Higher wages mean higher costs for companies. There’s no denying that. And in the near term, that’s what investors typically focus on.
However, there are interim and longer-term benefits that outweigh any short-term concerns with increasing empoyee wages. In fact, Wal-Mart (NYSE: WMT) boosted its minimum wage in April and is already seeing lower turnover and a rise in job applicants.
One of the big keys to increasing wages is that it lowers turnover, which is rather costly. An often-cited statistic is that the replacement cost of hiring a new employee averages a fifth of the previous worker’s salary. There’s also a direct correlation between wage increases and a better store experience, increased customer sentiment and rising store traffic.
Wal-Mart is the big name when it comes to wage increases, given that it’s the world’s largest employer. In April it said it was boosting the minimum pay for employees in the U.S. to $9 an hour. Next year it’s upping that to $10 an hour.
However, the close to $1 billion investment in higher wages will lead to big strides in improving its brand image. More importantly, it should also help fix some of Wal-Mart’s key issues, such as faster checkouts, better stocked stores and better store service.
Wal-Mart isn’t the only company investing in its staff. A few other blue chips are doing the same. However, these companies have market caps of more than $50 billion, so an overnight change from higher wages shouldn’t be expected.
McDonald’s Changes Course
McDonald’s (NYSE: MCD) is taking a slightly different path than Wal-Mart. It’s just upping wages for employees in its company-owned stores, not franchised locations. It will be paying $1 over the local minimum wage.
Now, McDonald’s has a lot of other issues on its hands. The company rolled out a turnaround plan last month which includes menu innovations – such as having fewer but more impactful menu items – and a strategy to organize the company into different segments to better allocate resources in faster growing markets.
McDonald’s is also taking a page from the Wendy’s (NASDAQ: WEN) playbook by refranchising upwards of 3,500 stores by the end of 2018. When completed, 90% of McDonald’s locations will be franchised. The initiative will help get McDonald’s out of the restaurant management business and allow it to focus on its brand and menu.
Setting an Aggressive Target
Then there’s Target (NYSE: TGT), which upped wages for all its employees to at least $9 an hour last month.
Target shares have been a major underperformer over the last five years, up 50% while the S&P 500 index is up 92%. The company had a major hiccup with its expansion into Canada, and has since shut down those operations.
Target is getting aggressive with its turnaround by selling off over 1,600 in-store pharmacy clinics to CVS (NYSE: CVS). Target’s pharmacies operate near break-even, so getting close to $2 billion for the operations was a positive.
Going forward, Target will likely shift toward a smaller store format, which should help it expand faster. The smaller store strategy increases its potential footprint by allowing the company to tap into more urban markets.
A true corporate comeback takes time and various initiatives, but it’s hard to execute a turnaround without the support of your employees. The wage increases by the three blue chip stocks above are just the start of their turnaround journeys. But they have started paving a path.
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