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Wages and Sandwiches

Sigma Investment Counselors

February 7, 2014

There has recently been a heightened interest in the appropriate level for the minimum wage and whether it should be increased. Clearly, this is a highly political discussion, with strong views on both sides. That is probably healthy, but investors should set aside their opinions and direct their attention to the possible affect on their portfolios.

The entire issue of minimum wages is contentious and complicated. As an example, perhaps it would be helpful to consider the potential impact on a single item that we are all familiar with, the sandwich. Most of us have brown bagged it and/or packed endless school lunches. Often the key ingredients, in addition to bread, are cheese and/or cold cuts. You can buy sliced cheese and cold cuts, pre-packaged, at the local super market, or buy “sliced-to-order” items at the deli, which offers greater choice and the ability to select the thickness and quantity that you prefer.

However, deli products are generally more expensive and take more time, for the store and the customer, than is the case for pre-packaged items. Because custom slicing meats and cheeses is relatively labor intensive, any increase in wage rates will probably have a greater impact at the deli than in the pre-packaged department, further increasing the price spread between “sliced-to-order” and pre-packaged. This could cause some shift in demand. Who will benefit and who might get hurt? Where are the best margins? Maybe every one gets hurt as more consumers shift to good old PB&J.

Of course, most wage changes and their affect on business are far more complex than sandwiches. In any event, investors need to seek to evaluate potential changes and act accordingly.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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