Walmart’s Employment Model Is A Recipe For Eventual Self-Destruction

Author: July 16, 2013 12:37 am

walmart

There are memes floating around the Internet regarding Walmart’s employment model vs. Costco’s employment model, and how Costco’s profits have gone up while Walmart is finding itself in trouble. People are calling on Walmart to pay its employees living wages, saying that if Costco, Trader Joe’s, Wegman’s, and more, can do it and still turn hefty profits, then Walmart should have no problems with it. Then there are those on Walmart’s side of the issue (which are many), who believe that no company should have to pay what they consider “high wages” for unskilled labor.

However, there’s another way to look at it, which is from a business standpoint. Here’s what happens: You keep your employees happy by paying them a living wage and providing benefits, and generally treating them well at all levels, to keep their morale up. They, in turn, become more productive employees and, because they have a good job, are less likely to leave the instant something else comes along.

This, in turn, drives down your turnover costs. As businesses *ought* to know, turnover costs more money than investing in your workforce does. You have lost productivity during the hiring and training process, higher recruiting costs, and more, averaging to about 20% of an employee’s annual pay, for jobs that pay $50,000 per year or less. For jobs paying $30,000 per year or less, replacing one employee amounts to roughly 16% of their annual salary, but if your turnover is even 30% per year, which is lower than average turnover across the food service and hospitality industries, that still adds up.

Roughly 70% of Walmart employees leave within the first year, meaning most, if not all, Walmart stores have near-constant turnover.

And those are just the costs that can be easily quantified. There are “ripple effects” with turnover also, as the employees left to pick up the slack generated by the vacant positions become less productive in their own jobs. When that’s a constant problem across your entire workforce, your productivity potential is never realized.

At the same time, when your turnover is low, you’ve got employees with growing experience, which not only adds to their productivity, but also makes your customers more happy and more likely to return, because they like the staff. Customer acquisition can cost six to seven times more than customer retention, and having a strong, experienced, knowledgeable and productive workforce with high morale helps to keep customers coming back. This obviously applies to some industries more than others, but even the retail industry, where customer loyalty can be difficult to come by, can save money by improving customer retention.

Is it perfect? No. You’ll always have that dissatisfied customer. You’ll always have some poor employees. But with this type of employment model, it’s easier to sift your bad employees out from your good employees, and advance your good employees. It also means you can be more discerning when hiring. You’ll likely have a larger pool of candidates to choose from when you have an open position, so you can pick and choose.

With Walmart’s employment model, oftentimes all you get are bad employees, for these reasons: You can only attract the bottom of the barrel, and/or you do get some good employees, but they become so demoralized so fast that they stop going above and beyond, and they stop caring about the job they do, and become weak employees until they get a better job. Then they’re someone else’s good employee. There’s no point in caring about your job when the company you work for doesn’t care about you.

This is such a basic and sound philosophy that it should be practiced far more than it is, not out of social responsibility, but rather because it makes good business sense over the long term. When you have an employment model that minimizes turnover as best as possible for your industry, they help grow your company, and you can focus harder on other problems your business faces.

This is not an argument about minimum wage, or about small businesses, which face problems and challenges that large corporations do not. This is an explanation of how companies like Walmart are hurting themselves. Walmart would probably be able to end its PR nightmare and raise its profits by changing its employment model to one that nurtures employees, instead of one that treats them like dirt. Those who support Walmart’s employment practices do not support strengthening the economy in real, sustainable ways, nor do they support business longevity. They are unbelievably shortsighted.

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4 Comments

  • ” it should be practiced far more than it is, not out of social responsibility, but rather because it makes good business sense over the long term. ”

    Since when do any businesses these days care about the long term? (1975?) Doing things to ensure long-term stability, like shifting profits into higher wages for rank-and-file employees, might temporarily inconvenience the Most Important People In The World: Wall Street gamblers who hold shares for a few fractions of a second at a time.

    • Rika Christensen

      They, unfortunately, take Milton Friedman’s words as gospel. Many of the companies that only look to the end of the quarter are heavily reliant on some type of subsidy. They’re often the ones that will scream the loudest about taxes, closing loopholes, etc., because they’re dependent on those, too, just to keep turning a profit.

      I read a letter awhile back from one of GM’s former CEOs, to the CEO at that time, and was obliquely addressed to every CEO everywhere. The entire letter boiled down to this: “STOP THINKING SHORT-TERM ONLY!!”

      I’ve been told that different industries have to have different business models, and therefore I should be careful about comparing businesses this way. To a degree, that is true. Even different types of businesses in the same industry have to have different business models. They have to have different employment models as well. However, the basic premise–treating your employees well to minimize turnover and maximize their productivity–holds true across the board. The manner in which accomplish that is what changes due to your business model.

  • The Walmart method of treating not only employees but suppliers has resulted in mass copying of their tactics. All of retail including suppliers, with a couple of exceptions, are all participants in the race to the bottom of the wage scale. If Walmart can do it an make money, they think they can all do it.

    The other reason Walmart has had flat same store sales for years is that so many employers are using the Walmart method of treating employees. Their best customers can no longer afford even Walmart.

    Let’s face it. Most people who are doing well financially won’t shop at Walmart. Walmart is destroying their own customer base.

  • And what goes unmentioned: Demoralized employees cost even more due to workplace sabotage, and employee theft.

    http://www.amazon.com/Sabotage-American-Workplace-Anecdotes-Dissatisfaction/dp/0962709131

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