Walmart surprised the markets last week when it announced, along with its year-end results, a salary increase for 500,000 of its employees, raising company minimum wages to $9 per hour in April 2015 (bringing the average wage to $13) and $10 per hour beginning February 2016. The retail giant’s financial results were otherwise unremarkable, with a revenue increase of 2%, sales up 1.9% and net income up 2.1%. At the end of the day, the stock was down 3%. But it was the salary increase that drew attention, both among analysts and on social media. While actually a long-expected move, and certainly a good investment, the salary increases might not be sufficient to help anchor the business model towards more sustainable and profitable long-term growth.

The long-awaited move towards more decent jobs

Walmart has long been the symbol of a socially unsustainable business model: low prices for customers, based on the lowest possible employee wages. Although the company does not disclose wage levels and payroll, it has been known to employ hourly workers at minimum wages, in part-time and contested working conditions1. In the past decade, the company has experienced major strikes, work conflicts, and store disruptions, as well as a class-action lawsuit over employee compensation.

Some studies have even attempted to estimate the cost of low-paid workers relying on social aid2 on the American economy, although the results have not been confirmed3. In addition, Walmart’s CEO pay was estimated by Bloomberg to be 611 times higher than its median worker in 2013, ranking Walmart as 18th on the list of top CEO pay ratios in the S&P 5004.

Walmart’s decision reflects market conditions: a tighter job market and increasing wages for the lowest paid-workers since 20135 have almost made this hike necessary to keep stores staffed. But more importantly, it illustrates a growing understanding in the market of a simple economic equation: decent working conditions and acceptable wages decrease employee turnover (and thus associated costs), and increase motivation, productivity and revenues6. Walmart’s wage hike costs $1 billion, or 0.8% of the total revenue of the last quarter (a number which probably contributed to the share price dip on Thursday). But this is not a cost: it is an investment7. Paying to have access to better motivated, more productive staff is key to Walmart’s business. The labor factor might contribute to explain what is currently not working with the company, and causing lukewarm financial results. Both 2015 and 2016 will be the years where we need to watch the relevant human capital indicators – if Walmart starts publishing them.

Why this stepmight not be enough

This wage increase occurs in a context where most middle and lower incomes have been stagnating over the past three decades and, more importantly, have not kept pace with economic growth8. This has potentially negative impacts on markets and growth, as it undermines the very engine of the economy: consumption. The IMF, the OECD, Standard & Poor’s, among many others, have confirmed this in several economic studies focused on the topic of high and rising income inequality. While the increase projected by Walmart is good news for employees, it is still well below levels of wages that would be expected to boost the economy to a sustainable growth pattern.

Another reason why such a strategy might not be sufficient is due to business practices by some of Walmart’s competitors. Costco, as an example, offers a similar promise to its customers, albeit with a membership: low prices, with a good customer experience. Costco pays higher wages than Walmart, with a minimum of $11.50 in 2013, and an estimated average of $20 an hour, in addition to benefits9.

Costco has systematically outperformed its competitors, including Walmart. In terms of net income per employee, Costco outperformed Walmart in 2014 by nearly 45%, and in total return for the past year, Costco beat Walmart 23.48% to 16.57%. This result was achieved thanks to a more efficient and loyal workforce, but also to a different model. Costco, like Trader Joe’s, shuns major advertising and communication about its products, and has a more limited choice of items within product types. This “unorthodox” business strategy is what drives revenues, customers and profits10. While Costco and Walmart are quite opposite, their customers are not, and the continuous success of companies like Costco may well be a harbinger of the future food retail superstore, with a more balanced, fair and financially sustainable profit sharing paradigm.

What a sustainability analyst sees in Walmart

Walmart has made progress in environmental sustainability over the past few years, especially with initiatives such as the undated target of zero waste11 and the closed loop fund for recycling12. However, the limited ESG data published by the company shows a lagging performance.

The overall ESG performance of the company is 57/100, an average score according to Sustainalytics. When delving into the breakdown of this score, Walmart’s social performance stands at 48/100, which is relatively low13. Indeed, the company offers very little data on its employees. In its latest 180-page sustainability report, wages, turnover, levels of absenteeism or training are not reported14.

In terms of environmental performance, Walmart has made progress, especially in bringing about environmental responsibility in its supply chain, but is still lagging in results, notably concerning its own operations. Less than 25% of its energy supply comes from renewable energy, whilethe same figure at Staples is 100%. Absolute GHG emissions continued to grow in 2014, even if emissions per sale have slightly decreased. In comparison, Woolworths has reduced and stabilized its total CO2 emissions over the past three years, while sales increased by 4.7%. Woolworths, Carrefour and Tesco all publish water and waste indicators, while Walmart does not report such data.

Transparency drives sustainable business – and builds trust with stakeholders and investors. While Walmart is moving in a positive direction in terms of ESG performance, we expect much more in terms of disclosure and dated and quantified long-term objectives.

Flash.MP. Feb. 23 18.51

 

Margarita PirovskaPhD, is the Policy & Sustainability Analyst at Cornerstone Capital Group

 

Dehao Zheng contributed to this report.

 

[1} http://laborcenter.berkeley.edu/pdf/2007/walmart_downward_push07.pdf

[2] http://business.time.com/2013/11/18/walmart-seeks-food-donations-to-help-needy-employees/

[3] h and http://laborcenter.berkeley.edu/pdf/2004/walmart.pdf

[4] http://go.bloomberg.com/multimedia/ceo-pay-ratio/. Average ratio was estimated at 204.

[5] http://www.epi.org/publication/stagnant-wages-in-2014/ and http://www.bloomberg.com/news/articles/2014-04-16/tight-job-market-in-u-s-cities-prompts-higher-pay

[6] http://blogs.wsj.com/atwork/2015/02/19/one-reason-wal-mart-is-raising-pay-turnover/

[7] See our reports on income inequality, looking at decent jobs and their effects on corporate performance and the social costs of doing business.  

[8] http://www.epi.org/publication/stagnant-wages-in-2014/

[9] Although Costco does not publish much social data, information on their social practices and outcomes are available through studies such as https://hbr.org/2012/01/why-good-jobs-are-good-for-retailers

[10] http://www.businessinsider.com/costcos-unorthodox-business-strategy-2013-3?op=1

[11] http://corporate.walmart.com/global-responsibility/environment-sustainability/waste

[12] http://www.closedloopfund.com/

[13] Source: Sustainalytics. Walmart is ranked “average performer” overall (35th out of 53 companies in the peer group), “underperformer” on social and governance issues, and “average performer” on the environment.

[14] http://cdn.corporate.walmart.com/db/e1/b551a9db42fd99ea24141f76065f/2014-global-responsibility-report.pdf