Wal-Mart's turnabout?

[Jim Devine <jdevine03@xxxxxxxxx>]

AUGUST 9, 2006/BUSINESS WEEK
http://www.businessweek.com/bwdaily/dnflash/content/aug2006/db20060809_233091.htm

Top News
By Pallavi Gogoi

Wal-Mart's About-Face
It's not only raising wages but also updating products and remodeling
stores to attract more affluent shoppers

Wal-Mart is raising wages? The move came as something of a shocker.
After all, the retailing giant is known for both its low prices and
its low wages. So parsimonious is the company that politicians across
the country are turning to legislation to compel Wal-Mart to pay
employees an extra buck or two.

Yet this week, Wal-Mart (WMT) said it would raise the starting pay at
1,200 of its Wal-Mart and Sam's Club stores by an average of 6%.
"These start rate changes, combined with our competitive benefits like
affordable health care, 401K and profit sharing, and annual incentives
for our hourly associates, make us an even more attractive employer,
which is why people stand in line to apply for Wal-Mart jobs," said
Susan Chambers, executive vice-president of the People Division for
Wal-Mart Stores, in a statement. A spokesman for the company said it
had conducted a wage survey and found the increases made sense to
"remain competitive as an employer."

FAUX WOOD.  The decision is certainly a deft public relations move. It
comes as the city of Chicago is on the verge of raising the minimum
wage for big box retailers like Wal-Mart to $10 an hour. It also
coincides with a month-long bus tour by activists and politicians to
prod the company into raising wages and improving health-care benefits
(see BusinessWeek.com, 8/2/06, "Wal-Mart Foes Hop a Bandwagon"). "It's
really an image thing," says David J. Abella, portfolio manager at
Rochdale Investment Management, which manages more than $2 billion in
assets.

Wal-Mart has fought hard against the Chicago ordinance and criticized
its detractors. The company has argued that it pays reasonable wages
and benefits and that states and municipalities do not have the right
to dictate its employment policies (see BusinessWeek.com, 7/19/06,
"Rollback Ruling Favors Wal-Mart").

But look more closely and the move to raise wages seems like a key
building block for a company in transition. Wal-Mart studied its
customer base closely last year and discovered that many of its
shoppers were quite affluent, not just the lower and middle income
customers it targeted. In a bid to get these affluent shoppers to
linger more in its stores and presumably buy more, higher-margin
goods, Wal-Mart has launched several initiatives in the past few
months: It introduced a trendy line of clothing called Metro7, moved
to double the number of organic products at its stores, and has
started remodeling half of its stores with wider aisles, faux-wood
floors, and nicer restrooms.

SOFT SALES.  A higher wage structure seemed to fit the image of this
new Wal-Mart. At least in theory, if Wal-Mart takes better care of its
employees, they in turn will take better care of the customers,
especially the affluent shoppers it is trying to court. "Wal-Mart
finally recognized that retail is not just about prices," says
Patricia Edwards, managing director and portfolio manager at
Seattle-based Wentworth Hauser & Violich, a money manager with $8.2
billion in assets including Wal-Mart shares. "To be good at retail you
have to have not just good prices but the right shopping experience;
people can be put off by rude clerks, dirty restrooms, and long
lines."

But will raising wages by 60 cents an hour change employees' behavior?
Maybe not enough. "I don't see the possibility of attracting different
types of customers just by raising wages," says Barry Shaked, chief
executive of Retalix, which provides technology solutions to the
retail and food industry. In fact, Shaked believes that Wal-Mart is
making a mistake by trying to go upscale. "Wal-Mart is trying to have
something for everyone and in the process it will lose its current
customer," he warns.

Already Wal-Mart's transition isn't going as smoothly. According to
Virginia Genereux, a Merrill Lynch analyst, Wal-Mart's newer stores'
sales per square foot slipped a little in June. Considering these are
likely the ones with the new store redesign in place, it's a worrying
slip. Charles Grom, an analyst with J.P. Morgan Securities, says that
existing stores could see soft sales too, because of the extensive
remodeling that will go on over the next few months. "Once the
remodels are done, they better be firing on all cylinders," says
Seattle portfolio manager Edwards.

Only time will tell whether the higher wages will translate into
better service at Wal-Mart. But George Rue, chief investment officer
for New Covenant Trust Company, which manages $1.5 billion and owns
Wal-Mart shares, points out that employees will obviously take any
wage increase they can get. "Whatever the motivation, better wages
from one of America's largest employers is always a good thing," he
says.
--
Jim Devine / "In science one tries to tell people, in such a way as to
be understood by everyone, something that no one ever knew before. But
in economics, it's the exact opposite." --- Paul Dirac [edited]