When Wal-Mart raises its minimum wage to $10 (€8.81) an hour next year, Target and other competitors are going to face a dilemma: Follow suit and jeopardise profits or risk losing their best workers.
Matching Wal-Mart’s $10 wage would cost some of the retail industry’s largest companies an extra $4bn over what they paid workers in 2014, according to an analysis by the Hay Group of 100 chains that employs 5m salespeople.
About 10% of companies are considering an increase to $10 an hour, with more likely to follow, said Craig Rowley, who runs the consulting firm’s retail practice.
Wal-Mart cast a harsh light on the issue last week when it warned its profits would shrink next year, hurt by spending $1.5bn to increase pay for about 500,000 workers.
The main revelation was it will cost Wal-Mart more money to bump wages to $10 than it did to get to $9.
The news sent Wal-Mart’s shares down 10% in a single day, marking their worst decline since 1988.
Investors’ biggest concerns: Even if giving workers a raise improves customer service, as Wal-Mart says it will, it is hard to see what the financial payoff will be.
“The problem is, the math is just awful,” said Scott Mushkin, an analyst with Wolfe Research.
Wal-Mart plans to spend $2.7bn on increased wages and training over the next two years. If that boosts sales by 1%, that would only translate into about $350m in profit, he said.
“The return on investment is terrible.”
Wal-Mart’s move to $9 an hour in April put pressure on companies to boost pay, but many were already compensating workers more than that amount.
The effect of having the world’s biggest retailer go to $10 will be more noticeable.
The average retail wage in September was $9.56, according to data on 61 retailers compiled by job-search website Glassdoor. Just 19 of those pay an average of $10 or more.
Several of the big discount chains, including Ross Stores and TJ Maxx, only embraced the $9 level after Wal-Mart made the first move. Target, Wal-Mart’s biggest direct competitor, quietly increased its minimum pay to $9 an hour this year.
The latest pressure comes at a time when merchants are already struggling with razor-thin margins.
Across the retail industry, sales increased less than 1% last month.
While consumers have more money in their pockets from fuel savings and a slight increase in wages, they are spending those dollars elsewhere.
Prior to Wal-Mart’s move, Gap announced it would raise base pay to $9 an hour in 2014 and $10 this year.
That made it a bellwether for the shift, but the chain was already paying higher wages to much of its workforce.
When it provided its annual earnings forecast in February, the company had already absorbed the change.
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