How McDonald’s Wage Hike Could Boost Its Business
Business + Economy

How McDonald’s Wage Hike Could Boost Its Business

© Mike Blake / Reuters

McDonald's decision to raise wages for about 90,000 workers could help turn around its business, Standard & Poor's credit analyst Robert Shulz said on Thursday.

Standard & Poor's Ratings sees tough times ahead for the burger chain. The firm reduced its outlook on McDonald's credit to negative prior to the announcement. But while higher wages raise McDonald's costs, it moves the company closer to its long-term goals, Schulz said. 

"Obviously there's a cash cost to that, but there's also a cash cost to turnover, to morale. This is a customer service business, so the wage increase we see as one of the many things that the company has on the table to reconnect with the customer," Schulz told CNBC's "Squawk on the Street."

Related: 13 Disturbing Facts About McDonald's

McDonald's said on Wednesday it would raise pay to an average of $10 per hour for employees at company-owned restaurants. The policy does not apply to stores owned by franchisees, which account for 90 percent of its 14,000 U.S. locations.

The wage hike, along with simplifying McDonald's menu and testing some new items, is all part and parcel of returning to positive U.S. comparable store sales—a key measure of growth in the restaurant industry, Shulz said.

In fiscal year 2014, McDonald's global comparable sales growth dropped 1 percent. Its U.S. unit delivered a 2.1-percent decrease in comps. Standard and Poor's outlook reflects its view that McDonald's may not be able to improve revenue growth, customer traffic and market share over the next two years, especially in the United States.

If that happens, Standard and Poor's said it would likely reduce its rating further to A-, which indicates McDonald's is no longer viewed favorably to its peers. The firm believes there is a 33 percent chance the burger chain fails to turn around its business in the near term.

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"Over the next 18 months we don't really expect to see much that would cause us to go back to stable in the next quarter or two," Schulz said.

Standard and Poor's noted that McDonald's has overcome periods of weak menu trends, but warned that the current competitive environment is "fierce."

Consumers have shifted to so-called fast casual restaurants such as Chipotle, which are widely perceived to use ingredients that are fresher and of a higher-quality than those offered by traditional fast food eateries.

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