Wal-Mart’s Crash Course in Labor Economics

Wal-Mart’s Minimum Wage Breakdown
Wal-Mart plans to raise the wages of hourly workers because it didn’t have much choice as minimum-wage rates rise and the labor market tightens.
Bloomberg, February 23, 2015

 

 

 

 

Last week, we learned that Wal-Mart was giving the lowest-paid of its hourly employees a raise. In a blog post, Wal-Mart Chief Executive Officer Doug McMillon said that as of April, the company will pay a minimum of $9 an hour. That is $1.75 more than the federal minimum wage of $7.25, which has been unchanged for almost six years. Next February, Wal-Mart’s lowest hourly rate will rise to $10. All told, about a half-million Wal-Mart workers in the U.S. will be affected.

There has been lots of theorizing about why the nation’s largest retailer did this: See this, this, and this. But I have a much simpler explanation: The Wal-Mart business model is broken.

As in any complex situation, there are many nuances and wrinkles: This was inevitable; state minimum-wage laws had already mandated those minimums (or higher) in at least two-thirds of Wal-Mart’s stores. In the years since the last federal minimum-wage increase, many of Wal-Mart’s employees had fallen below the poverty level and the strengthening economy has made it harder to attract and retain employees.

There is also the issue of the negative PR generated by Wal-Mart’s low, low wages. As we discussed back in 2013, many of its full-time employees receive a full array of federal and state welfare. Wal-Mart has become the nation’s largest private-sector beneficiary of taxpayer-supported public assistance (see “How McDonald’s and Wal-Mart Became Welfare Queens“). Indeed, the U.S. taxpayer has been subsidizing the wages of this publicly traded, private-sector company to the tune of $2.66 billion in government largess a year.

Although many factors contributed to the move, the simple reason for the increase is because Wal-Mart has stopped growing. Same-store sales have been little changed or declining for some time now. When we look at the underlying causes, the company’s workforce, and how it is managed, are the prime suspects.

Zeynep Ton, a professor at MIT Sloan School of Management, explains the underlying management error:

Labor is seen as a cost driver rather than a sales driver. Managers do not have much direct control over sales, almost never making decisions on merchandise mix, layout, price, or promotions. But managers do have control over payroll costs and are evaluated regarding whether they meet weekly or monthly targets for payroll as a percentage of sales. At times these pressures have been such that Walmart managers have put pressure on employees to work off the clock.

With a bonus structure designed to drive down labor costs, guess what Wal-Mart managers did?

Cutting on salary and benefits, however, didn’t necessarily lower costs. About 44 percent of Wal-Mart’s hourly staff turns over each year. That’s a lot of people, because the company employs 2.2 million workers worldwide. Hiring replacements is a costly and time consuming process.

Consider competitors such as Costco: It has average hourly wages of$20 and a turnover rate of “17% overall and just 6% after one years employment,” according to the Harvard Business Review. HBR estimates the full cost of “replacing a worker who leaves is typically 1.5 to 2.5 times the worker’s annual salary.” That is no small chunk of change.

That is before we get to the PR black eye Wal-Mart has repeatedly inflicted on itself. Consider the charity food drive it held to feed the hungry at Thanksgiving. Why was this noble effort problematic? Because the beneficiaries were the companies’ own starving employeesIts own employees couldn’t afford to buy food at Wal-Mart.

Not paying your employees enough to shop at your own store is a second-order issue. As Daily Beast writer Daniel Gross noted, Wal-Mart has failed to learn the first lesson of Henry Ford:

Walmart’s same-store sales are falling as the surrounding retail market surges. What’s the problem? By screwing its workers with low wages, the nation’s largest private-sector employer is preventing a huge chunk of the American workforce from shopping at its stores.

Where the numbers can really start to add up for Wal-Mart is in the indirect costs associated with how management treats its employees. These all seem to be having a substantial affect on growth. Consider this parade of horribles detailed at Gawker as a result of these management practices:

• Lost sales from in-store customers

• Permanent loss of customers who get frustrated and defect to Target and Costco

• Generally surly attitudes among workers, diminishing the Wal-Mart shopping experience

• Employees who leave the company the first chance they get

True, it is tough to measure some of this. However, as Costco has shown, well-paid and happy employees tend to equal satisfied customers. Unhappy employees and unhappy shoppers is very likely the corollary of this.

