Wal-Mart's Raises to $10 an Hour May Cost Retailers $4 Billion

Wal-Mart's $10 Wage, Will It Hurt Other Retailers?
  • Retailer's profit woes raise concern for chains that match pay
  • Reaching $10 threshold seen as more painful than jump to $9

When Wal-Mart Stores Inc. raises its minimum wage to $10 an hour next year, Target Corp. and other competitors are going to face a dilemma: follow along and jeopardize profits or risk losing their best workers.

Matching Wal-Mart’s $10 wage would cost some of the retail industry’s largest companies an extra $4 billion over what they paid workers in 2014, according to an analysis by the Hay Group of 100 chains employing 5 million sales people. About 10 percent of companies are currently considering an increase to $10 an hour, with more likely to follow, said Craig Rowley, who runs the consulting firm’s retail practice.

Wal-Mart cast a harsh light on the issue last week when it warned its profits would shrink next year, hurt by spending $1.5 billion to hike pay for about 500,000 workers. The main revelation was it will cost Wal-Mart more money to bump wages to $10 than it did to get to $9. When the company first announced its two-step pay increase earlier this year, that wasn’t clear.

The news sent Wal-Mart’s shares down 10 percent in a single day, marking their worst decline since 1988. One of investors’ biggest concerns: Even if giving workers a raise improves customer service -- as Wal-Mart says it will -- it’s hard to see what the financial payoff will be.

“The problem is, the math is just awful," said Scott Mushkin, an analyst with Wolfe Research LLC. Wal-Mart plans to spend $2.7 billion on increased wages and training over the next two years. If that boosts sales by 1 percent, that would only translate into about $350 million in profit, he said. "The return on investment is terrible."

Getting to $10

Wal-Mart’s move to $9 an hour in April put pressure on companies to boost pay, but many chains were already compensating workers more than that amount. The effect of having the world’s biggest retailer go to 10 bucks will probably be more noticeable. The average retail wage in September was $9.56, according to data on 61 retailers compiled by job-search website Glassdoor. Just 19 of those pay an average of $10 or more.

Several of the big discount chains -- including Ross Stores Inc. and T.J. Maxx -- only embraced the $9 level after Wal-Mart made the first move. Target, Wal-Mart’s biggest direct competitor, quietly increased its minimum pay to $9 an hour this year.

The latest pressure comes at a time when merchants are already struggling with razor-thin margins. Across the retail industry, sales increased less than 1 percent last month. While consumers have more money in their pockets from gas savings and a slight increase in wages, they are spending those dollars elsewhere. Rather than heading to the local shopping center, families are devoting their budgets to mobile-phone bills, health care, paying down debt or new cars.

"We are still in a slow-growth economy," Rowley said. "When you take on an expense like raising wages, you’ve got to take less profit."

Gap’s Move

Prior to Wal-Mart’s move, Gap Inc. announced it would raise base pay to $9 an hour in 2014 and $10 this year. That made it a bellwether for the shift, but the apparel chain was already paying higher wages to much of its workforce. When it provided its annual earnings forecast in February, the San Francisco-based company had already absorbed the change.

Target, meanwhile, hasn’t said when it might switch to $10 an hour. With more than 300,000 employees, the company’s average wage was $9.85 as of September, according to Glassdoor. That’s up 5 percent from a year earlier.

"Fixating on some single number, to us, an average number, is unimportant," John Mulligan, Target’s chief operating officer, said in a conference call with analysts earlier this year. "It’s about being competitive locally at a store level within a marketplace. That is important, and we’re going to be competitive."

Focus on Talent

With unemployment hovering around 5 percent, wages had already been inching up this year, Rowley said. But it was Wal-Mart -- with more than 4,600 stores and 1.3 million workers in the U.S. -- that forced the hand of corporate executives, he said.

"When Wal-Mart and Gap both raised starting wages, it caught everyone’s attention -- even at the board level," Rowley said. "Boards started asking questions, like, ‘What are you doing to make sure you can hire talent?’ Boards don’t typically ask about talent compensation."

Hourly wages for sales associates have increased 2 percent this year on average, according to Glassdoor. Some retailers, including Ross, Sears Holdings Corp. and Neiman Marcus Group Ltd., have upped pay by more than 10 percent, according to the website’s data.

Higher Turnover

Employee turnover also is going up, a sign workers are more comfortable jumping to other jobs. The rate is currently about 65 percent a year for retailers, according to the Hay Group, which provides consulting and salary data to merchants, including Wal-Mart. That compares with 50 percent during the recession.

Another job-search firm, Indeed Inc., has seen a 31 percent increase in retail job postings this year. That compares with an 11 percent increase in 2014.

"One of the biggest challenges retailers face are open positions," Rowley said.

The effects also are putting pressure on fast-food chains, which compete for the same entry-level workers, said Jennifer Bartashus, an analyst at Bloomberg Intelligence. McDonald’s Corp., Wendy’s Co., Yum! Brands Inc., and Jack in the Box Inc. have all said they are looking for ways to use more technology in their restaurants to reduce the need for labor, she said.

At a McDonald’s down the street from Wal-Mart’s headquarters in Bentonville, Arkansas, the help-wanted sign outside is offering a $250 signing bonus and $9 starting wage.

"A company like Wal-Mart increasing what they are paying entry-level workers puts pressure on anyone in that kind of industry," Bartashus said. "Whether you are stocking shelves at Wal-Mart or a cashier at Jack in the Box, the skills are fairly similar across the board."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE