Walmart plan to increase wages an act of brilliance

But fast-food industry – including McDonald’s – won’t be following in its footsteps any time soon

Walmart plan to increase wages an act of brilliance FREE to Subscribers

Sylvain Charlebois is a professor of food distribution and policy at the University of Guelph in Ontario.
Contact Sylvain

GUELPH, ON, Feb 27, 2015/ Troy Media/ – Walmart shareholders were not overly thrilled to learn that the company was planning to increase the salaries of their poorly paid employees in the U.S. Known for its cost-cutting approach and shrewd management methods, the announcement came as a surprise.

Given that this soon-to-be-better-paid group includes more than 500,000 people, most of them women, many social activists applauded the retail giant’s move.

Walmart Canada not affected

This decision, however, will not affect Walmart Canada, at least not yet. But with this decision to invest an additional $1 billion in its workforce, Walmart has clearly made a statement about the value of human capital in retail.

Of course, this new approach is likely due to a tighter job market in the U.S. In order to better serve more demanding customers, Walmart needs to retain its employees and train them properly. Job growth in the U.S. has not led to a widespread increase in wages, and this positions Walmart as one of America’s most powerful advocates for a more equitable capitalistic economy. On that basis alone, the announcement is an act of brilliance. Many analysts believe that the decision has put pressure on other sectors to follow suit, particularly the fast-food industry.

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The competitive landscape is very different for fast food players

Criticized for its low wages and poor working conditions, many interest groups have called on McDonald’s and other fast food companies to increase wages to $15 an hour. Attacks on the industry have been quite public, but the fast food industry following in Walmart’s footsteps is highly unlikely.

Many fast food chains have supported their growth by using the franchise model. For example, more than 80 per cent of McDonald’s restaurants are owned by entrepreneurs, individuals, and families. Margins may be reasonable at McDonald’s Corporate, but franchisees operate restaurants with margins rarely exceeding 3 per cent. Even operators who own more than one outlet struggle to increase margins due to mounting royalty fees, which have been a source of frustration for many operating partners. To increase wages, they would need to increase prices, something they don’t even control. Walmart, on the other hand, owns and operates all of its stores, so changing compensation grids is much easier.

Even if McDonald’s Corporate agreed to pay hikes across the board, contractual arrangements between head-office and franchisees makes for a very rigid administrative environment when it comes to localized cost management. Current schemes offer no authority to head-offices on salaries; none. A policy which would increase salaries at corporate would be impossible to implement at store level.

Walmart better positioned to increase wages

The competitive landscape is also very different for fast food players. While fast food companies mainly sell food, Walmart offers a wide range of products with varying margins. Walmart, therefore, has more options to offset increased wages on their balance sheet. The food business has different challenges, especially in the last few years. Fast food chains face major headwinds when dealing with increasing input costs, and that is likely to continue for quite some time.

The reality, though, is that social pressures will continue to mount against the fast food industry. Walmart’s decision was smart for the company and the economy as a whole, for the reasons mentioned earlier. The business model used by fast food chains has made them vulnerable to systemic socio-economic tensions, and it will likely get worse. Walmart’s decision to act in contradiction of its own managerial values may be an invitation to the fast food industry to review its own operating model. Or else the industry may not survive.

Dr. Sylvain Charlebois is Professor of Food Distribution and Policy at the University of Guelph’s College of Business and Economics.

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