Wal-Mart has shown that it can be pragmatic on some issues often associated with the political left. The company’s solar efforts, for example, are second to none in the U.S. To be sure, the decision to go solar when you own lots of flat roofs in the Sun Belt was simply math.

The same is probably true of its wage increase: The rebounding economy meant that Wal-Mart may have had little choice but to increase pay.  It was long overdue.

 

Originally published here:  Wal-Mart’s Minimum Wage Breakdown

 

 

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  1. rd commented on Feb 23

    There is a Wal-Mart on one of my routes home. I occasionally stop there to pick up some things. Of all the stores that I go to, these days Wal-Mart is the one most likely NOT to have something in stock (or at least on the shelf). Its not unusual for me to walk out of the Wal-Mart with a third of my shopping list unfilled because it simply wasn’t available for purchase. That wasn’t a major issue a decade ago, so they are clearly having more difficulties today than back then. They also have the slowest check-out lines of any of the stores I frequent. While the other stores are occasionally out of stock of something, it is generally not a chronic issue.

    • willid3 commented on Feb 23

      part of that was their scheduling of workers. seems like a few years ago they decided to staff their stores with just enough workers to support sales. this has lead to times when there are very few workers available to stock the shelves. never mind the split shift schedule, which lead to less on the shelves which of course leads to fewer sales. and that split shift has not exactly helped them keep workers, since they want to leave to go were they can work 8 hours at a time, not 4 on, and 4 off.

    • Crocodile Chuck commented on Feb 23

      I read this as well. But why run a freaking retail operation, if you’re not even going to stock your own shelves?

      I mean, why get up in the morning & go to work? WTF?

    • rd commented on Feb 23

      Yep. like GM they have focused so much on cost-cutting that they seem to have forgotten that there are actual customers who buy things.

    • willid3 commented on Feb 23

      they were hoping for magical customers to buy stuff, whether it was there or not.

      seems like i recall there was an internal email from an executive wondering where the customers were

    • rd commented on Feb 24

      An interesting thing is that Wal-Mart just kicked Target’s butt in Canada. However, some interesting things to consider with this:

      1. Canada has universal, single payer health care, so employer health care coverage is not a significant issue for hiring and staffing decisions.
      2. Canada has higher minimum wages, so everybody is competing from the first floor, without some dwelling in the pay basement to cut costs.
      3. There are some other work rules in place as well (time-off requirements, maternity and paternity leave, etc. in many provinces)

      As a result, Wal-Mart Canada can just focus on their overall operational prowess without having to impoverish its workers in order to compete because all of its competitors are on a relatively level playing field..

      http://www.marketwatch.com/story/what-wal-mart-got-right-in-canada-and-what-target-botched-2015-02-11?mod=MW_default_more_headlines

    • LeftCoastIndependent commented on Feb 23

      The dockworker slowdown might have had something to do with the empty shelves.

    • willid3 commented on Feb 23

      empty shelves happened long before that. its been going on for at least 5 years now.

    • sooperedd commented on Feb 25

      I stopped in a local Walmart with my wife last week to grab some motor oil and filters. They were out of the 3 different oil filters I needed and the oil (Mobil 1 5W30); a popular brand and weight. We walked by the bird food section to buy some seed and it was half empty. I made the comment to my wife why does anyone shop here, the shelf conditions are horrible? And then wondered why do I shop there?

  2. Init4good commented on Feb 23

    Best analysis yet. Nice job Barry.

  3. guadas commented on Feb 23

    Ooooooh – I LIKE (maybe even love) how this opportunity could develop:

    1) Walmart is on its “train wreck” path

    2) Walmart OWNS real estate and lots of it. Most, if not all, near concentrations of population.

    3) Walmart’s boxes are getting covered in solar panels.

    4) Walmart’s stores “fail” to the boxes are now empty…..as well as the large parking lots.

    5) Inside, the now-empty boxes are ripe for large storage batteries….electrical storage. Parking lots are ripe for more panels and more batteries.

    6) Wala – a source of some distributed power generation and storage nearby local population concentrations. Tesla and local utilities show interest now…….

