Wal-Mart Stores Inc. has warned that its financial results for the fiscal fourth quarter will be less rosy than expected. The world's largest retailer now says profit may fall a bit short of the low end of its earlier forecast of $1.60 (U.S.) to $1.70 a share for the quarter ended Jan. 31.
It's the latest sign that all is not well in the fiercely competitive retail arena. Vicious price competition is rocking the industry. And Wal-Mart, like other big discount retailers, faces a new problem in its core U.S. market, where the poor are spending less on such essentials as food, clothing and pharmaceuticals as benefit cuts hit home.
This has played into the debate now raging in the U.S. and Canada about whether to increase minimum wages. Wal-Mart's profit warning suggests that major employers may have to rethink their knee-jerk opposition to the idea.
Like most companies whose business model depends on keeping wages as low as possible, the biggest private-sector employer in the U.S. has long made it clear where it stands.
Wal-Mart wages all-out battles to combat efforts aimed at boosting minimum wages. It typically can count on plenty of support from local politicians who fear job losses more than stubbornly high poverty levels and from conservative groups whose opposition to mandated minimums is embedded in their DNA. The retailer warned last summer that it would abandon plans for three stores in poor Washington, D.C., neighbourhoods if the city proceeded with a law requiring major retailers without collective agreements to pay at least $4.25 above the normal minimum hourly wage of $8.25. The mayor vetoed the bill.
But Wal-Mart has no such complaints about government handouts to the poor. That's because the retailer counts on the less fortunate for a significant part of its revenue. One consumer study reckoned that about 25 per cent of Wal-Mart's shoppers come from households earning less than $25,000 (U.S.) a year. The U.S. poverty line for a family of four is just above $23,500.
Wal-Mart's revenue has taken a hit since the federal Supplemental Nutritional Assistance Program (government-speak for food stamps) was trimmed by $5.5-billion on Nov. 1. That's when a temporary provision of the 2009 stimulus legislation expired. The result was reduced aid – $29 a month less for a household of three – for nearly 48 million Americans and hence less money going into Wal-Mart's coffers. A new farm bill awaiting Senate approval will shave a further $8-billion from the food program over the next decade.
The impact on results from the SNAP flap "is greater than we expected," chief financial officer Charles Holley said Friday. Yet Mr. Holley had to know this could be a problem, because about one of every five Wal-Mart shoppers uses food stamps, a higher level than for any other major food retailer. Target ranks second at about 17 per cent.
It seems odd that such a free-market bastion needs government poverty programs to make its business model work. But that is exactly the case: The fourth-quarter profit warning makes it clear that the retail giant has left itself surprisingly vulnerable to cutbacks in social assistance.
A higher minimum wage is no panacea for the ills afflicting America's underclass, but it could help boost demand from among many of Wal-Mart's low-income customers. And it would not leave the retailer at any competitive disadvantage since other retailers would have to observe the same minimums.
But won't a higher wage floor cause companies to employ fewer workers? That's a surprisingly complex question, and myriad economic studies have produced no clear answer.
At the very least, though, dropping its opposition to a higher minimum wage would provide Wal-Mart with a clear win in public perception. And it could help to prevent the unpleasant spectacle of one of the world's biggest, richest companies having to warn investors about its unexpected reliance on food stamps.