Walmart and the $15 Wage

Walmart and the $15 Wage

Walmart is the largest business in the world with over 1 million employees, a gross income of $44.4 billion and a profit of $15.8 billion in 2012. In the classic strategy of drive to the bottom they are focused on relentlessly pushing all costs down. This strategy is exactly what you would expect from conservative, professional managers who are focused on the next quarter bonus check. In a conservative world no one would ever challenge the correctness of this strategy.

The fact that more and more people are viewing Walmart as a pararia company in of no real concern. Walmart owns (or rents) enough congresspersons that no ‘problem legislation’ could ever get passed. There are attempts to organize the workers but, at least so far, propaganda and intimidation are keeping labor at bay. So Walmart will continue its policies until one day the black swan will arrive. (Remember when Montgomery Ward, Sears and Kmart could do no wrong.) That will be the quarter that the management bonus checks will not be so large, but since next quarter looks OK, what me worry?

Now it is very unlikely that any one in the Bentonville headquarters will think outside the box, but just for fun let’s think about alternatives. Suppose a liberal thinker were to wander in to headquarters and propose that Walmart grow at a faster rate than the current plan. Let’s assume that the management was tired of the holidays and it was too cold for golf so they let him give his pitch.

Here is his presentation:

I propose that Walmart immediately set the wage for associates at $15/ hour. GASP! This will cost the company about $7 billion.

After the ‘are you crazy’ and ‘that’s impossible’ comments die down he continues.
Here are the reasons:

1) Take the moral high ground. In one stroke the business that has been the pariah company that everyone loves to hate will become the champion. The world will be hailing Walmart and probably even Pope Francis will be applauding. While Walmart doesn’t care a whit for the moral high ground this move would generate $100’s of millions in free positive publicity. It would also cause a significant group of middle class shoppers who care about human values to shop Walmart rather than picket its stores. This would be hard to quantify but some where between $100 million and a billion per year would be a good SWAG (Sill Wild Ass Guess).
2) Walmart would suddenly gain a growth advantage over its competitors. As the leader in positive labor relations Walmart could expect that a lot of the pay raise to employees would come back to the store. Employees, now with some money , would spend with their benefactor. This would be about 20% of $7 billion their raise represents, or $1.4 billion.
3) The big kicker is that if Walmart went to $15/hr there is no way the other low pay companies could not match or come close. This would create a lot of money for a lot of people. They would know that their raise came from Walmart so off to Walmart they would go. Based on the S&P Capital IQ Database there are 6,800,000 non-Walmart low wage workers in large US corporations. If we make a first order assumption that the median wage will rise to, say $14/hr. That would add about $48 billion to the available spending at the bottom where it will all be spent as fast as it comes in. Walmart, as the new leader in retail in the eyes of the poor will get 20% or more of that or about $10 billion per year in new business.
4) There are thousands of small businesses that have low wage workforce that would need to increase wages. The wage increase would likely be less, say $3 or $4/hr but it would still put money in a lot of hands. Here again that would drift to Walmart. Perhaps difficult to quantify but still in the billions through Walmart’s front door.
5) When you consider that if Walmart went to $15/hr there are also a lot of ‘light skill’ jobs paying $10 to $15/hr that would also need to increase by at least $5 to keep the employees from going to Walmart for a job. This would add another few billion to the Walmart income.
6) The sales growth would continue as the secondary effects of the Walmart raise flowed through the low income segment of the economy. Only Walmart could get this kind of return. It is the place all low wage workers will go and is big enough and profitable enough to make this kind of move. The result would really be a transfer of cash from all the other low wage employers to Walmart. For example, fast food workers with a $7 raise would not be likely to eat many more hamburgers but they would all spend more at Walmart.
7) This move would gut the competition. The low price brands would need to increase labor pay to meet Walmart but as a follower there would be little positive benefit for them. They would probably get an increase in sales but it would not cover increased costs so they would need to raise prices which would put them at a greater disadvantage to Walmart.
8) The current labor problems would disappear. Instead of having to close stores to stop unionization as they did in Quebec they could let the labor relations staff go and save some money.

Is there any president for this? Yes, it turns out there is. In 1914, exactly 100 years ago, Henry Ford was producing cars but he wanted to sell more. He knew he could reduce the price of the car if volume increased. Marketing could only do so much and competitors were making gains. So he announced he was more than doubling wages to $5 day for workers. At that rate the workers could afford to buy Fords and buy them they did. He was attacked as a Communist and he was vilified by the business community, but he sold his Fords to the workers and he laughed all the way to the bank.

Now it is safe to say that there is no one in Bentonville that would suggest following in the footsteps of Henry Ford and that is the difference between entrepreneurs and professional managers.