McDonalds Owes Me Sixty Nine Cents

I had a very unusual experience at my favorite fast food outlet this morning and I am trying to determine what it means. 

For many years I have used McDonald’s as a key economic indicator.  I don’t review the financial performance.  I don’t care if revenue is up or down.  Profits and market share are not part of the analysis.  The main indicator I use is the response from the person who takes my order at the “drive thru”.  If I can clearly and easily understand the person taking my order, the economy is in trouble.  If the Valedictorian from Penn is working at a fast food franchise until they find a better job, we are in a recession.  Lately, the communications have been mixed.  I have found a few “drive thru” professionals to be very articulate and others completely incomprehensible.  So I figure the economy is treading water.

This morning, however, I had a totally unique experience after ordering a Sausage McMuffin Without the Egg.  The young lady who recorded my order said that the charge would be $2.10 and I could settle the transaction at the first window.  Having lost most of my small bills on golf bets, I had to pay the tab with a twenty.  The pleasant and helpful eighteen year old handed me my change and she said:  “I don’t think this is enough.”   I replied:  “I beg your pardon?” and I counted the change.  It was $15.86.  At this point my CPA background came to the surface and I said:  “You owe me $2.04.”  She replied that she did not have any $1s and offered some quarters.  “Oh crap, I only have two quarters.”  I said: “Okay, we are getting closer. You owe me a buck fifty four.”  “Here, take all the nickels and dimes.”  “You still owe me $.69.”  “I’m sorry, I don’t have it and I can’t pay you.”  I said:  “Hey, don’t worry.  You gave it your best shot.  However it is 8:15 in the morning.  How are you going to settle up with the other cash paying customers you encounter today?  You don’t have any money!”  She replied, “It is going to be a long day.”

Wow!  The world’s largest fast food company ran out of money.  How could this happen and what does it mean?  This is something that I never expected from my key economic barometer. In addition, this is something I never encountered before in the United States or anywhere else.  I spent a lot of time in Trinidad, a truly third world country, and never found a merchant that could not give me the right change.  To say that this makes the United States look like a third world country is an insult to Trinidad.  The Trinnies always paid their debts.

Is this a Micro economic problem or a Macro issue? 

It definitely is a Micro problem.  At least one McDonalds can’t give change to their customers.  I assume they pasted a sign in the window that says “We only accept Credit Cards” after my transaction.     

Unfortunately, it may be a macro economic issue.  Perhaps a lot or most of the Golden Arch franchises in the United States are out of money.  They address the sales issue by going “All Credit Card” but that has a lot of ancillary challenges.  For McDonalds, there is a clearing delay in processing Credit Cards and a fee from the bank that reduces their income.  Sure they can execute the current sale but they have a delay in getting their cash and they won’t get as much.  If they have a problem with their margins (the difference between the $2.10 sales price for a sausage McMuffin and the cost of making the delectable treat) things will only get worse as time passes. 

Certainly, McDonalds is feeling the impact of higher costs.  When food prices went up with inflation, they increased for you, me and Mickey D’s as well.  Then, the minimum wage increased and some very large states require a living wage for all fast food employees.  In the past, many of these jobs were part time positions for students and others who enjoyed the additional income.  A high schooler could work a few hours a week and fund his or her entertainment budget.  This seemed to work for everyone.  With the $20 an hour requirement, total wages went up but actual work hours declined.  When a $20 wage became a requirement, the fast food outlets countered by reducing staff to the bare minimum and they crunched their profit margins as much as possible.  Some vendors are reducing the number of full time employees by cutting back the number of hours everyone works. In most states, part time employees are not entitled to the same benefits as full time workers.  Paying less for benefits is a partial offset to the financial impact of higher hourly wages. 

Why doesn’t McDonalds simply adjust the sales price to their traditional profit margins?  Because a lot of their diners can’t pay the higher price. Their customers could afford stopping by on the way home and buying dinner for four for $25 dollars but they can’t afford stopping by for $50.  With the increased cost, perhaps the breakeven point for McDonalds on that order is $45 dollars. In fact, the cost increases may have driven a lot of families to peanut butter sandwiches. So a franchise in Sacramento may really be up against it.  Smaller profit margins and fewer sales.    

On a macro basis, the switch to “Credit Cards Only” also has a very negative impact on the buying power of the US consumer.  Before the jump in inflation three years ago, 60% of Americans were living “paycheck to paycheck”.  Every dollar they earned, they needed to spend to support themselves and their families.  When inflation hit, they suddenly did not have enough income to pay the bills.  There was a small rise in income but it was much less than the rise in inflated cost.  So, many of us rang up credit card debt to make it through the month.  There really were not a lot of options and we hoped the price increases were temporary.  Over the three year period, the percentage increase declined but prices were still rising.  Nothing got cheaper and the increased cost for the three years was around 20%.  The 60% living “paycheck to paycheck” find themselves getting farther behind each month and it isn’t getting any better. 

According to Forbes, the average interest rate for credit cards, in the US on July 29, 2024, is 27.62%.  When I charge $50 at McDonalds and put it on the card, the cost of the meal just increased 27.62% or $13.81.  That dinner that set me back $25 a few years ago just cost me $63.81.  What choice did I have?  I don’t have the fifty bucks and we need to eat.  After two years of my income falling short of my expenses, I have now maxed out my credit cards.  I can only pay the minimum and I have reached the limit on all my cards.  Where do I get the money to pay the cards?  I take an early withdrawal from my IRA account.  This tacks on a 10% tax penalty and the distribution is taxable to me.  Assuming I am in the 24% tax bracket, my meal is another 34% more expensive, raising the total cost to $85.51.  The real cost of my dinner has gone from $25 a few years ago to $85.51 today. 

Even worse, I am simply making minimum payments and I am going to have the same problem at the end of next month.

An equally bad outcome is that I am taking a big chunk out of my retirement savings.  The IRA mathematics works beautifully if you start contributing early and compound earnings in your account for many years.  By paying my credit card bills out of my IRA, I am destroying the ultimate value of my IRA savings.  Anyone who does this for a few years, very likely, will have to work well beyond the 67 year retirement age.

There are a lot of people in this boat.  Remember, before the inflation debacle started, 60% of Americans were living “paycheck to paycheck”.

How does this turn around? Suffice to say, it is very unlikely that prices will ever decline.  The best we can hope for is that they stop going up.  If prices stabilize and wages go up, we can get to “paycheck to paycheck” again.  Hopefully, many will progress past that point.

So, many of us are not feeling better when our politicians tell us the economy is great.  For us it is simple.  I ratcheted my credit cards to the max and I am hitting my retirement accounts.  Nothing is cheaper and it isn’t getting better for me.  Most of us have not run through the process of computing the real cost of inflation but we absolutely feel it at the end of each month when we pay the bills.

McDonalds continues to be my best economic indicator.  I was taken aback when I found that they ran out of money this morning.  I only hope the next time I order a Quarter Pounder With Cheese that the most recent Rhodes Scholar is not the person telling me, in the Queens English and with perfect timber and diction, to “Pay at the first window and please remember, we only accept credit cards.”