    Hmmmmmmmm

    • tigerlilac commented on Feb 24

      I use to work for an investment bank that had a “Walmart” retail shopping center fund. One of the worst conceived investments I have seen. Walmart killed the small shop space and negotiated favorable leases for itself that made it impossible to make any money as a real estate investor. Of course, the investment bank was selling to retail investors through brokers who were making larger commissions on on this fund than they normally would and they were promoting it as a “guaranteed” return (actual a return of capital, not a return on investment). The dividend went form 8% to zero and the president of the fund manager (one of the smartest guys I worked with in business) said he was shocked (aka Claude Reins).

      My point being, Walmart leases space, they don’t own it unless the deals I worked on were anomalies and I don’t think they were.

  4. Livermore Shimervore commented on Feb 23

    I visit there frequently when I’m in central Florida. For whatever reasons, a Wal-Mart down there is always on the way to something else (because of sprawl), whereas here in the North-East they always seem to be out of the way. On one of my last trips I spoke to one of the kids working there. I learned that it’s very difficult to land a job at Wal-Mart. I thought he was putting me on. He told me that because of tax breaks, they give first priority to “people on welfare or people who have been be sent by the unemployment office… not necessarily the best people applying”. He told me his elderly uncle (who retired with benefits apparently) has a good work history and skills but has been repeatedly turned down. Apparently Wal-Mart not only subsidies its wages on the backs of tax payers but the customer service quality as well…

    That being said, I stood in line behind a guy with a shopping kart that spilling over with food, enough to feed a big family. All processed meats, processed grains and processed sugars. He had three kids with him and looked like one of the Duck Dynasty cast members, plus 50 lbs. Another register opened up but I wanted to see how much his haul cost him. It was barely $100. There’s no beating Wal-Mart when it comes to this type of diet. The same shopping list at the Publix supermarket would have cost at least 30-50% more. Meanwhile the Publix seems to be nearly empty every time I stop in no matter the hour. If Wal-Mart’s business model is broken, then all of it’s competition are deeper trouble.

    • bigsteve commented on Feb 23

      I live in Central Florida, Orlando to be exact. There are so many grocery stores to shop in (six within five miles of me) that prices are not that far apart anymore. Too much competition. Publix is always full as is Walmart, Winn Dixie and Aldi. And I do not know anyone of them that you could have a cart spilling over with food for a hundred dollars. I particularly like Publix and Aldi as they only stock top quality. Aldi is a bit cheaper but the selection is more narrower than Publix. I do shop Walmart but only because of a few brands they stock that I like and it is directly on the path to work and open during the late hours I work.

    • rd commented on Feb 24

      I live in Upstate New York which is the birthplace of Wegman’s, a “100 Best Employer” grocery chain. They are competing head to head with Wal-Mart on a price basis for food staples. The Wegman’s stores are always full of people (and the shelves well stocked).

      You don’t have to be a bad employer in order to compete.

  5. Crocodile Chuck commented on Feb 23

    I just read the remainder of the article @ Bloomberg. BR nailed it.

  6. tigerlilac commented on Feb 23

    As always, Barry, an excellent analysis that is easy to read. If you keep writing like this the Kudlows of the world will see their heads explode. I would recommend you for the Clinton cabinet but, alas, your taste in cars is a little too high end for my favorite senator’s (Elizabeth Warren) fans but certainly not for me. Maybe you could just give Clinton some advice on the side along with Warren.

    • LeftCoastIndependent commented on Feb 23

      Clinton = NAFTA, CAFTA, WTO, Glass-Steagall repeal, China not so free trade. Be careful who you vote for.

  7. LeftCoastIndependent commented on Feb 23

    Anyway, a few years back, I got stuck unexpectedly overnight out of town, so I ended up in Walmart to buy a clean shirt. It was only $18 and 100% cotton. Wow, what a deal. After washing the thing 10 times, I came to realize it was at least 50% poly/rayon or whatever. I got ripped off. That was the first and last time I shopped at Walmart.

  8. VennData commented on Feb 23

    Yeah, bring back Bush.

    ROFL. Gotta love these “independents”

    • LeftCoastIndependent commented on Feb 24

      Sorry Venn, but you won’t be ROFL when you get sold out. And I’m no Con neither, nor a tin foil hat loser. I will admit, they all have something good to say, but collectively, they are a total disaster. It amazes me that people like you can be so polarized in politics. As long as there are suckers like you, TPTB will continue to take care of the special interests at your expense. Question authority.

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