While Lyft (Private:LYFT) and Uber (Private:UBER) continue to revolutionize how a growing proportions of America thinks about personal transportation, another less-remarked revolution may be cooking in the same pot. Unlike the carsharing revolution, which threatens "only" the automotive and energy sectors, this one could disrupt most of the industries in America, and the world.
You see, Uber and Lyft are doing more than turning people into passengers. They are also turning people into drivers. And that has real implications for the single largest market in America: the labor market.
A New Source Of Labor Demand
Uber and Lyft recently passed a major milestone (yes, another one) when they revealed that after years of mostly on-boarding professional drivers who have been chauffeuring people for years, they are now drawing a majority of their new drivers out of their pool of riders: ordinary people who are leaving various other careers behind to become either full- or part-time independent contractors with ridesharing companies.
Because most ridesharing customers use multiple ridesharing services and drivers use their own car, these new workers also have their choice of which company to work with when becoming drivers. In fact, some of them work for several different services. Competition for drivers is thus little less fierce than the competition for riders. In fact, most of the upstart challengers to the entrenched duopoly begin their business model pitch with more generous driver pay. Fasten, out of Boston and Austin, promises drivers a flat $1 fee commission for each ride, compared to Lyft's 20-25% and Uber's 20-30%. Juno, in New York City, is even offering drivers equity in the company.
These two facts combined add up to something rather pivotal for the labor market. If drivers can readily be drawn from other fields and put into service as rideshare operators, and if competition for drivers is heating up, then competition for labor is by extension heating up across the entire labor market. When deciding where to hire their next driver, Lyft and Uber and others are most probably indifferent to whether they get them from a competing service or from another employer's back office or sales floor. And while estimates of Uber and Lyft pay vary, and few credit the companies own $25-$35 an hour claim, most have it at least 50% higher than minimum wage.
Thus, as ridesharing continues to grow, certain employers may be more vulnerable to disruption as low-wage labor becomes progressively harder to find.
How To Play It?
This will not happen overnight. Any industry or market takes time to see a major change like this fully come to fruition, and the labor market will be no different. What I am describing will undoubtedly be a multi-year process, at minimum. But long before the process is full wrought, the trend will become clear enough that traders and investors will be re-pricing various stocks according to what the companies bottom lines will look like when the process is finished. Therefore, as with many things, changes in the stock values may come faster than the changes in the underlying fundamentals.
McDonald's is already under a great deal of pressure to raise wages, albeit currently most of it is political - union picketing and protest marches producing minimum wage laws - than economic. The $15 minimum wage is not a reality yet, but the company has received considerable negative press for its labor policies and is still one of the largest employers of minimum wage workers in America.
To be sure, McDonald's is already trying to respond to the pressure. McDonald's has recently announced that it will finally expand its mobile app to include in-app meal ordering, in an effort to reduce the number of man-hours spent transcribing orders customers are perfectly capable of typing for themselves. This will help to reduce labor costs. It's senior management is also considering - some would say threatening - replacing workers completely with robots in at least some of its locations. McDonald's may also benefit from the fact that its other competitors in the restaurant space, like Burger King, don't really use labor any more efficiently than it does, so it will not really be too far behind.
The Walton Empire
So McDonald's might or might not be able to adapt in time, but it has a decent chance. That makes it a less than ideal potential short candidate. A better candidate for shorting due to labor costs might thus be Wal-Mart. While many retailers are labor-intensive operations, Wal-Mart is truly in a class by itself. Wal-Mart only sells half as much merchandise per employee as Costco (NASDAQ:COST) does. Or put another way it needs twice as many employees to sell the same amount. It is far behind its competitors in self-service checkout and other basic labor-saving investments, although it is now trying to change that.
And Wal-Mart's competitors are not nearly so laggard. Costco is twice as good labor-wise, and online retailers like Amazon (NASDAQ:AMZN) are even better. Even if Wal-Mart does now recognize the need for investments in new labor-saving initiatives, its competitors may already be so far ahead of it that it doesn't have time to catch up. It is hard to picture the third-largest employer - behind only the Pentagon and the People's Liberation Army - with almost $15 billion a year in profits, as anything other than a colossus, but Wal-Mart is increasingly out of step with the new economic patterns. It is built on a cheap labor foundation that may crumble, and faster than anyone thinks. Meanwhile strong price competition will probably limit its ability to pass higher costs on to customers.
Quantifying the impact is a little harder, but we can still put it in the ballpark. Wal-Mart employs 2.2 million people, 1.4 million of them in the US alone. They don't disclose the breakdown of full versus part time, so we don't know the average number of hours worked. But we do know that full-timers earn about $13 on average, and part-timers $10. New employees are only guaranteed $9, however. 50% above the minimum wage would be $12 an hour. Some say rideshare drivers can make more. And they can make their own schedule, another perk Wal-Mart does not offer.
Let's assume a generous $11 wage currently and 20 hours a week. Let's also say that to get workers to accept the lack of flexibility retail requires, Wal-Mart raised the average to $13, the current full-time rate. Even a $2/hour raise would increase Wal-Mart's labor costs by $2.8 billion in the United States alone. That corresponds to a 20% fall in profits and, with the P/E holding steady at 15.5, probably a 20% fall in the stock as well. If rideshare wages really are even higher, or if continuing competition for drivers sends it higher in the future, the damage is even worse.
In my opinion, most investors are drastically underestimating the impact Uber and Lyft will have on the American economy. Which is really saying something, since a lot of people think they will have a substantial effect. But their impact is usually quantified solely in terms of transportation, rather than in terms of labor as a whole. As ridesharing companies continue to offer jobs that are easy to start with minimal training and experience, low-wage employers like Wal-Mart and maybe McDonald's as well will increasingly find their business models obsolete.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.