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Ripple Effects of Minimum Wage Hikes

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Walmart recently announced that in April it will raise the minimum pay for a half million of its employees to $9.00 per hour, a full $1.25 per hour higher than the federal minimum wage of $7.25 per hour. The change will affect about 40% of all of the people Walmart employs in the United States. Beyond that, Walmart’s latest move on wages is expected to impact workers at many other companies across the country, as well. There will be ripple effects across the retail industry as even workers who currently make more than minimum wage will see a pay raise to keep pace with the raises others are getting. How will these changes affected you? If many more employers follow Walmart’s lead and increase wages, how important is the federal minimum wage increase many have been debating?

THE RIPPLE EFFECT

When the minimum wage goes up it is not only those workers making the minimum wage that are affected.

Internal Effects

File:Ripple effect on water.jpgWithout raising the wages of some workers making above minimum wage, an increase in the lowest hourly rate would actually hurt the position of higher wage earners on a relative pay basis. In other words, if you currently make $9.00 per hour, the new lowest wage Walmart will pay, you make 24% more than a worker making the current $7.25 minimum wage per hour. When the new minimum goes up to $9.00 per hour, if you don’t get a raise you are now making the same wage as someone who just started work today. You earned that 24% differential, so if you don’t also get a pay increase you have taken a pay cut relative to the lowest wage earners. That won’t sit well with workers and employers are not ignorant to this.

Independent research firm The Brookings Institute estimates that the workers who will most likely get pay increases include those making up to 50% more than the existing minimum. In a few states in the Southeastern part of the country, more than 30% of the workforce falls into that category. This is why, before they ever announced a hike in their minimum wage, Walmart and others sharpened their pencils and figured out how much the ripple effect would cost them across their entire workforce.

Just how many people will feel the ripple effect and how much will it cost? Walmart says their increase will affect a half million of its employees, but it is not clear if that includes those who already make more than $7.25 per hour. However, on a broad scale, The Brookings Institute estimates that if the federal minimum wage was increased it would affect 29.4% of U.S. workers, which would affect nearly 25% of all hours worked in America. Without delving into numbers for each company that raises its wages, that gives you an idea of how broad the impact might be.

External Effects

Rest assured, the rest of the retail world has heard the shot Walmart fired across the bow of the industry and they have already been thinking about how they will handle a minimum wage hike. Whether the wage increase is in the form of a mandate from the federal government or from market forces like the country’s largest employer hiking their pay, the impact will be felt across the industry. Reactions have been mixed, so far, with some retailers joining in and increasing wages and others bucking the trend in hopes of protecting their profits.

TJX Companies is one of the companies that competes with Walmart for quality employees and they have already announced they will follow its lead and raise its minimum wage for all its hourly wage workers. TJX employees will make at least $9.00 per hour starting in June and hourly employees who have been with the company for at least six months will see their minimum pay increase to $10.00 per hour in 2016. TJX employs approximately 191,000 people and it is the parent company of T.J. Maxx, Marshalls and HomeGoods.

Gap, Inc. was ahead of Walmart in the wage hike department. They raised their company’s minimum hourly wage to $9.00 last year, with another $1.00 increase kicking in this year, putting their minimum at $10.00 per hour for 2015. Gap management said 65,000 of Gap employees have been impacted by the wage hikes.

Ikea is another retailer who raised its minimum hourly wage last year. The company announced last June that it would raise its average minimum wage in 2015 to $10.76 per hour. Ikea was already paying an average minimum hourly wage of $9.17 before the wage increase. They are not the only retailer who has stayed ahead of the curve by paying its employees more than the federal minimum. These higher wages have led to higher employee satisfaction and workers have been public about how they feel. Many of the companies who offer higher wages consistently receive positive reviews from employees on websites like Careerbliss.com and Glassdoor.com. While these reviews don’t directly add to company profits they sure don’t hurt their recruiting efforts.

