In Defense of Wal-Mart

Mohammed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yesterday, as I was browsing my Facebook news feed, I came across an interesting post by one of those anti corporate groups that have become a dime a dozen after the Occupy Wall Street movement 2 years ago.  It featured a picture of Costco's (NASDAQ: COST)  former CEO Jim Sinegal and read "Costco pays $17 per hour on average to its employees and refused to cave in to Wall Street demands to cut employees benefits and salaries."

While the mentioned post didn't say it outright, it was most likely a read in-between the lines attack on Wal-Mart (NYSE: WMT) the world's largest retailer. Wal-Mart certainly isn't the most favorably viewed company in the eyes of many labor groups, and is routinely accused of underpaying its employees, even though it usually makes the top of the list of the Fortune 500. The founder of the company, Sam Walton, himself was strongly against labor unions. 

However is it fair to criticize Wal-Mart for not paying its employees as much in comparison to Costco?

Well let's forget Costco for a minute. Let's compare Wal-Mart with another company on the complete opposite side of the spectrum, Goldman Sachs (NYSE: GS), which had an average annual compensation per employee of $367,057 last year. This is down from a high of over $600,000 in the middle of the last decade pre-global market meltdown.

The amount of a company can afford to pay its employees is based on two factors:

  • Revenue per employee of the organization
  • Cost structure of the organization.

Goldman Sachs had 32,600 employees in 2011 and $28.8 Billion in revenues. This gave them $872,000 per employee. Wal-Mart had $446 Billion in revenue, but 2.1 million employees which results in $212,000 dollars per employee. That means if both companies distributed their entire 2011 revenues to their employees evenly without paying for any expenses, retaining any earnings, or paying any dividends; Goldman Sachs would be able to pay all its employees 4 times as much. 

However, distributing all your revenues to employees is not realistic, so let’s take a look at the second factor;  how both companies generate their revenues and their cost structure.

If The Investment Banking Division (IBD) of Goldman Sachs works on a $50 Billion deal for a client it may charge a fee somewhere around 0.1% of the deal size. That equals to $50 million. All Goldman Sachs needs to do is have a team of analysts, associates, VPs, and MDs working around the clock for the client and pay a few other expenses here and there. Compensation is actually a very big cost for Investment Banks like Goldman Sachs, and usually compromises around 30% of the firm’s total revenue. After all costs and expenses have been factored in Goldman Sachs got to keep $7.5 million of the original $50 million on average as after tax profit for FY2011. 

As for Wal-Mart, in order to generate that same $50 million it needs to acquire, ship, handle, distribute, and clear inventory costing $33 million which can then be marked up and sold to customers for $50 million. Then out of what is left needs to pay for all the overhead and operating expenses of managing a giant corporation which has over 2 million employees, 950 million square feet of retail space, and more than 5,000 stores across the world. After all is said and done Wal-Mart got to keep $1.75 million out of the original $50 million in after tax profit for 2011.

So, in returning to Costco, it's true that Wal-Mart has more in common with Costco than it does with Goldman Sachs, however, the two companies have two different business models. Costco is a warehouse type retailer that sells many items in bulk at low prices for break even or a slight profit, but also generates money through membership fees. It also sells many high end and expensive items, as well, that carry a greater margin. It's worth mentioning that Costco is currently the largest wine retailer in the world. Wal-Mart stores are also much more complex; a typical Costco carries about 4,000 SKUs, while a Wal-Mart could carry more than 140,000 SKUs.

As we saw from the comparison to Goldman Sachs, it is not entirely fair to demand different companies with different models to pay employees in the same fashion.

Wal-Mart is also not leading a 'race to the bottom' as some may suggest. Many of the lower paid jobs at Wal-Mart are what could be described as low skill jobs that don't require specialized skills or high education levels. The laws of supply and demand suggest that if there are many out there who are able and willing to take the job, then wages are likely to be depressed. In the US, there is a Federal minimum wage law which provides a floor at $7.25 for wage levels that prevents employers from exploiting low skilled labor. 

Wal-Mart pays many of its new sales associates $11.75 per hour, more than 50% higher than the minimum wage, so Wal-Mart is not necessarily exploiting its employees. In reality it’s actually providing a great service to different communities by providing employment opportunities to many people who might otherwise have no jobs or income. Remember, we're not talking about Facebook with 3,000 people employees or Google that has 25,000 employees; we're talking about a company who has more employees than there are people living in the state of Nebraska or the Middle Eastern country of Qatar. The money required to pay all these people just won't surface out of nowhere.

Wal-Mart does have a responsibility to its employees to treat them in a manner that it fair, but it also has to balance its responsibility to employees with its responsibility to other stakeholders, such as shareholders and customers. Look at what happened to Kmart, it was bigger than Wal-Mart in the 70s and 80s, but later began running into trouble. Wal-Mart has a duty to remain profitable and competitive, otherwise it could lose its edge and go bankrupt, and if that happens then 2.1 million employees around the world may suddenly have no job.

I am not against Wal-Mart treating its employees better, I think every company should treat its employees in the best manner possible, as I believe people are a company's most valuable asset. However, I am against saying that this company is evil or greedy because it doesn’t pay its employees as much as another company.


 


I have no positions in any of the companies mentioned above

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