Walmart’s Employment Model is a Recipe for Eventual Self-Destruction

14Jul13
This is a selfmade image from the english wiki...

This is a selfmade image from the english wikipedia. The photographer has uploaded it as GFDL (Photo credit: Wikipedia)

Also posted on Addicting Info

There are memes floating around the Internet regarding Walmart’s employment model vs. Costco’s employment model, and how Costco’s profits have gone up while Walmart is finding itself in trouble. People are calling on Walmart to pay its employees living wages, saying that if Costco, Trader Joe’s, Wegman’s, and more, can do it and still turn hefty profits, then Walmart should have no problems with it. Then there are those on Walmart’s side of the issue (which are many), who believe that no company should have to pay what they consider “high wages” for unskilled labor.

However, there’s another way to look at it, which is from a business standpoint. Here’s what happens: You keep your employees happy by paying them a living wage and providing benefits, and generally treating them well at all levels, to keep their morale up. They, in turn, become more productive employees and, because they have a good job, are less likely to leave the instant something else comes along.

This, in turn, drives down your turnover costs. As businesses *ought* to know, turnover costs more money than investing in your workforce does. You have lost productivity during the hiring and training process, higher recruiting costs, and more, averaging to about 20% of an employee’s annual pay, for jobs that pay $50,000 per year or less. For jobs paying $30,000 per year or less, replacing one employee amounts to roughly 16% of their annual salary, but if your turnover is even 30% per year, which is lower than average turnover across the food service and hospitality industries, that still adds up.

Roughly 70% of Walmart employees leave within the first year, meaning most, if not all, Walmart stores have near-constant turnover.

And those are just the costs that can be easily quantified. There are “ripple effects” with turnover also, as the employees left to pick up the slack generated by the vacant positions become less productive in their own jobs. When that’s a constant problem across your entire workforce, your productivity potential is never realized.

At the same time, when your turnover is low, you’ve got employees with growing experience, which not only adds to their productivity, but also makes your customers more happy and more likely to return, because they like the staff. Customer acquisition can cost six to seven times more than customer retention, and having a strong, experienced, knowledgeable and productive workforce with high morale helps to keep customers coming back. This obviously applies to some industries more than others, but even the retail industry, where customer loyalty can be difficult to come by, can save money by improving customer retention.

Is it perfect? No. You’ll always have that dissatisfied customer. You’ll always have some poor employees. But with this type of employment model, it’s easier to sift your bad employees out from your good employees, and advance your good employees. It also means you can be more discerning when hiring. You’ll likely have a larger pool of candidates to choose from when you have an open position, so you can pick and choose.

With Walmart’s employment model, oftentimes all you get are bad employees, for these reasons: You can only attract the bottom of the barrel, and/or you do get some good employees, but they become so demoralized so fast that they stop going above and beyond, and they stop caring about the job they do, and become weak employees until they get a better job. Then they’re someone else’s good employee. There’s no point in caring about your job when the company you work for doesn’t care about you.

This is such a basic and sound philosophy that it should be practiced far more than it is, not out of social responsibility, but rather because it makes good business sense over the long term. When you have an employment model that minimizes turnover as best as possible for your industry, they help grow your company, and you can focus harder on other problems your business faces.

This is not an argument about minimum wage, or about small businesses, which face problems and challenges that large corporations do not. This is an explanation of how companies like Walmart are hurting themselves. Walmart would probably be able to end its PR nightmare and raise its profits by changing its employment model to one that nurtures employees, instead of one that treats them like dirt. Those who support Walmart’s employment practices do not support strengthening the economy in real, sustainable ways, nor do they support business longevity. They are unbelievably shortsighted.

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4 Responses to “Walmart’s Employment Model is a Recipe for Eventual Self-Destruction”

  1. 1 Rick

    Those that support Wal-Mart’s employment model rarely are focused much beyond the end of the next quarter.

  2. 2 grammatteus

    Excellent. I heartily agree with every word said here. Companies that look at the immediate costs of a thing and not the long-term goals they should have within their industry should fall by the wayside in the end (IF the free market model works, which I don’t believe it does: too many companies here in the UK provide woeful service and hire employees even from other countries, yet they still continue in profit year after year) – human resources are HUMAN long before they are ‘resources’!

