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Why Gap Is Raising Its Workers' Pay

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Two weeks ago, the Congressional Budget Office released its study on the impact of raising the minimum wage in the United States. Pundits, along with other commenters who don't care about real discourse, jumped on the highlights from both sides of the report. Headlines about massive job losses or huge benefits for impoverished families popped up everywhere, and then everyone yelled. In short, it was just another Friday in American politics.

In the midst of the yelling, Gap (NYSE: GPS  ) decided that it didn't care what the outcome of the bickering was. Yesterday, the retailer announced that it was going to bump up its workers' pay to a $10 minimum in 2015, starting with a $9 minimum later this year. It seems like an odd thing for a business to do, but it makes perfect sense for Gap and for other retailers.

The value of the in-store experience
Gap's online business has been a star for the company. In the first three quarters of last year, online revenue grew 24%. Online growth comes with challenges, though, and one of those challenges is that customers are less likely to impulse-shop online. While we tend to find it easy to spend money sitting in front of our computers, studies have shown that fewer of us buy things on a whim.

To counteract that drag on sales, brands are trying to make coming into the store an experience, so that even frequent online shoppers will have a reason to come in. Gap has recently launched a "reserve in-store" program on its website, allowing customers to reserve an item in their local Gap. To get the real sales benefit out of that program, Gap sales associates need to be on the ball and selling when customers come in.

Gap's CEO, Glenn Murphy, said that part of the reason for the increase in pay was so that Gap could attract better talent to make the most out of the customers whom it does get in-store. In an earnings call last year, Murphy said that Gap aims to do more for customers than simply propping up a 40%-off easel in front of the store. "I mean, anybody could do that," he said,before explaining how Gap was focusing on its brand to drive customer foot traffic.

What it means for Gap
In the company's announcement of the wage increase, it made it clear that this was not a political issue. Specifically, it said, "To us, this is not a political issue." Gap's in-house wage increase has none of the knock-on effects of a mandated increase, and the company hasn't announced that any job culling will be required to fund the raise. Instead, Gap sees this as an investment in better salespeople and better sales from those employees.

This is a longer play from Gap, and the benefits aren't going to just jump off the page. Instead, look for sales to creep up as the company starts to attract talent from less generous employers. Gap should be able to start pulling in better folks quickly, as the splash in the mall employment circle will likely spread far and wide -- the raise will affect 65,000 employees. As a man who's spent a lot of time on the front lines of retail companies, this seems like an excellent move for the workers, for Gap, and for retail in general. Hats off.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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8/28/2015 4:02 PM
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