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Wal-Mart is raising wages? The move came as something of a shocker. After all, the retailing giant is known for both its low prices and its low wages. So parsimonious is the company that politicians across the country are turning to legislation to compel Wal-Mart to pay employees an extra buck or two.
Yet this week, Wal-Mart (WMT) said it would raise the starting pay at 1,200 of its Wal-Mart and Sam's Club stores by an average of 6%. "These start rate changes, combined with our competitive benefits like affordable health care, 401K and profit sharing, and annual incentives for our hourly associates, make us an even more attractive employer, which is why people stand in line to apply for Wal-Mart jobs," said Susan Chambers, executive vice-president of the People Division for Wal-Mart Stores, in a statement. A spokesman for the company said it had conducted a wage survey and found the increases made sense to "remain competitive as an employer."
FAUX WOOD. The decision is certainly a deft public relations move. It comes as the city of Chicago is on the verge of raising the minimum wage for big box retailers like Wal-Mart to $10 an hour. It also coincides with a month-long bus tour by activists and politicians to prod the company into raising wages and improving health-care benefits (see BusinessWeek.com, 8/2/06, "Wal-Mart Foes Hop a Bandwagon"). "It's really an image thing," says David J. Abella, portfolio manager at Rochdale Investment Management, which manages more than $2 billion in assets.
Wal-Mart has fought hard against the Chicago ordinance and criticized its detractors. The company has argued that it pays reasonable wages and benefits and that states and municipalities do not have the right to dictate its employment policies (see BusinessWeek.com, 7/19/06, "Rollback Ruling Favors Wal-Mart").
But look more closely and the move to raise wages seems like a key building block for a company in transition. Wal-Mart studied its customer base closely last year and discovered that many of its shoppers were quite affluent, not just the lower and middle income customers it targeted. In a bid to get these affluent shoppers to linger more in its stores and presumably buy more, higher-margin goods, Wal-Mart has launched several initiatives in the past few months: It introduced a trendy line of clothing called Metro7, moved to double the number of organic products at its stores, and has started remodeling half of its stores with wider aisles, faux-wood floors, and nicer restrooms.
SOFT SALES. A higher wage structure seemed to fit the image of this new Wal-Mart. At least in theory, if Wal-Mart takes better care of its employees, they in turn will take better care of the customers, especially the affluent shoppers it is trying to court. "Wal-Mart finally recognized that retail is not just about prices," says Patricia Edwards, managing director and portfolio manager at Seattle-based Wentworth Hauser & Violich, a money manager with $8.2 billion in assets including Wal-Mart shares. "To be good at retail you have to have not just good prices but the right shopping experience; people can be put off by rude clerks, dirty restrooms, and long lines."
But will raising wages by 60 cents an hour change employees' behavior? Maybe not enough. "I don't see the possibility of attracting different types of customers just by raising wages," says Barry Shaked, chief executive of Retalix, which provides technology solutions to the retail and food industry. In fact, Shaked believes that Wal-Mart is making a mistake by trying to go upscale. "Wal-Mart is trying to have something for everyone and in the process it will lose its current customer," he warns.
Already Wal-Mart's transition isn't going as smoothly. According to Virginia Genereux, a Merrill Lynch analyst, Wal-Mart's newer stores' sales per square foot slipped a little in June. Considering these are likely the ones with the new store redesign in place, it's a worrying slip. Charles Grom, an analyst with J.P. Morgan Securities, says that existing stores could see soft sales too, because of the extensive remodeling that will go on over the next few months. "Once the remodels are done, they better be firing on all cylinders," says Seattle portfolio manager Edwards.
Only time will tell whether the higher wages will translate into better service at Wal-Mart. But George Rue, chief investment officer for New Covenant Trust Company, which manages $1.5 billion and owns Wal-Mart shares, points out that employees will obviously take any wage increase they can get. "Whatever the motivation, better wages from one of America's largest employers is always a good thing," he says.
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