  3. 3 Jimmy Jack Jingo

    I have been in manufacturing and wholesale distribution for 29 years. My business is automating small-medium businesses from the back office to the warehouse to e-commerce, from software to hardware. My average customer is a $35-million, 2nd/3rd generation-owned manufacturer/distributor, but I have some very large companies as customers, and much smaller ones, as well. My customer base spans the country, and I have traveled all over this country for the past three decades.

    Many of my customers are Walmart vendors and I have been to Bentonville to discuss my customers’ integration into the Walmart system, and assisted my customers in that integration. So, I have seen the belly of the beast, so to speak.

    I’m not here to defend Walmart’s employment practices because I do not agree with all of them. I do agree with your assertion that high employee turnover costs businesses money…it is simply a productivity fact that every company I have ever worked with faces in some portion of their work force. Simply increasing wages, however, will not solve the problem on its own, and that is also a well-known business fact. In the retail industry, in particular, increasing costs can make or break a retailer.

    I would caution you about comparing industries and their employment practices because different industries operate on starkly different profit margins. For example, in the retail industry in general, the net, after-tax profit margin standard is 3%-5.5%. In their last annual income statement, Walmart showed a 3.6% net, after-tax profit. Meanwhile, Exxon, a similar sized company, showed a 9.2% net, after-tax profit, and Microsoft showed a 23% net, after-tax profit, and these profit margins are also standard in the oil and software industries.

    By contrast, in Costco’s last annual income statement, the net, after-tax profit was 1.72%, less than half of Walmart’s and below the industry standards for profit. No doubt, it could be argued that Costco is taking less profit because it is voluntarily investing more money and benefits into its employees. It can also be argued that the higher per-capita investment in employment costs, while resulting in lower turnover, are not yielding higher productivity that translates into profitability. It would appear to be a conscious choice made by Costco, though.

    I have noticed a great deal of focus on how much Walmart employees are “costing” government, but I have never seen a side-by-side comparison of the alleged costs to government with the contributions Walmart stores make to government, which are considerable. From sales taxes, to unemployment taxes, property taxes, FICA taxes, truck use taxes, fuel excise taxes, gasoline taxes…I mean the list is endless. I would be willing to bet money the net is Walmart stores add more to local and state government coffers than their employees “cost” those governments. I wonder how much those people would cost those governments unemployed.

    Finally, I would point out that according to the Bureau of Labor Statistics, only 2.6% of the employed US work force makes minimum wage or less, and the vast majority of those workers are in the food service industry. In point of fact, the average minimum wage in this country is over $23/hr, and that a BLS number, not mine.

    Minimum wage was never meant to be a “living wage.” It was always meant to be an entry-level wage for unskilled workers to enter the work force, and that is precisely how it functions as is illustrated in the fact that only 2.6% of the work force makes minimum wage or less. As the BLS numbers show, the VAST majority of wages in this country are determined by the market, not by minimum wage, and that includes Walmart.

    Jimmy Jack Jingo

    • The minimum wage was created to institute a minimum standard of living here. Its creation didn’t have anything to do with getting unskilled workers into the workforce. In fact, up until about 30 years ago, the minimum wage WAS a living wage. The idea that the minimum wage is supposed to get unskilled workers into the workforce is a recent idea and has nothing to do with its history.

      There’s more to it than wage increases, also, which I did mention. Employee morale the big one; it is not tied to wages alone. Walmart workers are treated notoriously poorly by their managers and by the company as a whole, and that’s a major gripe of Walmart’s employees. Other than pay, that’s the most common complaint. Better management training, better training for everyday associates, and a better understanding on the part of corporate of the demands of day-to-day jobs in the stores, would go a long way.

      Yes, the retail industry does have a lower profit margin than other industries. I am fully aware of that. I’m also aware that there are retailers who do pay decent wages/commissions, and provide benefits and morale-boosting incentives (not always monetary), and more, and still bring in plenty of profit; turnover is less of a concern for them.

      The basic premise is true regardless of industry. Treat your employees right, and they will work harder for you, which contributes to the other factors that ensure the health of your company over the long run.


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