Is The Problem With Wal-Mart Actually Wal-Mart?

| About: Wal-Mart Stores, (WMT)

The Wal-Mart panic over mid-February sales set off an enormous amount of hand-wringing and, I suspect, the current sell-off.

But one important question was not asked, at least not among this site's readers. Is this an economic problem or is it a Wal-Mart problem? Does the problem lie with our economy or with Wal-Mart (NYSE:WMT) management?

The two questions may be related, given Wal-Mart's size. With sales of $450 billion a year, Wal-Mart represents a full 3% of the $15 trillion U.S. economy. Put it this way - Wal-Mart sales are 15 times bigger than the change in the entire U.S. economy during the last quarter.

Many of those sales take place in other countries but the point remains. What Wal-Mart does matters to more than Wal-Mart.

The choices Wal-Mart has been making have been aimed at maximizing return to shareholders and minimizing costs. It was built on the strength of the lower middle-class in this country, from its founding in Bentonville, Arkansas to today. How the lower middle-class goes determines Wal-Mart's fate.

Lately, the lower middle-class has been doing poorly. Economist Emmanuel Saez says that, since the end of the recession, incomes for 99% of us are down, incomes for the top 1% are up 11%. No matter how well you merchandise you can't sell to customers without money. Ever see someone from the upper-crust pawing through a Wal-Mart sundress display?

A big reason for this income problem is Wal-Mart. It's not just that they pay minimum wage, that people who work there for many years still don't make much, and that they run off anyone they even suspect of harboring pro-union sentiment. It's that, in order to compete, other retail and food merchants are pressed to do the same.

There's a tell that Wal-Mart management is well aware of. Wal-Mart USA CEO Eduardo de Castro talks of young mothers surging into the store at the first of the month to buy baby formula, big gains in sales on the days when workers are paid, and other "disturbing behaviors."

Wal-Mart has responded in a variety of ways, including a deal with American Express called Bluebird, which I wrote about last year, which offers better terms and more dignity than the check-cashing services its customers use otherwise.

But there's something else Wal-Mart can do, something Henry Ford did a century ago when he was starting to produce the Model T in quantity.


Instead of fighting the President's proposal for a $9/hour minimum wage, what if Wal-Mart got behind it? What if, in fact, Wal-Mart gave it to its own workers? The company claims that would hurt margins, but it could have a dramatic impact on the top line. Competitors like Costco (NASDAQ:COST) already pay good wages, and the result is upper-middle income consumers flock to Costco in numbers Wal-Mart can only envy.

Passing a $9/hour minimum wage would force all of Wal-Mart's competitors to do the same. Getting there before others would increase employee loyalty, undercut the push for unionization, grow sales substantially and could improve Wal-Mart's popularity among higher-income consumers it's now losing to rivals, even end the political fights that seem to occur every time it tries to bring a store into a higher-income neighborhood.

Sometimes the wrong move for your politics is the right move for your business. I expect a lot of pushback from readers on this idea, but before you flame consider this. About 80% of Wal-Mart's retail employees are on food stamps. They're the biggest recipients of Medicaid in many states, and collect $2.66 billion in government aid each year.

Isn't it time to end the government subsidy of Wal-Mart's low prices, in the name of boosting Wal-Mart's results?

Disclosure: I am long COST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.