photo by Mike Mozart
Politicians, activists and pundits in the District of Columbia are shocked and outraged by Wal-Mart’s decision to renege on a promise to open stores in two poor areas of the city, in exchange for having won permission to open three that are already operating in more prosperous neighborhoods.
There are probably some economists and CEOs who are outraged at Wal-Mart’s decision, too, but I suspect hardly any are shocked by it.
I know I was not. Back in 2013, I wrote that the prospect of a higher minimum wage in exchange for local Wal-Marts in poor areas of the city as well as affluent ones would be a painful trade, though worthwhile, assuming such a political trade was necessary at all. Wal-Mart’s Washington deal, first announced in 2011, had already come close to falling through when the City Council voted to establish a minimum wage of $12.50 an hour; Washington’s mayor vetoed that bill, keeping Wal-Mart from fulfilling its threat to bolt back in 2013.
Unfortunately for D.C.’s poorer residents, that reprieve was temporary. The price of low-skilled retail labor is rising, even as competition from online vendors is driving the sales-generating potential of that labor down. The inevitable result is less retail labor. Wal-Mart is rapidly becoming a textbook example.
Earlier this month, Wal-Mart announced that increasing costs as well as the poor performance at the three existing stores in Washington have led it to abandon its plan to build the two supercenters slated for the economically struggling area east of the Anacostia River. Politicians, including current D.C. Mayor Muriel E. Bowser and former Mayor Vincent C. Gray, reacted with predictable outrage. But the Washington decision is part of a larger trend for the Wal-Mart, not an isolated incident.
In the same week it announced across-the-board wage increases for more than 1 million employees, the company disclosed plans to close 269 stores worldwide, including 154 in the United States. This decision will result in the loss of about 10,000 U.S. jobs, The Wall Street Journal reported. Wal-Mart’s announcement closely followed the decision not to open the two additional stores in the nation’s capital.
Mike Moore, Wal-Mart’s executive vice president for supercenters, said the D.C. decision was based on fresh assumptions about the profitability of those stores. Jack Evans, a member of the city council, told The Washington Post that behind closed doors, Wal-Mart officials were frank about concerns regarding Washington’s minimum wage, which could rise to $15 an hour if a proposed ballot measure succeeds this fall.
I would have thought the threat of legal action would by itself have been enough to prod Wal-Mart to open the D.C. stores, regardless of the underlying economics, but I do not have direct knowledge of how the original commitments were structured. The Washington Post reported that the city administration and the developer of one of the sites are investigating potential legal recourse, but it is not yet clear what consequences Wal-Mart will face, if any. Obviously, corporate executives at company headquarters decided the potential risks were worth taking.
Wal-Mart might argue in its defense that the District itself has radically changed the terms of the deal since 2011, or even 2013, by changing its labor laws in ways that have an outsized impact on the company and its massive supercenter stores. The city’s current minimum wage of $11.50 is already a high outlier on the East Coast, regardless of how voters respond to the measure to kick it up to $15 this fall. On top of that, the city - at the urging of the Obama administration - is considering legislation that would mandate up to 16 weeks of paid family leave for nearly every full- and part-time employee for a host of personal considerations.
If Wal-Mart priced the goods in its Washington stores high enough to reflect these costs, few if any residents of those poor neighborhoods would be able to afford to shop there. The store’s low prices would have been the major economic benefit provided by such locations, but are the very thing that make such locations unworkable with Washington’s labor laws. For that matter, it is an open question whether even affluent shoppers will pay inflated local retail prices when they can simply order goods online. The only jobs safe from the impact of Washington’s European-style labor initiatives may be those of the drivers who deliver such online orders.
Since Wal-Mart’s planned store closings across the U.S. mostly affect smaller-footprint “express” stores and not supercenters, the three locations Wal-Mart currently operates in Washington seem safe - for now. But if the city is really outraged at the company’s behavior, it could ask Wal-Mart to close those locations too.
It may not even have to ask. Right now Wal-Mart and the District of Columbia seem to want nothing to do with each other. This should come as a shock to nobody.