Walmart announced today that it is raising its starting wages in the United States from $9 per hour to $11, giving employees one-time cash bonuses of as much as $1,000, and expanding maternity and parental leave benefits as a result of the recently enacted tax reform. It is part of Walmart’s broader effort to create a better experience for its employees and customers. The new tax law creates a major business opportunity for other retailers as well — if their leaders are wise enough to take advantage of it.
The U.S. corporate tax rate is dropping from 35% to 21%. Retailers, many of whom have been paying the full tax rate, are going to benefit substantially. Take a retailer that makes 15% pretax income. Assuming its effective tax rate goes from 35% to 21%, it could save the equivalent of 2.3% of sales. Specialty retailers with higher pretax income will save even more.
Retail executives have a choice in how they use these savings. I believe the smartest choice — one that will help them compete against online retailers like Amazon — is to create a better experience for customers and to achieve operational excellence in stores. For most retailers, doing both requires more investment in store employees — starting with higher wages and more-predictable work schedules. My research shows that combining higher pay for retail employees with a set of smart operational choices that leverage that investment results in more-satisfied customers, employees, and investors.
Retailers that do not provide a compelling draw for their customers may not make it. In 2017, according to Fung Global Retail and Technology, there were nearly 7,000 store closing announcements, the second-largest number since 2000. There were 662 bankruptcy filings in retail, according to bankruptcydata.com, up 30% from 2016. This year is expected to be even worse. What’s more, two of my MIT Sloan MBA students analyzed store openings and closings from 2015 to 2017, looking at department stores with more than 50 stores and over $100 million in revenues, and found a positive correlation between customer satisfaction, as measured by Yelp ratings, and the net change in the number of open stores.
Many companies can no longer grow profitably just by adding stores — they need to get more out of their existing stores. Operational excellence makes that possible by ensuring that merchandise is in stock and well displayed, checkout is efficient, stores are clean, and employees are responsive to customers. Operational excellence also makes it possible to provide a better omnichannel experience by linking digital and brick-and-mortar channels. For instance, retailers are increasingly expecting in-store employees to serve customers who order online, by shipping products to those customers or enabling them to pick up their orders in the store. If that doesn’t work smoothly — that is, without operational excellence — it’s going to waste a lot of employee and customer time and convince customers they’re better off shopping online than in the store.
Creating a great customer experience and achieving operational excellence both require a capable and motivated workforce. You need knowledgeable employees who are cross-trained to manage customers’ needs wherever they arise. You need employees who can empathize with customers, are empowered to solve customer problems, and can spot opportunities to improve operations. You also need a capable and motivated workforce that can embrace and leverage new technologies.
Yet most retailers are far from having that kind of workforce. In 2016 the average employee turnover in retail was 65%. It’s hardly surprising, given that most retailers do not meet their employees’ basic needs, such as a living wage or a predictable schedule, let alone offer the conditions for motivation and engagement. In 2016 the median hourly wage of the country’s nearly 9 million retail workers was $10.37, below the poverty threshold for a family of four. Many retailers provide employees with their schedules only one or two weeks in advance, and might change them at the last minute. It is hard to focus on your work and empathize with customers when you can’t put food on the table or manage your life.
If we assume that payroll is 10% of sales — which is not atypical in retail — and if retailers use half of their tax savings (about 1.15% of sales) to increase wages, employees’ hourly wages would increase by 11.5%, putting them slightly above the poverty threshold. That increase, along with more-predictable schedules, would signal the company’s higher commitment to its employees and help create a more stable workforce. Once a company has workforce stability, it can start working on other changes such as empowering and cross-training employees and engaging them in continual improvement. As other companies have found, those changes will improve service and productivity, which will improve profitability. In short, the initial investment in employees will — if followed up — more than pay for itself.
Investing in store employees is not just the smart thing to do. It’s the right thing to do. “We didn’t want to build a low-cost business on the backs of employees,” Costco cofounder Jim Sinegal told my students last year. I don’t think he’s the only retail leader who feels that way.
The tax cut offers executives a unique opportunity to combine their moral reasoning with competitive forces in the retail industry to create an organization that is stronger today and better prepared for tomorrow.