Under three different CEOs, Walmart has done all kinds of somersaults to appease left-wing critics. In 2005, Lee Scott set goals of “zero waste” and “100 percent” conversion to renewable energy. In 2009, Mike Duke, the next CEO, took on Obamacare—as an outspoken supporter of the unpopular health care bill. This was “a stunning metamorphosis,” the Wall Street Journal declared in a company profile. Walmart had gone from being a “whipping boy of the political left to corporate leviathan now welcomed with open arms by a Democratic White House.”
This February, Doug McMillon, the current CEO, agreed to raise the entry-level hourly wage at Walmart to no less than $9 an hour in April and to $10 an hour (or 33 percent above the current federal minimum wage) in early 2016.
How is the sharply elevated internal “minimum wage” working out for the world’s largest retailer and (by a wide margin) the nation’s largest private employer?
So far, not at all well.
In announcing the company’s third-quarter results on November 17, McMillon acknowledged that the wage hike had been “by far the biggest driver” of a 13.3 percent reduction in corporate earnings over the first nine months of the fiscal year ending on January 31, 2016. Higher wages have added $1.2 billion in annual costs this fiscal year and will add another $1.5 billion in costs next year.
Net income at Walmart hit an all-time high of $17 billion in calendar 2012 (fiscal 2013, ending on January 31, 2013). According to Value Line estimates, it will drop to $14.8 billion at the end of this year and to $12.6 billion next year, which would be the lowest annual earnings for Walmart in a decade.
That is no big deal to critics like Robert Reich, who served as secretary of labor under President Clinton. Reich pointed to Walmart and McDonald’s in a petition that he launched on MoveOn.org in 2013 urging the biggest employers to increase wages so workers can finally “get a fair share in this economy.” “Your typical employee is now earning $8.25 to $8.80 an hour,” Reich wrote. “[Walmart and McDonald’s] can easily afford to pay [workers] $15 an hour without causing layoffs or requiring price increases.”
But regarding any profit as proof that a company can afford to pay more to its workers—without harming its customers—disregards the realities of a competitive marketplace.
For one thing, Walmart competes with other public companies in striving to maximize returns to shareholders. To say that Walmart has been getting hammered in this regard is something of an understatement.
Walmart’s shares have lost a third of their value since the beginning of this year—falling from a high of $90 a share in January to $60 at the close of business on November 17. Meanwhile, its biggest rivals have been gaining. Costco has climbed from $140 a share to $159, and Amazon.com has more than doubled in price.
In July, Amazon passed Walmart to become the most highly valued company in the retail sector, and since then it has shot further and further ahead. It now has a total market capitalization of $309 billion, dwarfing $195 billion for Walmart.
Walmart lags far behind both Amazon and Costco in productivity—measured in sales per employee—with Walmart at $219,000, Costco at $565,000, and Amazon at $578,000. It is clear that Walmart is intent on closing the gap by slowing the growth of bricks-and-mortar stores while putting much greater emphasis on e-commerce. As McMillon put it in his presentation on Tuesday:
But consider the impact on total employment at Walmart if the company were to close the productivity gap between itself and Amazon by 25 percent over the next three years while also achieving its stated objective of growing annual sales from about $485 billion to $530 billion or more.
In that situation, Walmart would need a global workforce of 1.7 million associates, well below the 2.2 million it has now—a loss of approximately 500,000 jobs. That would entail a loss of about 320,000 associates out of the U.S. workforce of 1.4 million associates.
While those numbers are speculative, they clearly point to the conclusion that Walmart will no longer be the great job-creation machine that it was in years past, which is something that self-declared champions of the working class should be thinking about in agitating for higher wages. Paying higher wages has made the company more focused on achieving higher levels of productivity.
At the same time the company may water down if not abandon its historic commitment to serving less affluent shoppers with rock-bottom prices across a vast array of merchandise. The late founder Sam Walton said his dream was “to serve the under-served.” That is less of a priority today. As McMillon stated at an investors’ meeting in October, “Globally, we know growth will come from middle- and upper-income households in the years ahead.”
Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, a free-market think tank in St. Louis.
