Tuesday, November 12, 2013

The Biggest Threat to Minimum Wage Workers Everywhere

From Zerohedge: http://www.zerohedge.com/news/2013-11-12/biggest-threat-minimum-wage-restaurant-workers-everywhere

Over the past year, unionized restaurant workers across numerous fast-food chains but mostly at McDonalds, expressed their dissatisfaction with compensation levels by striking at increasingly more frequent intervals - a sentiment that has been facilitated by the president himself and his ever more frequent appeals for a raise in the minimum wage. Unfortunately, as we have pointed out previously, in the context of corporations that have given up on growing the top line (as virtually all free cash goes into stock buybacks and dividends and none into growth capex), and in pursuit of a rising bottom line, employee wages are the one variable cost that corporations will touch last of all. But what's worse, these same unionized employees have zero negotiating leverage.
Perhaps nowhere is this more visible than in the recent strategy of smoothie retailer Jamba Juice, which in order to battle a 4% drop in Q3 same store sales has decided to radically transform its entire retailing strategy by getting rid of labor, cheap, part-time or otherwise, altogether. Presenting the biggest threat to minimum-wage restaurant workers everywhere: the JambaGo self-serve machine that just made the vast majority of Jamba's employees obsolete. Coming soon to a fast-food retailer near you.
Why did Jamba just make its retail sales force obsolete? Part of the problem is heightened competition: McDonald’s has entered the smoothie market, and others like Dairy Queen and Panera spent the summer promoting their rival drinks. Which means even less top-line growth potential. It also means that in order to push more of the top line straight to earnings, and bypass variable costs, a problem that will be faced by increasingly more corporations, Jamba's corner office had no choice but to unleash JambaGo.
The smoothie chain is hoping to see improvement from something it calls “JambaGo,” a self-serve machine that can be installed in cafeterias, schools, and convenience stores. Jamba Juice makes money by selling the prepackaged, pre-blended smoothie ingredients to JambaGo vendors, like a soda maker selling syrup to the owner of a soda fountain. The advantages: Jamba doesn’t need to build a store and the labor costs are much lower compared with hiring staff to concoct made-to-order drinks.

The company expects this model to help expand its brand more quickly and cheaply. Last quarter, however, revenue from the JambaGo program amounted to just about $400,000. But having recently landed a deal with Target (TGT) to put JambaGo machines in 1,000 Target Cafés, the company will soon have installed more than 1,800 machines (up from only 404 at the start of 2013). By contrast, there are currently about 850 Jamba Juice stores.

Based on a goal of $2,000 in annual revenue per JambaGo, the rough math for 1,800 machines is $3.6 million—a decent boost for a company that took in $228.8 million in revenue last year. Another 1,000 are planned for 2014, which would bring in another $2 million in annual revenue.
Here's what happens next: Jamba will do what every other company does to demonstrate that its radical strategy is successful - fudge the numbers and beat EPS for several quarters. This will happen even if JambaGo is ultimately yet another loss leader. However, its peers will watch closely and soon decide to roll out their own version of just this: a self-contained dispenser of a la carte prepared fast-food food, either liquid or solid, and in the process let go tens of thousands of their own minimum-wage employees, also known to shareholders as "costs."
What happens after that should be clear to everyone: more unemployment, lower wages for the remaining employees, worse worker morale, but even higher profits to holders of capital. And so on. Because in a world in which technology makes the unqualified worker utterely irrelevant, this is what is known as "progress."


From Harrison Fischberg:

It is important to note the hypocrisy and more accurately, the fundamental misunderstanding in regards to economics, of the common person. Generally speaking, individuals prefer to have the best quality product, at the lowest quality price. One would be hard pressed to find an individual who would buy the exact same product at a 10 fold price increase, when the option to buy it 10 fold cheaper is available. When shopping, people search for the best deal and this is not only "proven" a priori but can be seen empirically through Cyber Monday, Black Friday and sales in general. However, the issue comes forth when people want to pay the lowest possible prices for goods, but then find it morally repugnant for a person to work below a certain wage. What they are missing however is that, A) wages are prices and B) the action of the consumer is what drives the fundamental structure. If people were happy paying 30 dollars for a meal at Burger King, then those who work for BK most certainly could receive a higher wage. However, this simply isn't the case since there are other options to BK and the competition for best product, at the best price, will force BK to lower its prices as well as the wage they pay out. When the consumer realizes that it is they who form and orient the market, will things sort out. But until then, the call for government intervention will not fix a thing, leading companies to move towards automated machines. This is what the consumer is actually calling for. They just don't realize it.

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