Walmart’s wage increase: Are workers stealing less now?
The first stage of Walmart’s wage increases started in April with a move to a $9 an hour minimum pay. Already other retailers have been forced to, in essence price match Walmart on wages. Assuming the companies raising pay survive expect the President to bravely step forward and seriously push to hike the minimum wage for workers to somewhere below what the free market is paying.
If that sounds cynical you haven’t been paying attention to Walmart’s proactive and surprisingly progressive policies or the government’s missing sense of urgency on the same issues.
Some say this is a PR stunt. That’s silly. Walmart could cure cancer and it wouldn’t move the bar for them in terms of reputation. The company is aware of this. For reasons both fair and a liberal noblesse oblige-tinged attitude towards lower economic classes, Walmart is slightly less popular than the post office but more well-liked than earaches. Giving half a million people a 25% raise isn’t going to change Walmart’s reputation.
It’s worth walking through some of the numbers, if only to facilitate staring at them with our mouth’s agape, stunned by the enormity. Depending on what month it is, Walmart employs between 1.2 and 1.4 million people in the US. That’s about 1% of the American workforce. The wage increases will cost roughly $1 billion. That sounds like a lot but Walmart does roughly half a trillion dollars in global sales, $300 billion of which comes from the US.
This is a huge company at the center of the inequality debate. To understand what’s going on you have to have know just a bit about Walmart’s history.
Mr Sam’s Math: Pep is cheaper than Payroll
Sam Walton built Walmart by controlling expenses through efficient distribution then under-cutting other retailers on price. That’s the bleeding edge of capitalism. Employees who worked hard got promoted and, eventually, made a nice living but entry level pay at discount stores was, is and always will be low. If you can still find a mom and pop store look at the prices. They’re about 50% higher on high-volume basics like deodorant or dog food.
Americans weep for the death of corner stores but we killed them ourselves by pursuing better deals.
[Don’t tell me about CostCo. They pay more because they have fewer associates doing more complicated work. A guy moving pallets of merchandise around a store while customers are there should earn more than a greeter, just as God and Ayn Rand intended.]
Well after he became a billionaire “Mr. Sam” travelled from store to store holding morning rallies, culminating in annual jamborees disguised as shareholder meetings. That history is why, while other companies are leaning towards doing away with annual get togethers Walmart is still hiring Hollywood stars to come down to Bentonville for some good old-fashioned boosterism.
This year was hosted by Reese Witherspoon, more or less reprising the role of earnest, hyper-achiever Tracy Flick from the 1999 movie Election. Some people thought it was over the top. I say a top doesn’t exist.
Happy employees will work for less money and Sam was all about controlling cost. It seems absurd to have to actually say that but, like Walt Disney, the mythology surrounding Walton has obscured the fact that the man was, in fact, a capitalist. He was enthusiastic but the peppiness always had a cost controlling agenda at heart.
Here’s another thing Sam knew: Disgruntled workers have no compunction about stealing anything that isn’t nailed down and theft is what this whole thing is really all about, it’s just impolite to say so.
Shrink is the retail term for items that a store buys but can’t account for at the end of a reporting period. The loss on everything that goes into shrink is total and its a $42 billion a year problem for US retailers. Some of it is due to breakage or administrative errors but of the most part shrink is simply shorthand for “stuff that gets stolen”.
In the US, unlike almost any other country on earth, most shoplifting is done by store workers than by outside thieves:
Walmart’s head of US operations has said reducing shrink is a priority but he won’t specify exactly how big the problem is. Some reporters claim, with Walmart’s encouragement that their shrink rate is about 1% in the US.
Shrink comes straight out of gross margin. Walmart said shrink cost it about 13-basis points of margin last quarter, relative to a year earlier. Those are real numbers. For my purposes I’m going to say Walmart has the same shrink levels as average discounters in America. Since Walmart itself represents about ½ the total annual revenue of the US discount store industry the burden of proof is on people claiming the number is lower.
That being the case here’s about how big Walmart’s disgruntled employee problem is:
In a world where Walmart has no where left to put new stores there are likely about $6.5 billion in profits walking out the door. Walmart is betting happier employees will now only steal less but maybe even stop a shoplifter or two.
In fact, Walmart is betting more than $1 billion on the idea.
Was Walmart smart to raise its wages?
Which brings us back to whether or not Walmart was smart to pay its workers more. In today’s NY Times Paul Krugman offers a way of finding the answer for those who live in a world without disgruntled employees who steal:
You can use this formula for gauging the impact on the coming wage hikes in retail if you want. You can also use calculus to prove a bowling ball won’t fly but it’s easier just to drop one.
Beyond PR Walmart wins its billion wage bet if shrink is reduced by anything more than 15%. That’s the point at which the company saves more than the $1 billion of additional wages its spending. Everything else is just noise.
Sadly, no one wants to talk about this. Labor isn’t going to vow to steal less if they get paid more. CEO Doug McMillon is certainly not going to give associates a conference call shout-out for becoming incrementally less thieving. Shrink is just super awkward for both sides to talk about and most reporters and economists don’t understand retail enough to look at it.
That’s a shame because there’s a really cool social experiment being conducted by the new management at Walmart. Can you bribe employees into stealing less from your store? If so what’s the price. An extra dollar an hour? How about $2?
It would be nice if people knew how to keep score or if Walmart released the data. The important thing for investors to remember is this: everything works backwards from the P&L statement. Always.
