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Will Low Wages Kill WMT Sales This Holiday Season… And For Years To Come?

|Includes: Walmart Inc. (WMT)
Summary

AMZN's October 3rd move to become America’s retail employer of choice poses a long-term threat to Walmart.

With reputation in decline, move may have killed WMT's plan to win NYC.

Tightening labor market may pose challenge for $11/hr WMT while AMZN and TGT move to $15.

Amazon’s October 3rd move to become America’s retail employer of choice poses a challenge and a grave threat to arch-rival Walmart.

Amazon’s new labor market strategy, built around a $15 per hour minimum wage, passed its first test just two days later at a job fair Orlando, Florida. Job seekers lined up “50 people deep” to talk with Amazon recruiters, according to the Orlando Sentinel. Long lines also greeted Disney World, which has committed to a series of raises that will bring its minimum to $15 by 2021. But lines were “shorter or non-existent” for Walmart and other low wage employers, leading the Orlando Sentinel to warn that “worker shortage could play Grinch for stores this holiday season.”

Major U.S. retailers and shippers aim to hire more than 700,000 workers this year. UPS, which plans to recruit 100,000 seasonal workers, is offering a $13/hour minimum. Walmart’s arch-rival Target hopes to attract 120,000 seasonal workers at $12/hour. As at Disney World, workers at both companies are on a path to $15, Target by 2020. With a minimum wage at $11 per hour, Walmart has had little to say about increasing wages, but according to retailing expert Kate H. Taylor in Business Insider, “Amazon’s announcement that it is raising the minimum wage to $15 per hour should terrify Walmart.”

The long-term threat to Walmart

Walmart’s decision to remain a low wage employer is not merely a seasonal issue. It poses a permanent threat to the company’s success, especially with unemployment at a 48-year low. As Moody’s Lead Retail Analyst Charlie Shea noted in his response to the Amazon wage hike, “attracting, and then retaining, quality employees is critical for the ultimate success of any retailer, with benefits ranging from reduced hiring and training costs to improved production and employee morale, both of which trickle down to the consumer in the form of better service and an improved overall experience for shoppers.”

In her analysis of our tight labor market, retail sector consultant Pamela N. Danziger chastises Walmart and other brick-and-mortar retailers for ignoring the fact that “the personal touch that their retail employees can deliver is their greatest competitive asset against the onslaught of Amazon and online shopping.”

Higher wages can actually reduce labor costs, according to Michael J. Hicks, Director of Ball State University’s Center for Business and Economic Research in Muncie Indiana. He estimates that job-turnover in entry level jobs costs employers $3000 to $6000 per worker. For some low-wage employers, he concludes, raising wages by $3-$6 per hour could actually save money by cutting turnover in half.

Amazon’s political play

In the Amazon wage hike, Hicks also sees a shrewd move to avoid the opposition that plagues Walmart’s failed efforts to expand in Blue State urban markets: “Amazon is about to choose a second headquarters location, and in the process will likely extract well over a billion dollars in incentives from some American city. For this it and the city will receive significant criticism, and much of it will be well founded. So, Amazon is likely trying to insulate itself from some of that criticism, with some well-timed do-gooderism.”

As a political move, the pay raise has already succeeded masterfully. Listen to Sen. Bernie Sanders abandoning his former stance as Amazon CEO Jeff Bezos’s most prominent political critic. “What Mr. Bezos today has done is not only enormously important for Amazon’s hundreds of thousands of employees, it could well be, and I think it will be, a shot heard around the world,” Sen. Sanders said in a press conference. “Mr. Bezos and Amazon are now leading the way.”

Amazon gained further political points by reacting swiftly to complaints from higher-paid workers that they might gain nothing or even lose ground under the new policy. In a letter to Sen. Sanders, Amazon Senior VP for Global Corporate Affairs Jay Carney pledged that “all hourly operations and customer service employees will see an increase in their base pay, as well as their total compensation.” Carney, a former Press Secretary to President Obama, further declared “we are also proud to continue to provide our industry-leading benefits, including comprehensive healthcare, up to 20 weeks of paid parental leave and our Career Choice program, which pre-pays 95 percent of associates' tuition for courses in high-demand fields.”

Compare Amazon’s political posture with Walmart’s. As the New York Times noted in September, Walmart was handed a “stinging defeat” by political leaders and labor activists in each of its attempts to open stores in New York City.

Following those setbacks, Walmart invested at least $3.3 billion in its latest play for the New York market, via acquisition of Jet.com, an online sales platform which “focuses exclusively on chasing the urban millennial“ market. Jet.com offers New Yorkers same day delivery of their purchases, without ever having to enter a Walmart store. But the venture’s future will face continuing political risk as long as parent Walmart remains a low wage employer. “Walmart may think they have found a new under-the-radar path into New York City by buying up businesses already here,” NYC Comptroller Scott M. Stringer told the Times, “but we should not be fooled. We intend to be watching very carefully.”

Walmart’s Amnesia

After Doug McMillon took over as Walmart’s CEO, there was a brief moment when the company seemed ready to fix the reputation for poor pay, poor service and poverty-level wages which made it a pariah for so many consumers and communities.

“We want to create a great store experience for customers and do that by investing in our own people,” Doug McMillon declared in 2015, his first full year as CEO, as he announced that Walmart would raise its minimum wage to $9 per hour. “There is no better place in retail to learn, grow and build a career than Walmart,” he said in a letter to employees. The next year Walmart sales soared while other major store chains lost revenue. US CEO Greg Foran credited the growth to higher wages which put more money in employee pockets, money he says increased their Walmart purchases.

Since then, however, Walmart somehow forgot that higher pay can yield improved financial results. Walmart wages have lagged at $11 per hour, while Costco ($14/hour), Target (on a path to $15) leapfrogged past Walmart in the competition to recruit and retain skilled, customer friendly retail workers.

The 2015 pay hike had given Walmart a temporary boost in its public image, but it was followed by a sharp crash in public respect when the company failed to follow through with further improvement of its social responsibility track record, according to surveys by the Reputation Institute. By 2018, Walmart lost ground on every category tracked by this independent research firm including: performance, products, leadership, innovation, citizenship and governance. As should be no surprise, the very worst of the Walmart’s low scores was for its role as a workplace.

The world will be watching when Walmart shares its vision for the future at its Investor Day on Tuesday. Investors and consumers alike need answers to this crucial question: Will the company revive Doug McMillon’s 2015 pledge to become a “better” workplace or will it continue the low road practices which threaten to make its stock a poor investment and its stores a grim place to work and to shop?

Authors:

Steve Askin earned an MBA in Accounting at Columbia University School of Business and a Certificate in Economic and Business Journalism at Columbia Journalism School. He recently retired from the Service Employees International Union, where he conducted and led corporate financial analysis projects. Before joining SEIU, he worked as a journalist. His report on global business and economic issues appeared in publications including Business Week, the Christian Science Monitor and Le Monde Diplomatique.

Eddie Iny is the Campaigns Director at the Organization United for Respect (OUR). He has worked as a corporate research analyst and organizer in the labor movement for nearly 25 years. Eddie has a masters degree in urban planning and a bachelor’s degree in geography, both from the University of California in Los Angeles.