Wal-Mart's Wage Experiment Works ... for Workers
Over the past few years, I have had a brisk, if intermittent, correspondence with a professor of my acquaintance. Our subject: Wal-Mart. Specifically, wages at Wal-Mart, and whether (and then why) they could go up.
One of those conversations was already turned into a column, and this morning, he e-mailed me to ask what I thought about Neil Irwin’s latest piece in the New York Times on the outcomes of the company’s fairly recent foray into higher average wages. Irwin’s conclusion: Paying higher wages has allowed Wal-Mart to attract better workers, resulting in cleaner, nicer stores. My conclusion: All is proceeding as I have foreseen.
That is, I predicted that workers would like making more per hour, rather than less (who wouldn’t?), and that this would allow Wal-Mart to attract a better class of worker, or at least keep the workers it had around longer, reducing turnover costs and allowing the company to deliver a better customer experience. But I was less sure that this would actually deliver increased profits; indeed, Irwin notes that it hasn’t. Revenue is up, as are ratings in customer surveys. But so far, that’s not translating into enhanced profitability. “Operating income for Walmart’s United States stores was down 6 percent in the most recent quarter,” Irwin writes, “reflecting higher labor costs and other new investments.”
It would be great news if Wal-Mart could turn into a higher-wage employer, offering a real path to the middle class for people who aren’t interested in picking up and moving to a bigger city. Its stores are ubiquitous in America’s hinterlands, and as a massive national brand, it could offer real opportunity to folks who don’t seem to be getting much of it right now. But I’ve long been skeptical that Wal-Mart could remake itself as a new-model engine of opportunity to replace America’s vanished manufacturing plants. And so far, Wal-Mart’s not giving me much reason to revisit my skepticism.
For years before Wal-Mart finally raised its wages, comparisons between Wal-Mart and Costco were a perennial staple of left-wing writers, a genre that I dubbed “Costco shows it’s possible” (to run a big-box store with highly paid staff). Costco paid its workers generously, ran their argument, and was doing very well; ergo, Wal-Mart could do so, too, and it was only refusing out of stupidity or sheer meanness. This argument naturally segued into arguments for raising the minimum wage to $12 or $15 an hour; if companies were too evil or stupid to see where their best interests lay, then public-spirited politicians would have to take matters into their own hands.
This never made much sense: The fact that one retailer manages to pay relatively high wages in no way proves that every retailer should therefore follow suit. Costco and Wal-Mart look a lot alike to the sort of people who write articles comparing Costco and Wal-Mart: large spaces filled with stuff, both of which are visited at best infrequently by the writers. In fact, however, they have completely different business models.
Costco provides bulk goods to a relatively affluent demographic that does not do the majority of its shopping there; Wal-Mart is a full-service department store where a lower-income demographic expects to buy the bulk of its daily necessities. Because it needs to be everything to its core customers, Wal-Mart’s stores carry about 25 times the number of individual products (different brands, as well as different sizes) than Costco stores do. This makes Wal-Mart’s business vastly more labor-intensive, which in turn means that the company needs to worry more than Costco does about controlling hourly wage costs, and it gets less reward out of paying for skill and experience, because ultimately, there’s an upside limit to how much extra productivity you can wring out of clever, hardworking people engaged in the task of putting things on shelves. Meanwhile, since its business is pitched to a customer base that worries about every extra penny it spends, improving customer service won’t necessarily translate into higher sales; Wal-Mart’s core consumer is shopping mostly on price.
Though they didn’t realize it, the people who were arguing that Wal-Mart should adopt Costco’s labor policy were also arguing that Wal-Mart should adopt Costco’s business model, because the two are inextricably tied together. Unfortunately, Costco was already executing Costco’s business model brilliantly, which limited the upside to Wal-Mart crowding into its market (when it tried, with Sam’s Club, it didn’t do very well). And if you wanted to create Costco II, it wasn’t clear why you’d decide to reconstruct a massive legacy retailer in Costco’s image, rather than starting over with a new group of people who hadn’t spent decades of their lives learning to operate “big stores in small towns.”
However, the “big stores in small towns” business model has reached the natural limits of possible growth; overseas expansions have not gone as swimmingly as Wal-Mart’s conquest of America, and if the company wants to grow further, it’s going to need to do something different. For that matter, with Amazon breathing down its neck, it may have to anyway. So when Wal-Mart went ahead and raised wages, I expected that this presaged some shift in its business model, as managers sought to expand the mass retailer into something beyond its core competency.
So far, however, it seems, if anything, to be trimming back toward “big stores in small towns,” closing down many of the smaller, more urban locations that didn’t do as well as the company had hoped. It was never clear that it’s actually profitable to run that kind of business model by hiring and retaining better people, as opposed to simply hiring more warm bodies to put things on shelves at the lowest wage you can get away with paying. The most recent results certainly don’t offer huge encouragement to those who hoped it could.
If cleaner stores and better-stocked shelves don’t eventually translate into better profitability, the company will be under pressure from shareholders to shift its labor-cost model back toward its older, cheaper style. That’s unlikely to mean wage cuts -- cutting wages is nearly impossible, because it enrages workers, who leave, or stay on and carry out their work with surly indifference. Instead, if the pressure is severe enough, I expect that Wal-Mart will have to try to get by with fewer workers. With stores as big as Wal-Mart’s, that will be a challenge, because no matter how good that smaller workforce is, it can’t cover all those square feet three times faster than a less clever or less motivated workforce.
So far, my verdict on Wal-Mart’s experiment with higher wages is, as I wrote to my professorial pen pal: “Great if it works, but I’m not sure it works.” And as he wrote back: that “would be a great slogan for 90% of public policy.”
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