Wal-Mart Stares Down D.C., and Wins

 

Score a point for Wal-Mart (NYSE: WMT  ) . Last week, Washington, D.C., Mayor Vincent Gray vetoed the Large Retailer Accountability Act of 2013, which would have imposed a $12.50 "living wage" upon virtually all new non-union big-box retail stores in the city.

While the bill did not call out any specific retailer, Wal-Mart was clearly the target. Wal-Mart pays entry-level workers less than $10 per hour, and it was in the process of opening its first stores in Washington, D.C. Wal-Mart had protested the bill vigorously, and threatened to pull out of the D.C. market when the City Council passed the bill.

Ultimately, Wal-Mart's threats -- which were probably not a bluff -- worked. This highlights the fact that even in a low-growth economic environment, most major cities need big-box retailers more than the big-box retailers need them.

Living wage -- but not for all
Unlike most minimum-wage or "living-wage" bills, the Washington, D.C., bill targeted a tiny subset of employers: retail stores of 75,000 square feet or more with non-union workforces operated by companies with at least $1 billion of annual revenue. Moreover, stores that were already open were to be phased into the new wage system over a four-year period.

These bizarre requirements made the bill particularly unpalatable for Wal-Mart. Competitors who already have stores in D.C. would have been allowed to continue paying workers as little as $8.25 an hour for now. New retail stores generally experience a "learning curve" and do not reach peak profitability for several years.

Thus, Wal-Mart would have had an artificial cost disadvantage for the next few years, just at the time when its new stores would be at their least profitable level. Accordingly, officials should not have been surprised when Wal-Mart flatly informed them that it would drop plans for three new stores if the bill became law.

Wal-Mart also put another three stores that were already under construction under review. Moreover, Wal-Mart was not alone: According to Mayor Gray's letter to the City Council, other large retailers including Target (NYSE: TGT  ) and Home Depot expressed that they were unlikely to expand if it meant paying workers at least $12.50 an hour.

Balance of power
Mayor Gray came off as slightly defensive in his letter, stating, "I don't back down from bullies," and that pressure from Wal-Mart and other retailers didn't force his hand. However, that seems to be exactly what happened. Gray simply accepts that big-box retailers would not come to D.C. if they have to pay a special living wage.

The problem for living wage advocates is that depressed neighborhoods need Wal-Mart, Target, and other big-box stores more than the big-box stores need them. First, these stores bring lots of entry-level jobs that are suitable for people who have never been in the workforce. Clearly, minimum-wage jobs are not a viable long-term employment solution -- but without these entry-level jobs, young adults would have much more trouble gaining the experience necessary to qualify for better jobs.

Second, due to their vast supply chain networks and high-productivity stores, Wal-Mart, Target, and similar retailers can offer the same merchandise as other stores at a lower cost. By reducing the cost of living, these stores can significantly improve the quality of life for many people in low-income neighborhoods.

As a result -- and this was made clear in Mayor Gray's veto announcement -- D.C. needs these retailers more than they need D.C.: even if most of the jobs they create are "bad" jobs. The same is true in many other cities across the country. In fact, a similar big-box living wage bill in Chicago several years ago ended similarly with a mayoral veto.

Foolish bottom line
To many observers, it seems grossly unfair that major retailers like Wal-Mart and Target earn billions of dollars in annual profit while many of their workers earn less than $10 an hour. However, it is not practical to raise these entry-level wages through legislation without expecting push-back from retailers in the form of fewer stores (and fewer jobs).

While companies like Wal-Mart and Target are eager to grow, they still have ample room for expansion in other cities, states, and countries. They will invest where they can earn a good return on their investments. Any public policy that ignores this fact will ultimately fail, no matter how well-intentioned.

Wal-Mart may have won this battle, but it's increasingly feeling heat from two formidable competitors. To learn how these two retailers are beating Wal-Mart at its own game, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 16, 2013, at 11:39 AM, joeddins wrote:

    Walmart stores lower the cost of living for their customers. We could use an increase in the minimum wage to keep a level playing field for all employers. This way Walmart and McDonalds could increase the paychecks of their employees, without being at a competitive disadvantage.

  • Report this Comment On September 16, 2013, at 10:46 PM, TMFGemHunter wrote:

    Thanks for the comment. I agree that an increase in the minimum wage would make a lot more sense than imposing specific requirements that target just Wal-Mart and a few other companies.

    Adam

  • Report this Comment On September 17, 2013, at 12:31 AM, Corsair3117 wrote:

    The largest percentage, by far, of minimum wage jobs are, for youths taking their first step in the employment marketplace. They learn valuable lessons, raise their self esteem, and move on to the next level either at that employer or onto other venues. One look at the vast majority of your servers in the fast food world puts the lie to Big Union tales of middle-aged folk "forced to support their families on minimum wage jobs" The reason large raises in minimum wage levels is often called The Minority Youth Unemployment Plan is because these kids are robbed of employment opportunities as wages, like taxes, raw good costs are all expenses that affect the bottom line. The profits needed to run any place from a diner to a car wash. If that car wash owner can pay out $9/hr to 8 workers,($72 in hourly wages) it's simple math that he can only pay $12 to 6 workers ($72) or else raise prices that sees drivers stopping in less often. This is economics 101. It may not square with mouthy pols showing their love for humanity on other people's dime, but it's reality.

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