retailers

Wal-Mart's 'neutral stance' on the minimum wage hurts business

March 6, 2014: 5:00 AM ET

The discount retailer is forgetting the basic principle of business that those who earn more also spend more.

By Sanjay Sanghoee

140305173029-walmart-620xa

FORTUNE -- As the debate over raising the federal minimum wage goes on, Wal-Mart (WMT), the nation's largest employer, has backed away from news reports that it would support higher pay. The discount retailer recently said it's staying "neutral," which is really just a veiled way of opposing any increase. It would be easy to dismiss this as just another temporary fiasco for Wal-Mart, but the implications could be far bigger.

One way to view Wal-Mart's impartiality is that it contradicts capitalist principles. Capitalism is neither emotional nor ideological; it is opportunistic. Not directly supporting a minimum wage hike is a lost opportunity and a bad business decision that can compromise the financial interests of the company if you look at its target market. A significant segment, 40%, of Wal-Mart's customers make less than $35,000 a year, which suggests that its fortunes are tied to the same low-income segment who receive at or close to minimum wage.

MORE: Who will occupy RadioShack's retail desert?

The less those customers earn, the less they have to spend, as analysts saw when Wal-Mart reported disappointing earnings for the fourth quarter of 2013. Profits fell 21%, at least partly due to a decline in government benefits like food stamps. Since wages have a similar impact, Wal-Mart is effectively giving up more sales by not directly supporting a minimum wage increase.

Another factor is the trade-off between higher wages and welfare. Raising the minimum wage will enable the U.S. government to cut $4.6 billion in food stamps, according to a report by the Center for American Progress. So while Wal-Mart may have to pay employees more, that could be offset by reduced taxes if government spending declines. This is not guaranteed but should still be part of the math.

Wal-Mart also seems to have forgotten a basic tenet of smart business: If you can't beat them, join them. True, Wal-Mart can usually dictate wage levels due to its size, but in the current climate, that power is tenuous. In a midterm election year, politicians are likely to support some type of minimum wage increase in order to court the popular vote, and with other companies like Gap Inc. (GPS) and Costco (COST) jumping onto that bandwagon voluntarily, Wal-Mart risks losing out in terms of good workers as well as its image.

MORE: Bitcoin's digital tip jar: Microtransactions reborn

The value of good public relations is hard to quantify, but anyone in the retail business can tell you that it is not trivial. By refusing to support a higher minimum wage, Wal-Mart is giving up a rare opportunity to get positive press and generate goodwill with both customers and workers -- all of which then translate to more sales. It is also paying a price in bad publicity (which could be another reason for the sharp fall in earnings last quarter) over an issue it can't really control, so from a cost-benefit standpoint, Wal-Mart is doing the wrong thing.

It was not always like this. The CEO of Wal-Mart in 2005, H. Lee Scott Jr., urged Congress to raise the minimum wage to help his struggling customers since he was worried about the impact on his sales. It was a pragmatic approach that made business sense. Unfortunately, Wal-Mart's current management does not seem to be as astute.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.