Amazon (NASDAQ:AMZN) isn't exactly known as a champion of labor. Though the company is beloved by customers and investors, it has increasingly come under pressure over stifling working conditions in its warehouses, as pickers and packers have complained of harsh conditions, like oppressive heat and not getting bathroom breaks, in addition to low wages and few benefits.
The issue attracted the attention of Senator Bernie Sanders, who has lambasted the e-commerce giant and its CEO, Jeff Bezos, the richest person in the world, over the past several years, and that campaign seems to have worked. Amazon announced this week that it would lift its minimum wage to $15 an hour next month as the company ramps up for the holiday season and is soon expected to announce the location of its second headquarters, or HQ2.
In a press release Tuesday morning, Amazon said it would raise its minimum wage to $15 an hour starting Nov. 1 for more than 250,000 full-time employees and another 100,000-plus seasonal employees. Bezos explained the move, saying, "We listened to our critics, thought hard about what we wanted to do, and decided we want to lead." Amazon also plans to advocate for a higher federal minimum wage, which has been at $7.25 since 2009.
A game of chicken
In recent years, a slew of retailers including Walmart (NYSE:WMT), Target (NYSE:TGT), and Costco Wholesale (NASDAQ:COST) have announced wage hikes as the labor market has tightened and demands from labor groups have increased. However, these wage hikes are usually incremental. Target, for instance, promised $15/hour by the end of 2020, after lifting hourly wages to $11 earlier this year.
Amazon, with its latest move, just blew those expectations out of the water. Target had looked like a benevolent employer prior to Amazon's announcement. Now it's clearly falling behind. Both Target and Walmart currently offer an $11/hour base wage, while Costco starts at $14/hour.
No retailer wants to pay higher wages as they eat into profits, but with the labor market now tighter than it's been in at least a decade, especially with the holiday season around the corner, Amazon just made a savvy move. Raising wages will burnish its reputation, which is key at a time when the company has caught flak for monopolistic practices and not paying a living wage, and it will help the company ingratiate itself when it announces the new home for HQ2. Furthermore, the move will help Amazon attract more seasonal and full-time workers as competition in the labor market increases, and it puts pressure on rivals like Walmart and Target to follow suit, though those companies don't have the same flexibility that Amazon does.
What's a brick-and-mortar retailer to do?
Amazon doesn't break out wage expenses, and the company's starting wages are currently as low as $10/hour or as high as $14. If we estimate that the new wage hike will raise the average wage of its approximate 250,000 warehouse workers by $2/hour, that would cost Amazon an additional $1 billion. Amazon has made $6.3 billion in net income over the last four quarters and that figure has been fast increasing. The $1 billion in additional wage expenses would take a significant chunk out of Amazon's profits, but that may be worth it to the company as it improves its image and helps it recruit employees and grow. Amazon has also historically played a different game than its brick-and-mortar rivals, as the company has been willing to forgo profits in order to grow its top line and grab market share, and investors have rewarded it for doing so.
Walmart and Target aren't as lucky as Amazon, as those retailers are judged closely by their profits, and their business models are more reliant on labor. Therefore it would be more costly for them to raise starting wages to $15/hour. Walmart has about 1.5 million U.S. employees, and the company has already raised its starting wage aggressively in recent years, from $7.25/hour in 2015 to $11/hour currently. If we applied the same formula to Walmart, assuming a hike to a starting wage of $15/hour would cost it $2/hour per worker, that would deplete $6 billion in profits from its bottom line, which accounts for nearly half of Walmart's adjusted net income of $13.3 billion last year. Given that fact, it seems like Walmart would be unlikely to hike its starting wage to $15/hour just to chase Amazon unless the company found that to be in its own interest.
Target, meanwhile, which has stores only in the U.S., has about 350,000 employees. Since it has the same starting wage as Walmart, we can assume the same average $2/hour wage increase if Target suddenly implemented a $15/hour wage. Doing so would cost Target approximately $1.4 billion, or nearly half of the $3.1 billion in net income it's generated over the last four quarters. Again, that sudden loss of profit would likely be untenable to shareholders.
Walmart may have one advantage in this wage crunch: Since many of its stores are in parts of the country like the South, where the minimum wage is still $7.25/hour, there may not be as much pressure to hike employee pay. Also, the company is less likely to encounter direct competition in hiring from Amazon for its stores in rural parts of the country. Target, whose stores are more concentrated in metro areas, may not be as lucky, but both companies face an unwelcome challenge at a time when they are looking to deliver meaningful profit growth for the first time in years after making key investments in wage and store improvements.
Amazon's move will likely poach employees from both retailers and put pressure on them to follow suit. For Walmart and Target, this looks like a no-win situation.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.