Big-box retailers – and big employers – in the United States recently announced plans to raise their minimum wages.
In The Home Depot (HD) fourth quarter earnings results this week, the company announced an additional $1 billion investment in salary increases. This investment brings the starting salary in every US market to at least $15 per hour.
Meanwhile, in late January, US retailer Walmart (WMT) announced plans to raise its average hourly wage to over $17.50, now bringing the range to $14 to $19 per hour.
In a statement to U.S. employees, Walmart’s U.S. CEO and President John Furner said the pay increase was to “ensure that we have attractive compensation in the markets we operate in.”
Why raise wages now? Oliver Chen, chief executive of Cowen, said the decision to raise wages was “a no-brainer” for companies “in a tight labor market with low unemployment”.
This rise in higher hourly wages is part of a trend as retailers “want less turnover,” Chen said.
In January, the retail sector added 30,000 jobs, while the unemployment rate remained low at 3.4%, well below the January 2021 rate of almost 6.5%.
“The reality of retail – it’s a very people-centric business with a lot of front-line workers, so the future of retail is tech-driven but people-centric…where [brick-and-mortar] responds to clicks.”
Retail workers are needed to meet strong consumer demand despite inflation, added Jharrone Martis, director of consumer research at Refinitiv.
Retail sales increased by 2.3% on a monthly basis and by 3.9% compared to last year. For total retail, including food and beverages, month-over-month sales increased 3.0% in January 2023 to $697 billion and 6.4% from compared to the same period last year.
But what does rising wages mean for business results?
In the short term, higher wages will weigh, Martis said. It’s “almost like a necessary evil,” Martis said, because companies see it as “a long-term investment.”
Higher wages are “certainly a pressure on gross margin,” but the longer-term benefits outweigh, Chen added.
“In the short term, you have a gross margin, SG&A [selling, general, and administrative expenses] and spending pressure; in the long run, you have happier employees, and that should translate into happier customers,” Chen said.
Home Depot CEO Edward Decker sent a similar message to investors in the company’s earnings release, saying investing in the workforce “allows us to attract and retain the level of talent needed to maintain the customer experience we strive to deliver”.
Martis said big companies like Walmart and Home Depot can take the hit after emerging from the pandemic in a position of strength.
As for seeing if other retailers raise wages, Chen said, “Each retailer has to be very competitive on a market-by-market basis.”
Martis has a similar view. “If Target and Kroger want to stay competitive, they’re going to have to follow suit…Of those two companies, Target is in a much better position for that because they’ve also been a big winner during the pandemic, so it’s a company who can take the risk.”
Target (TGT) announced a new starting salary range of $15 to $24 last February.
For smaller retailers, however, it gets tricky, she said. “For a small retailer, that’s when you get in trouble. That’s when it could hit their margins the hardest.”
Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email him at [email protected]
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