Investors should have known going in that Wal-Mart’s decision to unilaterally raise the minimum wage of its employees was going to hurt the retailer’s earnings. Incurring $1 billion in new expenses without any offsetting increase in productivity was going to create a profits vacuum and suck the air out of any gains the company may have otherwise generated.
It’s going to kill profits next year, too, as Wal-Mart said its investments in wages and training would lower operating income by about $1.5 billion in fiscal 2017.
Of course, the retailer never promised immediate improvements, either. When it announced it was hiking pay to $9 per hour this year and $10 per hour next, it said the goal was to improve employee morale and turnover, which would lead to a better customer experience that would eventually help boost sales. That’s not something that happens in just a few quarters; we’re talking years here to change people’s perceptions.
Although it’s hard to dismiss the value of improving the lot of employees, the wage hikes also mean Wal-Mart is no longer a good investment. Here are three reasons why.
1. Wage increases actually aren’t improving morale.
In fact, they’ve arguably made the situation worse. More senior employees who’ve worked for years to get to their pay grade — and didn’t get a raise — are reportedly disgruntled with the policies. Wal-Mart’s going to have to lift the pay scale for those workers, too, if it really wants to improve morale, but it’ll be at the expense of adding more costs to its ledger and further depressing its profits.
2. Pay increases are forcing the company to cut costs elsewhere.
Wal-Mart has been cutting employee hours and closing (for at least a few hours anyway) stores that were previously open 24 hours. While it says the moves are unrelated to the pay raises and are part of its overall cost-cutting initiatives, even the employee union speculated it was about giving them a benefit with one hand then taking it back with the other. Then, earlier this month Wal-Mart announced it was eliminating 450 corporate positions, indicating there may be more unintended consequences for its escalating wage costs.
3. The wage hikes are bad news piling on worse news.
Wal-Mart’s business can’t support the added costs. Since 2013, there has only been one quarter where traffic at its U.S. stores has seen more customers coming in. Fewer customers and higher costs can only means more cuts are on the horizon, whether it’s employee hours, store hours, or the employees themselves. Moreover, even if it does generate the higher productivity Wal-Mart expects, that means it will be able to get by with fewer employees. Either way, you can expect fewer Wal-Mart workers than there otherwise would have been.