PROFIT PROBLEMS

05.16.13

Sad Face at Walmart

Maybe if Walmart paid its workers more, its workers—along with millions of other low-paid U.S. consumers—would buy more stuff at Walmart. Daniel Gross on the company’s profit problem.

One of these days, Walmart will figure out the reason that its U.S. sales suffer, quarter after quarter, year after year. On Thursday, the nation’s biggest retailer posted its quarterly results. They were less than overwhelming. Overall sales for Walmart’s U.S. stores came in at $66.56 billion, up a meager .3 percent from the first quarter of 2012. Same-store sales actually fell 1.4 percent from the year before.

In a period of economic growth, that shouldn’t be happening. In theory, the nation’s largest retailer should be a proxy for the retail economy at large. But Walmart is lagging. Through the first three months of 2013, in fact, overall retail sales in the U.S. were up 3.7 percent compared with the first three months of 2012.

Now, the company could be losing market share to other retailers and other e-commerce. And higher payroll taxes that kicked in on January 1 certainly have something to do with the pinched lower-end American consumer. (Walmart also blamed the weather, and lower-than-expected food inflation.) But this has been going on at Walmart for years. In 2012 for the full year, total sales at Walmart U.S. stores rose 3.9 percent. (Overall, U.S. retail sales rose 5.2 percent in 2012.) In 2011, Walmart’s U.S. stores notched growth of 1.5 percent; in 2009, the growth rate was a pathetic .1 percent.

This state of affairs is a source of befuddlement to Walmart executives. “Where are all the customers?” read a plaintive email from a Walmart executive that Bloomberg latched onto in early Feburary. “And where is all their money?”

It shouldn’t be so surprising. It’s not exactly a secret that the people who are Walmart’s core customers haven’t been doing particularly well in this very uneven economy. Walmart shoppers, indeed most Americans, tend to spend based on what they make. Reluctant to take on more debt, and lacking income from dividends and capital gains, their capacity to spend is heavily, almost exclusively, influenced by their wages. The problem for Walmart, and for many other retailers, is that wages simply aren’t growing much in America. According to the Bureau of Labor Statistics, average hourly earnings are up just 1.9 percent in the past 12 months.

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Last fall, The Daily Beast's Jake Heller headed to Walmart to see what people thought about how the company treated its employees.

Many of Walmart’s shoppers look a lot like its associates – i.e. the working poor

Walmart is part of the problem. From its origins to today, the company remains intent on paying low wages. It’s part of the business model. Walmart notes that it employs 1.4 million people in the U.S. The company says the average hourly wage for its associates is about $13 an hour. You can find data on average wage for associates by state here.

Walmart doesn’t really pay its workers well enough so that they can afford to go spend more aggressively. And demographically speaking, many of Walmart’s shoppers look a lot like its associates – i.e. the working poor. Meanwhile, the company’s policies have a ripple effect. Walmart accounts for about 1.23 percent of all private sector jobs in the U.S., and about 9.3 percent of all retail and trade service workers in the country. In many areas, Walmart is a very significant employer. Thanks to its size, Walmart often sets the standard for retail and service wages in the areas in which it operates. Walmart’s wages are a benchmark off of which other employers set their own wages.

There’s a circular logic to this. Walmart has to clamp down on labor costs, because other costs are rising and sales in the U.S. aren’t really growing much. The more its sales stagnate, the more it has to hold the line on labor costs in order to keep boosting profits. But its success at keeping wages low, or at operating while letting jobs go unfilled, hurts the ability of its employees – and many of those in the direct area and in the service industry – to earn and spend more. And that’s bad for Walmart’s sales.

Imagine a thought experiment, in which Walmart agreed to pay marginally higher wages across the board. Not double. Maybe just five percent more for wages – $13.65 an hour instead of $13.00 an hour; $63,000 for a manager, instead of $60,000. Sure, Walmart’s profits short-term profits might take a hit. Or maybe not. It could find other ways to wring costs of its operations, like using less packaging or electricity. Or maybe it would use some of the $6 billion in cash it pays out each year in dividends to fund higher wages.

Walmart’s higher-paid associates, aside from being happier, would be better off. They’d be more eager and willing to spend -- at Walmart, and at other stores in the area. The higher wages would also send a signal to the marketplace. If you want to compete with Walmart, you’ll have to raise your wages a bit, too. Pretty soon, those higher wages would filter into the local economy. After a year, I’d be willing to wager, Walmart would see an increase in sales.

Of course, it’s easy to single out Walmart. But this logic applies to other companies as well. We’ve noted that other cash-rich companies with low-paid domestic workers, like Apple, would be well-advised to pay higher wages. The working theory should be that those companies that can afford to pay higher wages, should. Not just because it will make top executives feel better. But because it will improve the economy, and ultimately, their own operations.