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Wal-Mart Has Faith Its Higher Wages Will Pay Off

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Wal-Mart Chief Executive Officer Doug McMillon keeps a copy of an April 1996 Fortune magazine article in his office. It’s headlined “Can Wal-Mart Get Back the Magic?” As McMillon put it in the prerecorded quarterly earnings discussion that the company released this morning:

It’s a pretty strong indictment of our future, and the fun fact is that it was written in 1996.

The sub-headline on the article offers such a good summary that I’m not going to go to the effort of paraphrasing.

Built on magnificent simplicity, the company has grown so vast and complex that Sam Walton would barely recognize it. CEO David Glass sees a bright future in food retailing; Wall Street has its doubts.

Long story short: Glass was right, Wall Street was wrong. Wal-Mart is now North America’s biggest grocer, and by the end of 1999 the company’s stock price, which had gone pretty much nowhere from 1992 through 1996, had more than quintupled.

As you can see from the above chart, Wal-Mart has had its downs and ups since then. After hitting an all-time high in January, its stock price is now in another slide. McMillon, who took over as CEO last year and was the subject of his own, quite flattering Fortune profile just a couple of months ago, brought the 1996 Fortune article along to the annual holiday-season planning meeting for store and market managers in Denver this month as a motivational tool. Wal-Mart was going through big changes then, and it proved the doubters wrong. “We’re in another period of change right now,” McMillon said he told them.

Much of the change has to do with technology, he continued, and combining “the best of the offline world with the best of online to serve customers however they want to shop.” And one of the biggest, toughest challenges has to do with making shopping in Wal-Mart’s stores less of a dreary, utilitarian slog:

As you know, in the first quarter, we initiated a comprehensive multi-year plan to increase starting wages and training for associates in our U.S. stores and clubs. During the second quarter, we implemented the next phase of changes to our Walmart U.S. store structure, including adding department managers. Our focus on running better stores that are clean and well-stocked, have friendly associates and an efficient checkout is resonating with customers. They’ve always counted on Walmart to have great prices. Now, we’re building their trust with better in-stock and delivering an enjoyable shopping experience.

In one sense, this is already working: Same-store sales were up 1.5 percent in the second quarter of Wal-Mart’s 2016 fiscal year, which ended July 31 -- the fourth straight quarter of gains. But there are complications. One is that, as Bloomberg’s Shannon Pettypiece reported earlier this month, raising the starting wage for Wal-Mart workers to $9 an hour earlier this year and $10 by next February has irked a lot of veteran Wal-Marters:

In interviews and in hundreds of comments on Facebook, Wal-Mart employees are calling the move unfair to senior workers who got no increase and now make the same or close to what newer, less experienced colleagues earn.

Also, perhaps less surprisingly, paying workers more has squeezed profits -- although the starting-wage increase actually isn’t the biggest factor. This is from the “assumptions for fiscal 2016 earnings per share guidance” in today’s earnings press release (the overall estimate is for earnings of $4.40 to $4.70 a share, down from $4.99 in fiscal 2015):

The impact from investments in wages, training and additional hours in our stores and clubs will be approximately $0.24, including approximately $0.08 in the third quarter. Our decision to add associate store hours beyond our February plan is the primary driver.

McMillon’s argument is that this will all be worth it as more, better-trained, happier store workers eventually drive enough of a sales increase to cover the added cost. It’s partly the efficiency wage argument, summed up by my Bloomberg View colleague Megan McArdle last year as, “paying workers more than the going rate can bring a lot of benefits to your company.” It’s also a bet that as the Internet keeps gaining in importance as a shopping channel, physical stores will have to offer things that online ones can’t -- such as personal service.

Wall Street has its doubts. Wal-Mart’s stock is now down more than 20 percent from its January peak, and it kept dropping after this morning’s earnings announcement. McMillon wishes to convince us that it’s 1996 all over again. It’s clearly not 1996 -- Wal-Mart is now the biggest corporation in the world by revenue, making it ever tougher to achieve high growth rates; one of its fiercest competitors today,, barely existed back then. Still, it would be awfully nice for low-wage workers across America if he turns out to be at least partly right.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Justin Fox at

To contact the editor on this story:
James Greiff at