photo by Mike Mozart
Like most people, I was delighted at last week’s announcement that Wal-Mart is raising its base wage from $7.25 an hour, the current federal minimum, to $9 this year and $10 next year. But I have a strong suspicion that this good news will come with a price.
No, I don’t mean Wal-Mart is going to have to significantly boost its well-advertised “everyday low prices.” That may happen, to a degree, but prices for most goods sold at Wal-Mart are subject to considerable competition. I don’t think the chain’s management intends to sacrifice its hard-earned place on the retailing value spectrum.
I believe the real cost of Wal-Mart’s move is going to become apparent in a year, or three, or maybe five, and it will come in the form of substantial cuts in the number of people who work there. Wal-Mart will offer better-paying jobs, but not as many jobs as it offers today.
Let’s look at some numbers. Wal-Mart said about 500,000 employees will be directly affected by the changes in its salary scale, which comes out to close to 40 percent of the chain’s 1.3 million American employees. (Wal-Mart has an additional 900,000 workers overseas.) Its worldwide sales totaled $473 billion in the fiscal year that ended in January 2014, of which U.S. sales were $279 billion. Globally, each Wal-Mart employee accounts for $218,000, while each American employee represents close to $364,000 in sales. Compare this with Amazon, which generated $89 billion in sales last year with around 154,000 employees as the year ended - a per-employee ratio of $578,000, which is actually understated, because Amazon boosted its employee headcount by some 31 percent just last year.
We traditionally think of Wal-Mart’s top competitors in brick-and-mortar terms, with Target, Kmart and Sears as the nearest analogs to the standard Wal-Mart store, and Costco as the top rival to Sam’s Club warehouse outlets. Increasingly, however, Amazon looms as the biggest competitor to Wal-Mart’s scale, supply chain and geographic reach. While Wal-Mart has been adding stores of varying sizes to try to make shopping more convenient, Amazon is working on new ways to get goods directly to customers faster than ever.
I think most people would rank Wal-Mart and its close brick-and-mortar competitors somewhere on the upscale/downscale continuum above Dollar General and below mid-tier department stores, like Macy’s, or full-service supermarkets, like Kroger or Publix. Where does Amazon rank?
Nowhere, that’s where. The upmarket/down-market positioning that is so important for physical stores hardly matters on the Web. Amazon is as upmarket or as down-market as I want it to be. It has no parking lot, so I cannot see whether my fellow customers drive old Chevys or new Mercedes. Pretty much everyone with a computer shops at Amazon sometimes. Wal-Mart cannot compete with that unless it competes on Amazon’s terms, with Internet-based selection and delivery direct to the customer.
And that is the way I think it is going to go. There is room for Wal-Mart to succeed. In groceries, for example, it already has a large customer base and supply network, while Amazon has none. There are millions of people, many of them elderly, who do not drive and lack easy access to supermarkets. Why can’t my elderly mother log on (or have her children or grandchildren do it for her), place a grocery order at her local Wal-Mart, and have her milk and bread delivered to her?
A delivery driver who brings my mother’s order to her door, or a stock clerk who handles and packs it at a nearby store or warehouse, can easily be worth $10 an hour in an automated and efficient environment. Someone who mops up the spilled pickles on Aisle 4, not so much. The challenge confronting Wal-Mart is not how much it pays its order-fillers; it is that all its stores simply require too many pickle-moppers. Amazon needs no pickle-moppers at all.
As I said, I am delighted for all of those Wal-Mart employees who will benefit from raises. Thanks to a tighter job market (Janet Yellen is surely paying close attention), Wal-Mart must offer better wages to attract and keep the personnel it needs. It will also offer better training and scheduling, which might be even more important for lower-paid workers than the immediate infusion of extra cash. But these benefits will come at a price, and most of that price will not be reflected in the cash register receipt. Don’t be surprised if Wal-Mart starts paying serious attention to bringing down that enormous head count.