Business

12.05.13

No, a $15-Hour Fast Food Wage Isn’t Crazy

As fast food workers strike for higher wages, pundits are dismissing their demands as unrealistic. But an exploding burger chain in Detroit proves the naysayers are thinking in a box.

Around the country Thursday, fast-food workers and their allies demonstrated to call attention to the plight of low-wage service workers. One of the demands is that highly profitable, massive enterprises like McDonald’s and Burger King should pay employees $15 an hour, which is more than double the legally-required minimum wage in most parts of the country.

Many observers regard such a suggestion as absurd on its face— “economic fantasy at its most delusional and counterproductive,” as my colleague Nick Gillespie put it here on Wednesday. These are low-end jobs in a generally free labor market. Nobody is forcing anybody to work at McDonald’s for $7.50 an hour. Besides, these companies couldn’t function if their labor costs were to double. I mean, who can make money on fast food while paying $15 an hour?

But if you look hard enough, you can find some enterprising souls who are doing just that. I first wrote about Moo Cluck Moo this spring, when the high-quality fast-food burger-and-chicken joint on a hardscrabble location in Dearborn Heights, Micighian, was paying $12 an hour. Even in a weak labor market, with plenty of people willing to work for less, the owners decided they’d construct their business model so that they would pay significantly above the market. In September, Moo Cluck Moo raised wages to the unthinkable level of $15 an hour.

Of course, this was a small-scale experiment—a single restaurant, in an area with very cheap rent (about $1,200 per month), with no budget for advertising and marketing. “Our first store was more or less a laboratory to see how we should run it while paying a living wage,” said Harry Moorhouse, who founded Moo Cluck Moo with Brian Parker. The proof would be if it could succeed and then scale. And it’s working. The company is plowing the profits from the first store into expansion. And on Friday, Moo Cluck Moo will double in size when it opens a second store in a strip mall near an Ikea in Canton, Michigan, a town about 10 miles west of Detroit. Unlike the first store, which had no seats and no parking, this one will have 29 seats and plenty of parking. (The rent there is higher: about $2,400 per month.) “It’s near a working-class neighborhood, Westland, that we think is underserved,” said Moorhouse.

Now, Moo Cluck Moo is still a very small enterprise and a very small employers; it takes four or five employees per shift to run the restaurant. But its early success and expansion gives the lie to the notion that you can’t run a quick-service restaurant while paying people $15 an hour. Perhaps you can’t run it in the way McDonald’s does, with its high rents in high-traffic areas, with its model of franchisees kicking lots of money to corporate, and the huge marketing, advertising, and corporate headquarters expenses. But it can be done.

Moorhouse and Parker believes the more stores they open, the more viable the higher-wage strategy becomes.

Even with its $15 hourly wages, labor “is only 25 to 30 percent of our operating expenses,” Moorhouse said. Moo Cluck Moo is raising prices at its chains by a few percentage points—from $3 to $3.25 for the hamburgers—“but that’s due to the rising cost of meat,” he said. And deciding that you’re going to spend more on labor just puts pressure on the owners to design the business so that it can open and expand efficiently. “We’re going to open Canton for about $70,000 all in,” said Moorhouse. “We don’t have to be on the corner of Main St. and Main St. We’re better off adjacent to a working-class neighborhood, where rents are lower.” These are the core customers for fast food, so they appreciate having a new choice. “And the folks from upper middle class neighborhoods will drive to us.”

In fact, Moorhouse and Parker believes the more stores they open, the more viable the higher-wage strategy becomes. It has already signed a lease for a third store in Waterford Township, a town about 30 miles to the north, that will open on February 1. And once that unit opens, Moorhouse believes the tiny chain’s purchasing power will increase. “We could lower our food costs by 10 percent overall, because the bigger distributors want to talk to us,” he said. By this time next year, Moo Cluck Moo hopes to have about a half-dozen units in the Detroit area. And it is talking to companies on both coasts that are interested in the concept.

Yes, it’s tiny. The Moo Cluck Moo empire consists of two small outlets with about two-dozen employees. But when you compare its model with that of industry leader McDonald’s, it actually looks pretty good. Moo Cluck Moo doesn’t spend much on advertising, but the positive press and word of mouth it gets from paying higher wages is worth a lot of money. By contrast, McDonald’s has garnered plenty of negative publicity thanks to its ham-fisted effort to dispense advice to employees on how to get by on low wages—by, for example, having a second job and not spending any money on rent, or applying for government benefits.

So, yes, founding a burger chain in Dearborn that pays people $15 an hour might seem crazy. That’s what they called another man from Dearborn who decided to pay his employees an above-market wage one hundred years ago.