Friday, August 16, 2013

Why Walmart is underperforming: terrible wages

Walmart’s same-store sales are falling as the surrounding retail market surges. What’s the problem? By screwing its workers with low wages, the nation’s largest private-sector employer is preventing a huge chunk of the American workforce from shopping at its stores.

Walmart is losing in America. The company, the nation’s largest retailer and largest private-sector employer, reported its quarterly results Thursday morning. And they were a disappointment.

A Walmart employee pushes shopping carts at a store in La Habra, California, in May. (Jae C. Hong/AP)

Overall sales—including international operations—rose, as they always do. But same-store sales at Walmart in the U.S. fell 0.3 percent in the quarter, which ran from April 27 to July 26, from the year before. This comes after same-store sales at U.S. Walmarts fell 1.4 percent in its first quarter from the year before.

Same-store sales are the preferred metric for measuring the success of a retailer. They strip out growth companies get from opening new locations and describe how the core business is doing. Each store operates like its own business. And at any business, when revenues fall, it’s harder to make a profit. Without an increase in same-store sales, it’s difficult to boost profits meaningfully. After all, the cost of overhead—rent, maintenance, electricity, labor, the expense of stocking the shelves with inventory—tends to rise year after year. Inflation pushes up the cost of everything, slowly.

Now, same-store sales at a chain like Walmart could fall for a variety of reasons. During a recession, when retail sales are falling broadly across the country, same-store sales would be expected to decline. If you’re losing market share—if more people are deciding to shop elsewhere because they don’t like your offerings—they might also fall. That’s not necessarily happening here. In fact, the retail business is doing quite well in the U.S. In the period from May through July, which overlaps with Walmart’s disappointing second quarter, retail sales were up 5.2 percent from the comparable period the year before. Car sales are booming. “Confident Consumers Step Up Their Borrowing,” reads the headline on a Wall Street Journal A1 article this morning. American consumers may still be paying down debt. But they’re doing their thing: shopping, consuming, spending.

They’re just not shopping more at Walmart. In fact, at the typical Walmart store that has been open for more than a year, they’re shopping less. Now, there are several explanations for this. Consumers could be hampered by the rise in the payroll tax. Or people who used to shop at Walmart may be choosing to shop elsewhere. I prefer a simpler solution.

By paying low wages, Walmart is effectively limiting the ability of a large chunk of the American workforce to consume.

People tend to shop with the wages they earn. Sure, they use debt to boost the size of the purchases when they have access to credit and are shopping for big-ticket items, like cars. But by and large, for the typical consumer at the lower end of the income ladder, spending is a function of income. When consumers earn more, they can—and do—spend more. When they earn less, they generally spend less.

The biggest problem in the economy is the refusal of companies, now in the fifth year of this expansion, to boost wages broadly. The rich are continuing to do well. But the typical worker just isn’t getting a meaningful wage. According to the Bureau of Labor Statistics, average hourly earnings for workers in the private sector have risen by a scant 1.9 percent in the past 12 months. Quarter after quarter, corporate America collectively puts up big profits, buys back shares, rewards executives handsomely, pays dividends—and then effectively freezes wages. And then executives at stores that cater to the bottom half of the income ladder wonder why nobody shows up. “Where are all the consumers?” read a plaintive email from a Walmart executive earlier this year. “And where is all their money?”

Too many CEOs labor under the delusion that the salaries and hourly wages they pay are adequate and sufficient to sustain growing consumption. In too many instances, they’re not. We’ve discussed this before. Walmart is the largest private-sector employer in the U.S. It accounts for about 10 percent of employment in the retail sector. It claims to pay average hourly wages of $12.78 in the U.S. Critics say those numbers, which are low ($12 an hour annualized for 52 weeks is less than $25,000), are inflated because they take into account higher-salary managers. Check out’s numbers on the pay at Walmart. Plenty of Walmart’s rank-and-file associates earn less than $10 an hour.

This isn’t complicated. Or, rather, it shouldn’t be complicated. By paying low wages, Walmart is effectively limiting the ability of a large chunk of the American workforce to consume. By setting a low benchmark, it encourages other employers to do the same. The sort of people who make up Walmart’s core shopping constituency are the sort of people who work there. Were they to earn more income, they’d surely spend more at stores—including Walmart. Since they don’t, they don’t.

Walmart prefers to blame external factors for its woes. “The U.S. retail environment remains challenging, with virtually no inflation in food and higher payroll tax instituted earlier in the year,” said Charles Holley, Walmart’s chief financial officer. “High fuel prices can impact spending as well. Our expectations for the back half of the year are through a lens of cautious consumer spending.”

Some day, the bosses in Bentonville will understand the connection between the low wages they pay and the continuing frustration of the bean counters. Sadly, for Walmart’s employees and shareholders, this is not the day. In premarket trading, Walmart’s stock was off about 2.5 percent.

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