Wal-Mart(NYSE:WMT)won praise from many in the media and employee community when it recently raised wages for its lowest paid workers. Under CEO Doug McMillion, the company seems to be steering away from its long-held strategy of keeping costs low in order to offer no-frills, rock-bottom prices to its low and middle-income customers.
Despite its dominance of retail, Wal-Mart has been losing its edge in recent years. Same-store sales have been negative in several of the past quarters, and although the company has found growth opportunities in e-commerce and its Neighborhood Market format, its core Superstore business has been looking increasingly stale.
McMillon, who stepped into the CEO position in early 2014, found a retail chain lacking in customer service. On store visits, he saw "long lines, empty shelves, and problems with produce," according to a Bloomberg report. Industry research by the American Customer Satisfaction Index backs up his assessment, as Wal-Mart ranked last in the customer satisfaction survey for both discount retailers and supermarkets. "Speed of checkout" was the top complaint for all stores, so it stands to reason that Wal-Mart could make customers happier by keeping more checkout lines open.
Based on that information, it should not come as a surprise that McMillon sees investing in employees as a solution. Wal-Mart announced in February that it would lift all staff wages to $9 per hour by April of this year and to $10 per hour by next February.
The decision, which will cost $1 billion annually, is designed to reduce turnover, increase morale, and make Wal-Mart more competitive in the labor market. Already, the move has prompted at least one other retailer, TJX, the parent of TJMaxx and Marshalls, to follow suit. Wal-Mart is large enough that its decision could reshape the industry by forcing competitors to keep up.
Rome was not built in a day and neither was Wal-Mart
According to a recent survey by YouGov Index, the decision to raise wages has not had any effect on its reputation as the retailer gets a score of -9 (on a scale of -100 to 100), down from -1 at the beginning of the year. The survey notes that "Wal-Mart has had longtime trouble shaking its negative reputation scores as a brand which consumers would be proud to work for." Interestingly, YouGov found that TJX did see some improvement after announcing its plans for a wage hike.
The YouGov survey shows us that brands such as Wal-Mart, which are so entrenched in the American psyche, have difficulty changing their reputation since the company has been seen by many as a drain on communities and taxpayers for well over a decade. Still, reputation, while important, will not be the determining factor for whether the decision pays off.
If raising wages can make Wal-Mart a more attractive place to shop and drive sales, the move will be justified. One argument in favor of raising wages is that Wal-Mart could save as much as $350 million in hiring and training costs if the company is able to reduce turnover by 34%.
But ultimately, the top line will have to grow to justify the move, and slim margins mean that additional expenses have to drive an outsized level of growth. With a gross margin of 25%, the $1 billion wage hike will have to drive at least $4 billion in sales to make Wal-Mart more profitable.
It is a big bet, but it is one the company needs to make. With rivals like Amazon and Costco putting up impressive growth numbers, low prices alone are not enough for Wal-Mart to succeed anymore. If it can again become a destination that shoppers want to visit, the company should be able to push its bottom line back up again.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool 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.