Walmart Is Doing Just Fine

Walmart announced their financial results yesterday.  In short their sales are up a little, but their net profits are down a little. Some commentators are suggesting that Walmart’s recent decision to increase the pay of their lowest paid workers is a problem.  For example, CNBC’s headline reads: “Is Wal-Mart just the first victim of rising wages?”

The answer is no, Walmart has some challenges, but the idea that their problem is that they are overpaying the lowest paid staff is not one of them.  I will explain some of the factors that have affected Walmart’s profits.

1.     Foreign Exchange Effects. We hear that bandied around a lot, and people probably think that it is just some nonsense excuse that corporate executives use, but it is both real and outside of the control of either the executives or the employees. Imagine that Walmart has a store in Europe that earned two million Euros in profit last year. This year through some combination of hard work and good luck that store earned two point two million Euros in profit, and the management is celebrating their great year. How does this look when the accountants in Bentonville write up their financial reports:

a.     Last year: 2 million Euros at $1.40 per Euro equals $2.80 million. 
     This year: 2.2 million Euros at $1.10 per Euro equals $2.42 million.

They are doing fine, having a great year, but on the financial reports it looks like they are having a terrible year. The fact that their foreign money is worth fewer dollars is in some sense irrelevant because Walmart is spending it on expansions overseas, not converting them into dollars anyway, but nonetheless, that is how the accounting works. This effect lowered Walmart’s reported profits by $189 million for the last three months, or over 3% of their total profits for that period.

2.     Prescriptions. More of their customers have health insurance. You might immediately think that that would be good for Walmart, because the customers can buy more stuff. Sometimes it is bad. A lot of customers who have long term illnesses for which prescriptions were a necessity were getting the prescriptions filled even without health insurance, and Walmart was able to charge them much higher prices than they charge for the same prescriptions when customers have insurance. That difference is actually growing, as the insurance companies have even more leverage than they used to, and they are lowering prices even more.

3.     Theft. Walmart experiences higher rates of theft than other stores.  While we don’t know, experts believe that much of the theft is by employees, and employees are particularly likely to steal stuff when they are quitting anyway. Reducing employee turnover is one of the main reasons that Walmart increased the pay of the low paid employees in the first place. As employees stay longer, and are happier in their jobs with more pay (we obviously don’t know how big an effect the pay increases will  have) Walmart is hoping to see less employee theft.

4.     Increases in total pay are because of both increased pay rates, and increases in total hours worked. Walmart’s total employee wage costs have increased for three reasons:

a.     Increased pay to the lower paid employees
b.     Increased hours for training (around preventing theft)
c.      Increased number of employees working in the stores (to improve customer experiences, and to reduce theft)

So not all of their increased compensation expense is related to the increases in pay.

Overall, they increased the employees pay not because they are altruistic, but because they made a business decision that over the long run, paying people a living wage (or closer to a living wage) will actually increase their profits over what they would be otherwise. That was a correct decision.

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