Wal-Mart Needs to Put Its Money Where Its Mouth Is

Unless Wal-Mart is willing to invest more financial resources on its employees, the company may continue losing market share to competitors such as Costco and Amazon.

Jun 6, 2014 at 3:36PM

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Wal-Mart (NYSE:WMT) is generating lackluster financial performance lately, and management is blaming its problems on weak consumer spending and other economic headwinds. However, the company is also clearly losing ground in the competitive battle against players like Amazon.com (NASDAQ:AMZN) and Costco (NASDAQ:COST).

In a recent press release following the latest shareholders meeting, management outlined the company's strategy to reinvigorate the business, which includes an increased focus on customers, investing in employees, and adapting to technological changes.

Nice words are a good start, but unless the company is willing to commit some cold, hard cash in areas like salaries and other employee benefits, things will hardly change much.

The problem
Wal-Mart has delivered disappointing sales and earnings over the last several quarters. The economic environment has been remarkably challenging for retailers, but competitors like Amazon and Costco are clearly outperforming Wal-Mart by a considerable margin.

Both Costco and Amazon offer competitively low prices, but it would be hard to argue that they have a big advantage over Wal-Mart in that area. Customer satisfaction seems to be the big differentiating factor for these companies.

Based on data from the American Customer Satisfaction Index, Costco has a customer satisfaction score of 84, the highest in its industry group, and considerably above the score of 80 obtained by Wal-Mart's Sam's Club warehouse business.

Amazon is also highly regarded by consumers; the company has a customer satisfaction score of 88, the highest in the online retail industry, and comfortably higher than the average score of 78 among online retailers.

Wal-Mart, on the other hand, has received harsh criticism from consumers over the last several years, and the company has a score of 71 in the American Customer Satisfaction Index. This is the last position in its industry group, and materially below the industry average of 77 among department and discount stores.

Put your money where your mouth is
According to the recent press release, the company intends to reverse the situation via three main initiatives:

First, we will be a customer-driven company. We've always said the customer is our boss and we'll make decisions based on how we can serve them better. Second, we will invest in our people. As we change and grow, it will be our associates who will make the difference. Finally, we need to be at the forefront of innovation and technology. We will lead with urgency to get ahead of change. 

This sounds like a well-intended and coherent plan. If customer satisfaction is a big problem for Wal-Mart, investing in employees and technology could be a smart strategy to improve customer service and add value to the company's customer proposition.

However, the press release provides some rather vague statements regarding employees, and no mention of rising salaries: "I'm proud of the jobs and opportunities we offer, and we can do an even better job of creating opportunities to learn and grow. We'll prepare our associates to serve customers better, while building the careers you want at Wal-Mart," says CEO Doug McMillon in the statement.

According to an article published last year in Bloomberg Buisnessweek, Costco pays its hourly workers an average of $20.89 per hour versus an average wage of $12.67 per hour for full-time Wal-Mart employees. Costco also offers far better benefits, and it provides superior opportunities for professional growth to employees at different levels.

It's no wonder Costco attracts a more talented workforce and keeps employees better motivated -- and this has direct implications on the shopping experience at its stores and on overall customer satisfaction.  

Amazon, on the other hand, has faced criticism from employees when it comes to salaries, but the company spends relentlessly on areas like technology and infrastructure to provide a high-quality experience for its customers, and this is probably the main driver in terms of customer satisfaction for the online retailer.

Focusing too much on cutting expenses seems to be backfiring at Wal-Mart, and the company is losing market share versus more innovative players such as Amazon and Costco. Maybe it's time for management to change its strategy; investing some money in human resources could help a lot in a key area like customer satisfaction.

Foolish takeaway
Employees are not just a source of expense on the income statement; they are also a decisive resource for companies when it comes to generating growth and competing in an increasingly dynamic business environment. Unless Wal-Mart is willing to invest more in its employees, the company might well continue losing market share to Costco and Amazon.

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Andres Cardenal owns shares of Amazon.com. The Motley Fool recommends and owns shares of Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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