Wal-Mart discovers that treating employees like serfs doesn’t work

Last week, we learned that Wal-Mart was giving the lowest paid of its hourly employees a raise. In a blog post, Wal-Mart Chief Executive Officer Doug McMillon said that as of April, the company will pay a minimum of $9 an hour. That is $1.75 more than the federal minimum wage of $7.25, which has been unchanged for almost six years. Next February, Wal-Mart’s lowest hourly rate will rise to $10. All told, about a half-million Wal-Mart workers in the U.S. will be affected.

There has been lots of theorizing about why the nation’s largest retailer did this: See this, this and this. But I have a much simpler explanation: The Wal-Mart business model is broken.

As in any complex situation, there are many nuances and wrinkles: This was inevitable; state minimum-wage laws had already mandated those minimums (or higher) for at least two-thirds of the employees in Wal-Mart’s stores. In the years since the last federal minimum-wage increase, many of Wal-Mart’s employees had fallen below the poverty level and the strengthening economy has made it harder to attract and retain employees.

There is also the issue of the negative PR generated by Wal-Mart’s low, low wages. As we discussed back in 2013, many of its full-time employees receive a full array of federal and state welfare. Wal-Mart has become the nation’s largest private-sector beneficiary of taxpayer-supported public assistance (see “How McDonald’s and Wal-Mart Became Welfare Queens”). Indeed, the U.S. taxpayer has been subsidizing the wages of this publicly traded, private-sector company to the tune of $2.66 billion in government largess a year.

Although many factors contributed to the move, the simple reason for the increase is because Wal-Mart has stopped growing. Same-store sales have been little changed or declining for some time now. When we look at the underlying causes, the company’s workforce, and how it is managed, are the prime suspects…

Labor is seen as a cost driver rather than a sales driver. Managers do not have much direct control over sales, almost never making decisions on merchandise mix, layout, price, or promotions. But managers do have control over payroll costs and are evaluated regarding whether they meet weekly or monthly targets for payroll as a percentage of sales. At times these pressures have been such that Walmart managers have put pressure on employees to work off the clock.

With a bonus structure designed to drive down labor costs, guess what Wal-Mart managers did?

Cutting on salary and benefits, however, didn’t necessarily lower costs. About 44 percent of Wal-Mart’s hourly staff turns over each year. That’s a lot of people, because the company employs 2.2 million workers worldwide. Hiring replacements is a costly and time consuming process.

Consider competitors such as Costco: It has average hourly wages of $20 and a turnover rate of “17% overall and just 6% after one years employment,” according to the Harvard Business Review. HBR estimates the full cost of “replacing a worker who leaves is typically 1.5 to 2.5 times the worker’s annual salary.” That is no small chunk of change.

My favorite Recovering Republican, Barry Ritholtz…always my first read at Bloomberg news sites.

Behavior rooted in the attitudes and analysis of 19th Century Republican royalty ends up unproductive pretty consistently. Enjoying the fruits of the economic crash provoked by the financial-real estate band of thieves and frauds, Walmart was able to draw its serfs from the supersized pool of unemployed, underemployed and maybe-never-again-employed made accessible by free market economic ideologues.

But, just as those who don’t study history are doomed to repeat mistakes, those who don’t include economics studies as part of understanding history are doomed to repeat the biggest mistakes before their competitors. How much time do you spend shopping at Sears, Borders or Radio Shack? Driving there in your Oldsmobile.

Not paying your employees enough to shop at your own store is a second-order issue. One that Republicans couldn’t care less about. An example of pig-headedness masquerading as fiscal conservatism.

Walmart appears to be trying to enter the 20th Century – if not the 21st. Anyone think the Walmartians in Congress will learn from their example?

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