Wal-Mart's Biggest Liability: Labor Costs (WMT)

In a company as large as Wal-Mart Stores Inc (WMT), it can be hard to increase profit by a measurable degree. Increasing margins on soap won’t affect the bottom, nor will saving on nominal expenses like plastic bags.

What Walmart can control though, is its labor force. Currently, Walmart is the third largest employer in the world after the United States and Chinese Armies. Finding a way to save money on labor, or to eliminate jobs altogether, would be a huge boon to the retailer.

Labor problems are not new to Walmart. The United States’ largest retailer has been fighting with employees, labor organizations and unions since the 1970s. Sam Walton, a strong anti-unionist instilled a non-union culture into Walmart that continues today.

In fact, the company has run into legal troubles throughout the world as it defends its labor policies. For example, the company has shut down stores which have voted for unions, arguing that the reason for closure was related to finances rather than the union itself. Other labor violations include illegal firings, threats, unpaid overtime and forced overtime. In short, Walmart isn’t a stranger to an unhappy workforce.

Today, with Walmart’s new turnaround plan, it would seem from the outside that Walmart workers have a pretty good life. They’re guaranteed $10 an hour, they receive paid vacations after 90 days and they have access to excellent training programs and promotion opportunities. (For related reading, see: Will Wal-Mart’s Wage Increase Pay Off?)

However, Walmart employees complain of their inability to be hired full-time, a lack of medical benefits and inconsistent scheduling which makes their lives difficult. Most of the $2.7 billion turnaround program has been implemented but employee hours have been cut, resulting in a lower net pay than before.

In addition, Walmart workers are fighting to have their employee discount apply to all food as well as general merchandise. Currently, only fruits and vegetables are subject to 10% employee discounts and only when the items aren’t on sale. Increasing the discount could cost Walmart almost half a billion dollars more per year, albeit with the added potential of getting more customers.

Walmart doesn’t give in to these demands because it can’t afford to. In the 2015 fiscal year, Walmart made a profit of $16 billion. This figure, when divided among Walmart’s 2 million-plus employees worldwide only works out to an additional $7,355 per year, or $3.67 per hour – and that’s with the company making no profit, something that private companies aren’t in the habit of doing. Aside from wages, Walmart spent $500 million on hourly associate bonuses in fiscal 2015, as well as almost $900 million in retirement benefits. Walmart currently provides a 6% 401(k) match. (For more, see: Three Reasons Costco Is a Great Company.)

It should also be noted that since the 2015 fiscal year annual report was released in January 2015, Walmart has increased its wages twice and that its minimum wage now stands at $10 per hour, making the $16 billion profit figure unlikely to be repeated for some time.

Walmart increased employee wages because it had to. The company was facing immense pressure from the media, their employees and outside organizations for wage increases. With churn costs 1.5 – 2.5 times the cost of the employee’s salary, Walmart needs to continually focus on employee retention. With the media running weekly stories about the poor working conditions at Walmart or the social services received by Walmart employees, the company needed a plan to stop the negative PR. Plus, as other retailers increase their wages and benefits, Walmart’s management is forced to do so as well, otherwise it would be left with a lack of applicants for its positions.

Walmart’s biggest expense is its labor costs. Instead of paying each employee a higher wage and then reducing their hours, Walmart ought to revamp its entire strategy to cut the number of workers it employs. (For more, see: Wal-Mart Plans Corporate Job Cuts.)

Currently, Walmart has 1.4 million American workers. What Walmart doesn’t have is mass-automation. Amazon.com Inc. (AMZN) uses robots in its distribution centers to pick orders. Competing retailers and grocers have replaced cashiers with self-serve checkouts. Walmart could copy Amazon by automating more of its distribution centers (at a high cost) or, it can easily cut its number of cashiers by 50 – 75% by replacing people with self-serve machines. These workers can be hired full-time and receive benefits. Employees will be happier with their increased competition and their jobs will be easier as they supervise a bank of self-serve check-outs, rather than have to serve customers themselves.

Self-serve has been implemented in every industry because of its incredible savings power. Retailers, airlines, restaurants, banks – they’ve all convinced consumers that doing work themselves is the best thing for them and the companies have reaped the financial benefits from it. Walmart needs to follow suit.

Walmart needs to drastically reduce its workforce to save on its greatest expense. Employees will be happier because of the increased opportunities for full-time hours and Walmart shareholders will be satisfied with higher profit from lower total employee wages.