wage – $2 an hour for workers who receive tips. We don’t have access to records to show whether Emerald City management contributed to this, but we have not seen them withdraw their membership from the local restaurant associations that funded it.
We don’t need to point out that such legislation does not benefit us as workers. Certainly Yum! Brands has been active at the federal level supporting similar bills. Obviously, any such expenditure by Emerald City would be available to help us get better wages. We should note that the entire labor movement in Washington State has been putting resources into defeating this bill.
We feel these statistics are sufficient to justify our demands for living wages and that Emerald City is totally capable of improving the wages and benefits they offer us as workers. We also feel we are totally justified in claiming this money since it comes out of the wealth we create as pizza workers. Again, we feel that other franchises are in a similar situation.