OPINION:
Wal-Mart announced this month that it is closing 154 stores in the country, the biggest retrenchment in its history. The retail giant, whose earnings have come under pressure in recent years, also revealed that it is scrapping plans to open two new supercenters in Washington D.C.’s poorest neighborhoods.
Wal-Mart chalked up its decision to pull out of its planned stores in the District to increasing costs and poor performance at its existing locations. But the city’s new $11.50 minimum wage, which may rise to $15 this fall along with other new labor costs, have clearly put the Wal-Mart business model of low prices in an untenable situation.
This is not only a D.C. story about one big retailer. West Coast businesses facing super-high starter wages are closing up shop, laying people off, and turning to more self-service. You can see some of their stories at Facesof15.com. Wal-Mart is closing stores, but it is not alone.
The move has been greeted with anger by D.C. legislators and commentators who seemingly believe that local labor regulations that drive up the cost of doing business do not dissuade low-margin businesses from setting up shop. Those who should be angry are the District’s poor, who will lose out on much-needed job opportunities, the chance to learn and advance to supervision, and access to low-priced goods.
Some commentators blindly argue the labor mandates could be paid for by limiting Wal-Mart’s $63 million compensation for its executive team and redistributing those funds to its employees. Wal-Mart employs approximately 600,000 people part-time. If its executive team took a 100 percent pay cut and distributed it broadly, staff wages would rise by eight cents an hour. Hard problems are not solved by such foolish attitudes.
Wal-Mart’s announcement reiterates the reality that minimum wage increases affect big and small businesses alike, from the largest private employer in the country to the neighborhood bodega. Each business location must sustain itself on its own economics and the will of the consumer.
Generally, there is no correlation between profit margins and size. Coincident with its low prices, a company like Wal-Mart has a profit margin of 3 percent. That is much less than many small businesses. When the government tampers with this business model of low prices and high sales volumes the result is closed stores.
But judging by the different minimum wage implementation rules in places with recent wage hikes, many legislators are still under the mistaken impression that labor regulations affect differently sized, low-margin businesses differently.
In Seattle and New York state, for instance, which have both recently passed $15 mandates, large businesses are subject to different wage requirements than smaller ones. In addition, they treat franchises, which are independent small businesses that pay a small royalty for branding, as indistinguishable from big businesses. Washington State’s Attorney General Robert Ferguson said, “Franchisees enjoy a unique economic advantage that gives them the ability to more easily absorb an accelerated wage phase-in.”
Research says otherwise. Lloyd Corder, adjunct professor at Carnegie-Mellon University and University of Pittsburgh, surveyed more than 300 franchise and 300 non-franchise businesses in minimum wage industries, asking about how they would react to a $15 minimum wage. He found that franchise businesses are more likely to be negatively impacted by a $15 minimum wage.
About two-thirds of franchise businesses responded that a $15 minimum wage would force them to reduce staff or reduce hours, whereas around half of non-franchise businesses would be forced to do the same. Franchise businesses were also significantly more likely to automate jobs in response to minimum wage increases than their non-franchise counterparts.
Those who think that you can disrupt company business models by mandating higher labor costs without consequences may also be looking forward to the arrival of the Easter Bunny.
• Richard Berman is president of Berman and Co., a Washington public affairs firm.
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