Labor rates in the retail sector

Within the United States, labor and its corresponding rates have become both a divisive and contentious issue. COVID-19 has only exacerbated an already combative labor environment. For example, COVID-19 resulted in massive layoff and furloughs for millions of Americans. The tourism, retail, entertainment, airline and energy sectors have all declined precipitously as consumer demand declined throughout the year. As consumer demand declined, corporations were forced to make the difficult chance to eliminate or cut their labor force. Adding more pressure to the prevailing labor rates, were consumer driven initiatives such as the “The Fight for $15”. The unforeseen and precipitous decline in consumer demand and the popularity of raising the minimum rage have created unique variables as it relates to the labor rate. As retail was one of the hardest hit industries, I believe a study of Wal-Mart is warranted due to the amount of people it employs and its relentless focus on costs.

The labor workforce is particularly important to both Wal-Mart and retail industry. During a normal economic year, the retail sector employs over 10 million people with sales of over $5.94 trillion. Wal-Mart itself employs over 2 million people around the world in areas such as finance, marketing, sales, logistics, technology, and more. Due to the sheer number of employees the company hires, the importance of the over labor workforce is critical to economic success (Charles, 2006).

As it relates to labor rates, Wal-Mart has been at the forefront of pioneering new initiates. The company was one of the first to raise its minimum wage rate for employees throughout the organization. The raise in wages ultimately would have a material impact on the overall financial performance of the business. Walmart’s competitive advantage is its pricing strategy. The company attempts to lower costs throughout the organization to help lower costs for consumers. Consumers, particularly those who are not brand lower, tend to be attracted to lower prices for everyday use goods. Items such as clothing, certain grocery items, home furnishings and electronics compete heavily based on price. As Walmart tends to have the lowest prices, consumers tend to be heavy users of its services.

As Walmart has an extreme focus on costs, a raise in rates would have an adverse impact on the company’s overhead and margins. For example, according to the latest investor annual report filing (Form 10-K) from Walmart, labor costs as a percentage of revenue have increased each of the past three years. When compared to its rival Target, the percentage increases are less. Exhibit 1 below indicates the percentage of labor relative to revenue for both companies in each of the past 3 years

Although the percentage increase for Walmart is much smaller than that of Target, the increase does indicate the rise in labor rates due to initiatives to increase the minimum wage. Walmart is in great position to manage these increase prices as it relies of product volume to make its profit. A rise in labor rates does not impact Walmart in the same manner that it does its other competitors. The recent COVID-19 pandemic illustrates this point as it relates to labor rates. As noted in the introduction, COVID-19 cause many consumers to lose their jobs and their corresponding incomes. As a result, consumers needed to trade down in order to afford the necessities of life while also preserving financial capital for the future. The need for lower costs good drove consumers to Walmart. In 2020, Walmart, during a pandemic, saw revenue increase 5.2% to over $134 Billion. This rise in revenue, offset the rise in higher labor costs associated with raises in the minimum wage. Essentially, the rise is labor costs were offset by purchasing volumes being much higher than anticipated. Unfortunately for other retailers, they did not fare as well. Just as Walmart did, many other retailers within the industry raised their labor rates as well. Unfortunately, due to the pandemic, the increases in rates were not offset by a rise in either per unit prices or an increase in unit volume. Instead, the exact opposite occurred as consumers elected not to purchase goods that were not necessities. This resulted in a slew of bankruptcies that included high profile names such as JC Penny, Brooks Brothers, True Religion, GNC, Neiman Marcus, and others. Now to be fair, rising labor costs were not the primary catalyst for the demise of the above companies. However, bloated cost structures, high debt levels, and high labor costs all contributed to death of these companies (Barry, 2007).

To conclude, the labor rate of Walmart is a critical input within the company’s overall success. From one, the company is the third largest employer in the world at over 2 million people. Second, political and societal pressures have caused the company to raise its wages for a vast majority of its workers. As a low-cost producer this directly impacted corporate overhead through larger salary expense, general and administrative expense, bonuses, retirement, and severance pay. The increase to labor costs and its corresponding impact on overhead is not unique to Walmart, however. Many of its competitors were forced to raise their wages as well. The rise in labor rates, contributed to the demise of many of the America’s most iconic brands as the grappled with changing consumer preferences, rising debt levels, and a bloated cost structure. Ultimately Walmart was able to offset its higher labor costs through increase in product volume as consumers flocked to stores in response to COVID-19. Even with the elevated labor rates, the company has still been a success throughout the world.