Giving Low Wage Consumers a Raise

There is a widespread attribution of WMT’s woes to the state of the low-income consumer—continued high unemployment, nonexistent wage growth, cuts to food stamp benefits. But here we see a tension inherent in WMT’s business model. As the largest employer in the country, with a labor policy based on notoriously low wages and benefits, and the increased use of temporary employees, WMT has driven standards down in the service sector labor market. These effects are felt most acutely in the local labor markets where WMT also has the largest market shares among low income consumers. As economic geographer David Harvey wryly observed, “Impoverished workers do not constitute a vibrant market.”

But as the national momentum continues to build for a raise in the minimum wage—due in no small part to the energy and courage of low wage workers, including WMT associates, who have been standing up for themselves—the debate about WMT’s ability to pay higher wages continues to rage. One foolish analyst recently argued higher wages were impossible, writing that “Wal-Mart’s model is not designed to pay higher wages. Thus, shareholders will suffer if wages rise.”
This analyst dismissed the example of Costco’s better paid, higher productivity workforce as an exception that is irrelevant to WMT. As many before have done, this analyst points to WMT’s larger assortment compared to Costco, stating “this will always require more labor than running discount warehouse stores.”

Consistent with the rhetorical traditions of the anti-living-wage genre, the foolish analyst studiously avoided comparing Costco’s performance to that of Sam’s Club, a discount warehouse chain that looks remarkably similar to Costco (and is owned and operated by WMT). Like Costco, Sam’s has a limited assortment of SKUs and caters to a members only, significantly higher income customer base than WMT supercenters. But while Sam’s Club workers receive pay that is comparable to other WMT associates, Costco employees make significantly more. Yet Costco’s investment in its workforce pays for itself, as the superior sales and operating statistics make clear.

Net Sales per Sq. Ft.

(Source: UFCW analysis of company filings. Sam’s Club data for each period represents annual data for the fiscal year ending in the January following the year identified. For example, 2013 data represents the period ending 1/31/14; Costco data for each period represents annual data for the fiscal year ending in August or September of the year identified.)

Why is the Costco comparison important? Because there are essentially two competing explanations for why WMT’s wages are so low: first, as WMT’s critics argue, the company has a deeply ingrained cost-cutting philosophy that blinds executives to the longer term opportunities missed by failing to invest in workers and increase their productivity. The alternative explanation is that high wages are simply incompatible with WMT’s business model—the company would pay workers more, its defenders imply, if it was financially viable to do so. The importance, therefore, of the Costco vs. Sam’s comparison is that it provides a natural experiment: what would WMT executives do if given the chance to operate a business model (discount warehouse clubs) which both critics and defenders of the company acknowledge to be consistent with a high-wage/high-productivity labor model? The answer, unfortunately for Sam’s associates and for WMT shareholders, is hypothesis number one: the company pays the same low wages at both WMT US and Sam’s Club stores.

In fact this conclusion is consistent with empirical research on the retail sector, which shows that a variety of formats, not just low SKU warehouse clubs, can implement high road labor strategies—but it isn’t just academic speculation. Any honest assessment of the operational problems at WMT stores will identify significant losses associated with a chronic underinvestment in labor—out of stock shelves, long lines at checkout, and chaotic backrooms are clearly hurting sales.

Frontline associates—members of OUR Walmart—have been raising these concerns publicly for over 3 years (see our reports here and here), and we are heartened to see mainstream analysts echoing these concerns in recent months. Earlier this year outgoing US CEO Bill Simon gave lip service to the need to add more labor to the store, and this morning his replacement Mr. Foran said the company had in fact added hours, but WMT associates have yet to report any noticeable change in staffing levels. But don’t just take the workers’ word for it. In June analysts at the highly respected Cleveland Research observed that any labor investments were “highly selective to almost non-existent,” and stated that this was the “biggest problem by far” the company faces in keeping its shelves stocked.

What do you think?