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As Wal-Mart Cuts Hours, Problems Emerge With New Pay Plan

By Jeremy Bowman - Sep 9, 2015 at 8:00AM

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The retail giant's plan to increase wages and improve customer service may be backfiring.

Wal-Mart Stores (WMT 1.97%) crashed falling its recent earnings report. The culprit? Sharply lower profits and reduced guidance due to a wage hike implemented in April. The world's largest retailer announced earlier this year that it would raise pay for all domestic employees a minimum of $9/hour starting this spring, followed by another bump up to $10/hour in February 2016.

As management presented the idea, it seemed like a win-win: increasing wages to reduce turnover and improve customer service, a consistently nagging problem for the big-box chain, which would in turn boost sales. However, the wage hike has already resulted in some unforeseen problems aside from the recent drop in profits.

First, reports emerged that the pay increases had made veteran workers who did not receive raises disgruntled. According to a report from Bloomberg, some employees believe the decision has had the unintended consequence of lowering morale. One said:

It's pitting people against each other. It hurts morale when people feel like they aren't being appreciated. I hear people every day talking about looking for other jobs and wanting to remove themselves from Wal-Mart and a job that will make them feel like that. 

Now, following that news comes another sign that some Wal-Mart workers are being disenfranchised by the wage hikes. The retail giant has been cutting employee hours at some stores in order to make up for the approximately $1 billion it's spending on increased wages and training. The shorter hours have come in a seemingly haphazard and unplanned fashion, with the company asking employees to leave shifts early or take longer lunch breaks.

Wal-Mart insists the cuts aren't affecting its initiatives to improve customer service by shortening lines and improving cleanliness, but it underscores a challenge the retailer faces as it tries to improve service and grow profits again.

It's all about the model
As competition from the likes of Amazon.com (AMZN 3.66%) and Costco Wholesale (COST 1.24%) has intensified, Wal-Mart's sales have slumped. Both of those rivals have employed alternative economic models to undercut Wal-Mart on price and deliver better customer service. The table below shows how the three businesses compare based on domestic sales and number of employees.

Company U.S. Revenue # of U.S. Employees  Sales per Employee
Wal-Mart $346 billion 1.4 million  $247,000
Costco $80.5 billion 129,000  $624,000
Amazon* $55.4 billion  96,300**  $575,000

Source: Company filings. *Results include Canada. **Estimated.

As you can see from the chart above, sales per employee at both Costco and Amazon are more than double that of Wal-Mart, meaning they are much more efficient in the way they use their labor. E-commerce and the buy-in-bulk warehouse model, it turns out, are better uses of labor than Wal-Mart's supercenter model, which is part of the reason those companies are generally able to offer lower prices. Costco and Amazon are also both renown for their customer service, which may be partly because they are able to pay their employees better. Not surprisingly, both Costco and Amazon are growing sales consistently, while Wal-Mart is struggling.

That disparity presents an ongoing challenge for Wal-Mart as it tries to drive comparable sales upward. Increasingly, it's become apparent that Wal-Mart's supercenters are becoming a drag on its performance, and the company instead is turning its focus to its smaller-format Neighborhood Markets and e-commerce.

It's a smart move, but it won't restore growth since its supercenters make up more than half of the company's sales. With the stock price down nearly a third from its highs earlier this year, the company needs to find a way to reinvigorate growth at its big-box stores. Improving pay would seem to be a step in the right direction, but not if it leads to lower morale and disgruntled workers.

Solving that problem and improving customer service along with it are key to Wal-Mart's future. It's clear change won't happen overnight, but the bigger question is if it will happen at all.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.48 (1.97%) $2.48
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$470.76 (1.24%) $5.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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