Fitch: US Restaurants and Retailers Allow Higher Hourly Pay

CHICAGO & NEW YORK--(BUSINESS WIRE)-- The roster of nationally recognized restaurants and retailers pledging higher pay and benefits to hourly workers continues to rise. Upward pressure on labor costs, combined with still tepid sales growth, could pressure margins in the near term, but investing in employees will provide positive returns over the long run, according to Fitch.

Yesterday, McDonald's Corp. (McDonald's: A/Negative) announced that the company will raise the hourly wage for employees at over 1,500 domestic company-owned restaurants to $1 dollar over the locally mandated minimum effective July 1, 2015, with the average projected to exceed $10 by the end of 2016. Additionally, workers with at least one year of service will begin to accrue paid time off, and educational benefits for employees at all 14,350 U.S. company and franchised units will be expanded.

McDonald's joins a host of other restaurants and retailers announcing wage hikes and/or better benefits and training for hourly workers since early 2014. These companies include The Gap, Inc. (BBB-/Stable), Starbucks Corp. (A-/Stable), Wal-Mart Stores, Inc. (AA/Stable) and Target Corp. (A-/Stable).

Pressure to respond has been intense, according to Fitch. Legislation to raise the federal minimum beyond $7.25 per hour is off the table, but states and municipalities continue to enact increases and the frequency and scale of nationwide protest by workers continues to grow. Moreover, the U.S. unemployment rate declined from a peak of 9.9% in April 2010 to 5.5% in February, suggesting that the labor pool may be tightening and, possibly, increased bargaining power for lower wage employees.

Nearly 30 states (60% of the U.S.) had minimum wages higher than the federal requirement as of February 2015, according to the U.S. Bureau of Labor Statistics. Moreover, on April 15, fast food workers and other supporters across 200 states are scheduled to rally for a $15 per minimum wage, well above the roughly $10 per hour average being offered across most of the aforementioned firms.

U.S. retail and food service sales, excluding motor vehicles and parts, rose a scant 0.9% versus the prior year during the first two months of 2015, according to the U.S. Census Bureau. Therefore, near-term pressure on margins is anticipated, as moderate price increases and higher productivity are likely to only partially offset the rise in labor cost. However, Fitch believes, over the long term, competitive pay and benefits will help companies improve their image with consumers and increase work force morale, ultimately resulting in better customer service and lower employee turnover.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
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Source: Fitch Ratings

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