NOT EVERYONE IS RAISING WAGES

While many retailers will follow Walmart and others’ example of higher minimum wages, not everyone is jumping on the bandwagon. One of the most notable companies to hold out is McDonald’s, which has 14,350 stores in the U.S. Understanding why they are not raising wages is helpful in understanding why other retailers may also not raise wages.

Franchising Throws a Wrench in the Works

About eighty percent of McDonald’s U.S. stores are owned and operated by franchisees, not McDonald’s. Not only does the company not have the ability to force its franchisees to raise wages, but it may not want to even if it could. They are in the business of selling franchises and forcing anything down franchisees throats does not exactly make them a more appealing franchise opportunity. A large percentage of stores of some of the biggest retailers in the U.S. are also franchise stores. Some of the biggest of these companies include 7-Eleven, Ace hardware, Circle K and GNC. The percentages vary by company, but for companies that operate using the franchising business model, the percentage of stores that are franchise locations is high. An example that is not a restaurant chain is 7-Eleven. More than 80% of 7-Eleven’s U.S. stores are owned and operated by franchisees.

Profitability is Highly Variable

Retail business models vary quite a bit from company to company. Even within categories, the differences can be startling. For example, Trader Joe’s stores generate almost twice the average revenue per square foot as Whole Foods stores and it has been stealing market share from Whole Foods. Retail profit margins [JS2] also vary widely with TJX at barely less than 8% and some niche retailers making profit margins in excess of 17%. That is a huge variation in profitability, so it’s no wonder that what works for one company may not work for another.

The graphs below illustrate the trend of Walmart’s net income/profit and those of some of its competitors.

Walmart Net Income/Profits

As you can see, the past few years for Walmart have been up and down, but the long-term trend has been a huge increase in profits. With 2014 profits of over $16 billion, Walmart is in a good position to afford the increase in costs that go along with its wage increases.

As the graph below shows very clearly, Walmart’s profits are much higher than many other retailers are. This graph shows profits in dollars, not as a percentage of sales. While some competitors’ profits may be higher as a percentage of sales, nobody pays their expenses with percentages, they pay with dollars. This is not to say that profit margins are unimportant. They are very important, but they are not the only thing to consider when a business is facing the prospects of big increases in their expenses. This is an important point, and a big part of the reason Walmart can do some things other companies cannot.

The companies shown in this graph include some very large competitors including Kroger (KR), Safeway (SWY), Costco (COST), and others. Without diving into the percentage of sales that each company drops to bottom line profits, the graph makes it clear that in terms of dollars, it is not even a close race for total profit.

 

Existing Wages Already Vary Widely

In addition to the federal minimum wage, many states have instituted their own minimum wage standards that mandate higher than the federal minimum. Twenty-nine state and the District of Columbia already have higher than federal minimum wages as their standard, including some of the largest states, like California and Florida. California’s state mandated minimum wage, for example, has been $9.00 per hour since the middle of 2014 and it will increase to $10.00 per hour at the beginning of 2016.

THE BOTTOM LINE

What do all these wage changes mean to you? If you work for a large retailer, you may see an increase in your pay in the near future. If you are an employer, you may need to consider raising your minimum hourly wages, or consider what impact not raising them may have on your business. Whether the federal government or your state ever increases the mandated minimum wage, the market may impose changes on many employers. There will always be people willing to work in retail for low wages, but the most successful retailers don’t just get by doing the minimum. Those who have tried to do the least possible to just survive have generally ended up falling by the wayside and being left in the dust. The new wage structure in retail and elsewhere is one that will be constantly evolving for those businesses who want to stay ahead of their competition.

If you want to stay ahead of the curve, it will benefit you to stay current with the issues that affect the retail industry. For more information about some of the companies mentioned in this article, please refer to our Eye on Retail company overviews. To stay up to date on an ongoing basis, feel free to supplement your reading by establishing a relationship with one of your Set and Service Resources team members who can help you navigate the world of retail recruiting.

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