Wal-Mart Stores may yet have the last laugh. Lower oil prices and rising consumer confidence should make it a great time to be a low-end retailer. Yet margins at America's biggest store chain are being squeezed by rising pay. The company said its February plan to boost wages for about 500,000 of its 1.3 million employees would cost it $775 million this year, contributing to a downgrade in its forecast for full-year profit.
The Bentonville, Arkansas-based retail giant called the higher pay an "investment". While that's a bit misleading in an accounting context, the move may eventually bring dividends. It hits profits in the near term, but there's a long-term competitive benefit in having stores that are cleaner, better stocked and filled with employees that have been around long enough to know where items can be found. Making its stores a more enjoyable place to shop may bring higher sales.
There's also the political and economic backdrop. Wal-Mart is America's largest private employer, and its decision to raise pay could lead more lawmakers to support higher minimum wage rates. Numerous localities and 13 states have raised their pay floors since 2014. Democratic President Barack Obama supports this trend, and Wal-Mart's presence in many predominantly Republican states may help persuade some of his opponents, too.
On top of that, US employment has been steadily improving and the jobless rate has been falling, indicating that labor conditions are tightening. Wal-Mart boasts far more shoppers than employees. It's costly to be one of the few companies paying low-earners more than the norm. But if rivals end up doing it because the market or new laws force them to, that will ensure the retailer's customers have more money to spend.
A Breakingviews analysis last May pegged the potential net benefit to Wal-Mart's earnings before interest and taxes at $1.3 billion annually, or just under five per cent of last year's figure. That involves a lot of assumptions. But it suggests the company's investment in wages is one that could well pay off.
The Bentonville, Arkansas-based retail giant called the higher pay an "investment". While that's a bit misleading in an accounting context, the move may eventually bring dividends. It hits profits in the near term, but there's a long-term competitive benefit in having stores that are cleaner, better stocked and filled with employees that have been around long enough to know where items can be found. Making its stores a more enjoyable place to shop may bring higher sales.
There's also the political and economic backdrop. Wal-Mart is America's largest private employer, and its decision to raise pay could lead more lawmakers to support higher minimum wage rates. Numerous localities and 13 states have raised their pay floors since 2014. Democratic President Barack Obama supports this trend, and Wal-Mart's presence in many predominantly Republican states may help persuade some of his opponents, too.
On top of that, US employment has been steadily improving and the jobless rate has been falling, indicating that labor conditions are tightening. Wal-Mart boasts far more shoppers than employees. It's costly to be one of the few companies paying low-earners more than the norm. But if rivals end up doing it because the market or new laws force them to, that will ensure the retailer's customers have more money to spend.
A Breakingviews analysis last May pegged the potential net benefit to Wal-Mart's earnings before interest and taxes at $1.3 billion annually, or just under five per cent of last year's figure. That involves a lot of assumptions. But it suggests the company's investment in wages is one that could well pay off.