By Sanjay Sanghoee
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.
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.
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.
MIT operations expert Zeynep Ton argues that the clothing retailer's pledge to increase worker pay is about much more than good PR.Christopher Matthews - Feb 20, 2014 3:01 PM ET
The government may be open, but consumer confidence won't likely rebound until a long-term budget deal is reached, and that has retailers worried.
FORTUNE -- As if taking the global economy hostage wasn't bad enough, Congress may very well ruin Christmas, too. No, really.
Senate Democratic and Republican leaders on Wednesday may have struck a deal to reopen the government and extend its borrowing authority into next year, but a cloud of MORENin-Hai Tseng, Writer - Oct 17, 2013 9:18 AM ET
J.C. Penney needs to seriously rethink its business model and it needs the space to execute on a new strategy. That cannot happen in the frenetic public markets.
By Sanjay Sanghoee
FORTUNE -- Shares of embattled retailer J.C. Penney surged this week on news that its cash levels at year-end will be better than expected. That is certainly good news for a company that has had nothing but problems lately. MOREOct 9, 2013 1:23 PM ET
The retailer's bonds are trading at around 70 cents on the dollar, suggesting investors think it could be headed for bankruptcy. But the value of its real estate alone is higher than all of its debt.
By Lauren Silva Laughlin
FORTUNE -- J.C. Penney may have a hard time drumming up shoppers to buy its discount clothing items. But the company still has one interesting bargain on the sale rack: its MOREApr 9, 2013 11:49 AM ET
S&P gives the retailer's bonds a high rating. Moody's says Amazon's debt is just above junk.
FORTUNE -- Amazon's recent $2.5 billion bond offering, if it were listed on the popular retailer's website, would get two very different and confusing reviews: One for nearly five stars; the other for just over one.
Days before the online retailer's late November debt deal, ratings agency Standard & Poor's issued its report on the soon-to-be MOREStephen Gandel, senior editor - Dec 18, 2012 5:00 AM ET
|NJ agrees to ban Tesla direct sales|
|Five predictions for the World Wide Web that were way, way, way off|
|76% of Americans are living paycheck-to-paycheck|
|Fannie Mae, Freddie Mac stock hit by proposal to close them|
|West prepares sanctions against Russia over Ukraine|