Walmart and the Washington, D.C., government are in a standoff. On Tuesday, Walmart said it would stop work on three large stores under construction in D.C.—and cancel plans for three more in the planning stages—if the city council goes forward with a plan that would force certain large retailers to pay a higher minimum wage. The Large Retailer Accountability Act would force companies with sales greater than $1 billion occupying big boxes (cough, Walmart) to pay a minimum wage of $12.50. (The minimum wage for regular companies in D.C. is $8.25). Of course, since companies that employ unionized workforces are exempt from the higher wage, a big-box retailer (cough, Walmart) could avoid this special treatment by cutting a deal with labor.
This legislation singles out Walmart for special treatment. And this isn’t the first time Walmart has faced tough opposition while trying to enter a potentially lucrative urban market. By refusing to give in to the demands of capricious legislators, Walmart is holding fast to principle. It’s also biting off its nose to spite its face. Walmart’s inability to contemplate the prospect of paying higher wages is inhibiting its ability to expand and grow as a business—not just in Washington, D.C., but in New York, Boston, and other large cities.
Walmart needs cities like D.C., New York, Boston, and Chicago a lot more than those cities need Walmart. Why? The Bentonville Behemoth has hit something of a wall in the U.S. It spent several decades building up a great business by parking giant stores in rural areas, in exurbs, and in suburbs. The company delivered low prices to low-end consumers by keeping labor costs low. In the process, it became America’s largest retailer.
But American workers haven’t really received raises in years, in part because companies—Walmart among them—have been really good at holding down labor costs. 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. Thanks to its size, Walmart often sets the standard for retail and service wages in the areas in which it operates. There’s a vicious circle at work. Walmart holds the line on labor costs because other costs are rising and sales in the U.S. aren’t really growing much. In the first quarter, Walmart’s same-store sales fell 1.4 percent from the year before. And the more its sales stagnate, the more it has to hold the line on labor costs in order to keep boosting profits. Hence the plaintive email from inside the bunker at Walmart in February. “Where are all the customers? And where is all their money?”
While Walmart has been hard-pressed to find growth in the places where it already operates, its culture has rendered it unable to break into domestic emerging markets—big cities. For its first half-century, Walmart purposely avoided densely populated urban areas—places where huge numbers of Americans with a huge amount of aggregated purchasing power reside. Many of these cities, including New York, San Francisco, Washington, D.C., and Boston, have thrived in recent years.
For Walmart to resume growing, it either needs its existing customer base to earn or spend more, or it has to figure out ways to reach huge numbers of new customers. Now, urban markets are notoriously difficult places in which to operate. They have tough zoning rules. Costs are high. It’s tough to find large blocks of space. There are unions and crusty local politicians to contend with, and a lot of competition. But the rewards are also greater: higher foot traffic; much more money floating around; the ability to operate around the clock; legions of poor, middle-class, and wealthy shoppers who appreciate bargains. Check out the New York City outlets of big-box retailers like Home Depot, Bed, Bath & Beyond, Whole Foods, and IKEA—they are jam-packed with customers.
Cities also tend to house politicians who are friendly to unions and responsive to small businesses that would suffer upon the arrival of Walmart. And so cities have proven reluctant to allow Walmart to come in on its own terms. They throw up barriers, like demanding that the company pay higher minimum wages or deal with unions. Thus far, Walmart has tried to overcome such resistance with advertising, lobbying, the lure of jobs, and occasional threats. But by and large, it hasn’t worked in D.C.
This isn’t the first time. A similar dynamic took places several years ago in Chicago, where the city’s legislature threatened higher wages. And after years of effort and a lot of money spent, Walmart has been unable to open in New York City. “As long as Wal-Mart’s behavior remains the same, they’re not welcome in New York City,” as Christine Quinn, the New York City Council speaker who is likely to become the next mayor put it. “New York isn’t changing. Wal-Mart has to change.” Last year, it gave up on plans to open in densely populated towns near Boston.
Governments may ultimately cave and let Walmart in on its own terms. But it would be far better, and smarter, if Walmart were to figure out a way to accommodate the concerns and go around the obstacles. The obvious solution would be for Walmart to establish a significantly higher wage scale for places like D.C., New York, and Boston than for Oklahoma and Arkansas. After all, virtually every other profession and trade does so. Baseball players get paid more to play in New York than they do in Kansas City. Lawyers, accountants, bankers, even journalists get paid more in the New York and D.C. areas than they do in Mississippi and Wyoming. That’s partially because the cost of living is higher in urban areas than it is in the boonies. But it’s largely because the revenues and profits businesses can make in cities are much higher, too. Should it ever open in New York or D.C., Walmart could certainly get away with charging higher prices in New York than it does in Oklahoma. And it’s a sure bet a store it opens in New York or D.C. would be more productive and efficient than an exurban big box.
Yes, there’s a certain self-defeating blindness when city officials erect barriers to a company that wants to employ 1,800 low-skilled city residents, as Walmart wants to do in D.C. But there’s also a self-defeating blindness when a very intelligent company that has run out of places to grow can’t do what is necessary to get into new markets. Walmart executives can curse those pain-in-the-ass East Coast liberals all they want. In the meantime, they’ll continue to lock themselves out of the only domestic markets they have yet to saturate.