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What Happens After A Mega Corporation Raises Its Workers' Wages

Earlier today, McDonalds announced that it would become the latest company to raise hourly pay for 90,000 workers by more than 10% and add benefits such as paid vacation for its restaurant workers. Specifically, starting in July, MCD will pay at least $1 per hour more than the local legal minimum wage for employees at the roughly 1,500 restaurants it owns in the U.S. The increase will lift the average hourly rate for its U.S. restaurant employees to $9.90 on July 1 and more than $10 by the end of 2016, from $9.01 currently. Finally, McDonald’s also will enable workers after a year of employment to accrue up to five days of paid time-off annually.

With this announcement, McDonalds joins the following companies which have likewise raised minimum wages in recent months:

  • WalMart
  • Aetna
  • Gap
  • Ikea
  • Target
  • TJ Maxx

Surely this is great news for the workers of these above companies, as some of the massive wealth accrued by corporate shareholders may be finally trickling down to the lowliest of employees, right? As it turns out, the answer is far from clear.

As the following WSJ story released overnight, here is what happens when mega-corporations such as WalMart and McDonalds, whose specialty are commoditized products and services and have razor thin margins, yet which try to give an appearance of doing the right thing, raise minimum wages. They start flexing their muscles, and in the process trample all over the companies that comprise their own cost overhead: their suppliers and vendors.

Take the case of WalMart: the world's biggest retailer "is increasing the pressure on suppliers to cut the cost of their products, in an effort to regain the mantle of low-price leader and turn around its sluggish U.S. sales."

What WalMart is doing is borderline illegal: it is explicitly telling its vendors "this is what you will do with your excess cash." Of course, we say borderline because WMT's action is perfectly legal in the confines of the pure law. However, in the context of an economy that is sputtering, WMT's vendors have no choice but to comply or risk losing what is certainly their largest revenue stream and risk bankruptcy.

The retailing behemoth says it has been telling suppliers to forgo investments in joint marketing with the retailer and plow the savings into lower prices instead. Makers of branded consumer products from diapers to yogurt typically earmark a portion of their budgets for marketing with Wal-Mart, spending on things like eye-catching product displays and online advertisements.

 

Wal-Mart has long had a reputation for pressing its suppliers to cut costs to help lower prices, but the retailer’s new leadership has embraced the concept with fresh vigor. Wal-Mart’s price advantage against its competitors has been eroded, and it has steadily been losing market share in the U.S. since the recession ended, while rivals including Kroger Co. and Costco Wholesale Corp. gained share, according to data from the consultancy Kantar Retail.

 

The new dictate on prices is creating tension with companies that supply the hundreds of thousands of products on Wal-Mart’s shelves.

The irony is that while WMT (or MCD or GAP or Target) boosts the living standards of its employees by the smallest of fractions, it cripples the cost and wage structure of the entire ecosystem of vendors that feed into it, and what takes place is a veritable avalanche effect where a few cent increase for the lowest paid megacorp employees results in a tidal wave of layoffs for said megacorp's vendors.

The zeal on pricing is part of a push by new Chief Executive Doug McMillon and U.S. head Greg Foran to turn around Wal-Mart’s core domestic business, which booked $288 billion in sales in the year ended Jan. 31, 60% of the company’s total. While U.S. sales were up 3% last year, the growth was a scant 0.5% excluding newly opened stores, and the division’s profit fell.

 

Messrs. Foran and McMillon laid out the pricing message during a private meeting with suppliers in February. They want suppliers to operate with the same everyday low cost model that Wal-Mart employs from top to bottom.

 

“They kept pushing, ‘We’re going back to basics, it’s all about low pricing,’ ” said one supplier who attended the meeting.

And a quick lesson in corporate double speak: where the new CEO says:

“We want to get back to a point where we are playing offense with price because of the way we go to market,” Mr. McMillon said, according to a transcript. “Our pricing strategy is aimed at one objective, and that is building trust.”

... what he means is that "our strategy is to remind our vendors that we call all the shots and since we can't cut prices any more, they will have to do it."

Messrs. Foran and McMillon laid out the pricing message during a private meeting with suppliers in February. They want suppliers to operate with the same everyday low cost model that Wal-Mart employs from top to bottom.

 

“They kept pushing, ‘We’re going back to basics, it’s all about low pricing,’ ” said one supplier who attended the meeting.

Which is another way of saying "deflation" in compensation, also synonymous for "lower wages for everyone else." Because now that each of WalMart's suppliers is forced by WMT management to cut their costs and to be "price competitive", they will either reduce wages of its own workers or, comparably, force their own suppliers to reduce pricing, and so on, until ultimatly the entire economy is gripped in wage deflation.

Which also means that Obama, who has decided to join the Fed in micro-managing the economy by diktat, will have no choice but to issue more executive orders, to undo the aftermath of this previous short-sighted commands. Perhaps he will start be realizing that it is not minimum wage that he should be focusing on but maximum hours as explained before:

Although when faced with what now appears certain sliding wages across a deflating US economy, not even Obama will be able to come up with mutually offsetting executive orders fast enough to fix what is now a runaway train on a collision course.

In fact, the only winner here, once again, will be the banks who will continue to fabricate, spin and perpetuate the lie that the only thing that can fix the next wave of declining wages is, as always, QE - QE whose only intention and purpose is to steal from the poor and middle class and give to the 0.01%.