Last week, WalMart doubled down on the wage hike debacle when the world’s largest retailer decided to give everyone a raise in February.
The all-in cost will be around $2.7 billion. While some were surprised at the move, it was easy to see coming. Indeed, we’ve long said that the company’s decision to hike wages for its lowest-paid employees would eventually necessitate similar raises for workers higher up the corporate ladder.
“The wage hierarchy has been distorted and that distortion had nothing to do with merit,” we wrote, back in August. “Higher paid employees don’t understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the wage hierarchy proportional, they may simply quit which means that, for Wal-Mart, raising the minimum for the lowest paid workers to just $9/hour will end up costing the company around $1.5 billion if you include the additional raises the company will have to give to higher paid employees in order to retain their 'talents' and avoid a mid-level management mutiny.”
Sure enough, that’s exactly what happened - only the cost is far higher than even we anticipated.
The problem is that when your business model revolves around “everyday low prices,” each and every additional penny you give to your employees is a penny that’s not passed on to customers as savings. That’s a problem, given how competitive the discount retail space has become. On top of that, margins are already razor thin and pinching them further has a dramatic impact on profitability as evidenced by the shocking guidance cut WalMart delivered in October.
Initially, the company sought to make up for the money “lost” to the wage hike by squeezing the supply chain. When efforts to extract more savings from vendors weren’t sufficient, WalMart simply fired some folks, first at the home office in Bentonville and then at 269 stores where 16,000 employees learned this month that they no longer have a job.
But the employees at the shuttered stores aren’t the only ones affected by the decision to close hundreds of locations. Also out in the cold are local customers who in some cases will now be forced to effectively commute to the grocery store and pharmacy as the family-owned businesses which used to serve small communities were put out of business when WalMart came to town.
“Though mom-and-pop stores have steadily disappeared across the American landscape over the past three decades as the mega chain methodically expanded, there was at least always a Wal-Mart left behind to replace them,”Bloomberg writes. “Now the Wal-Marts are disappearing, too.”
Bloomberg tells the story of The Town’n Country grocery in Oriental, North Carolina which was “a local fixture” for nearly half a century - until WalMart showed up.
The Town’n Country closed last October after sales collapsed by a third. “They ruined our lives,” Renee Ireland Smith, who ran Town’n Country said. “They came in here with their experiment and ruined us,” she laments, referencing WalMart’s foray into smaller stores called “WalMart Express.” Here's more:
“I was devastated when I found out. We had a pharmacy and a perfectly satisfactory grocery store. Maybe Wal-Mart sold apples for a nickel less,” said Barb Venturi, mayor pro tem for Oriental, with a population of about 900. “If you take into account what no longer having a grocery store does to property values here, it is a significant impact for us.”
Oriental is hardly alone. Wal-Mart Stores Inc. said on Jan. 15 it would be closing all 102 of its smaller Express stores, many in isolated towns, to focus on its supercenters and mid-sized Neighborhood Markets.
That’s a big problem for small towns, often with proportionately large elderly populations. For the older folks of Oriental -- a retirement and summer vacation town along the inter-coastal waterway -- the next-nearest grocery and pharmacy is a 50-minute round-trip drive.
Towns like Clearwater, Kansas, and Merkel, Texas, are among those hit by Wal-Mart closures. In Godley, Texas, with a population of roughly 1,000, Wal-Mart opened a small store just a year ago. Within months, the only other grocery store in town -- Brookshire Brothers, part of an employee-owned regional chain -- shut its doors. Now with Wal-Mart gone, the closest full-service grocery store is about a 20-minute drive away.
This is just one more example of why improving the quality of life for poorly paid hourly employees isn't as simple as implementing across-the-board wage hikes.
WalMart's move to give employees $10/hour instead of $9 has now, i) adversely affected the supply chain and might well end up driving some vendors out of business as the retailer pushes for more savings, ii) cost the jobs of hundreds who were gainfully employed in Bentonville, meaning the economy lost breadwinner jobs so the company's meagerly compensated shelf stockers could be slightly less poor, iii) irreparably damaged WalMart's reputation with investors, and now iv) left many a community across the country with no grocery store and no pharmacy.
We're pretty sure this wasn't what WalMart had in mind when they first announced that the company was prepared to appease the living wage crowd early last year, but now that the horse has left the barn, we wonder if perhaps the retailer has entered a terminal decline similar to what befell that other "Mart"...
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