Big box retailers — and big-time employers — in the U.S. recently announced plans to increase their minimum wage.
In Home Depot’s (HD) Q4 earnings results this week, the company announced an additional $1 billion investment in wage increases. This investment brings the starting wage in every U.S. market to at least $15 an hour.
Meanwhile at the end of January, U.S. retailer Walmart (WMT) announced plans to increase its average hourly pay to more than $17.50, making the range now $14 to $19 per hour.
In a statement to U.S. employees, Walmart U.S. CEO and president John Furner said the increase in pay was “to ensure we have attractive pay in the markets we operate.”
Why raise wages now? Oliver Chen, managing director at Cowen, said the decision to increase wages was "a no brainer" for the companies "in a tight labor market with low unemployment."
This boost in higher hourly wages is all part of a trend as retailers "want less turnover," said Chen.
In January the retail industry added 30,000 jobs, while the unemployment rate remained low, at 3.4%, far lower than the January 2021 rate of nearly 6.5%.
"The reality of retail — it's a very people-centric business with a lot of frontline workers, so the future of retail is tech-enabled but people centric ... where [brick-and-mortar] meets clicks."
Retail employees are needed to fulfill strong consumer demand despite inflation, added Jharrone Martis, director of consumer research at Refinitiv.
Retail sales were up 2.3% on a monthly-basis and up 3.9% compared to last year. For retail overall, including food and beverage, sales month-over-month were up 3.0% in January 2023 to $697 billion and up 6.4% from this time last year.
But what do rising wages mean for the companies' bottom lines?
In the short-term, higher wages will weigh, said Martis. It's "almost like the necessary evil," Martis said, as the companies see it "as a long term investment."
Higher wages are "definitely gross margin pressure," but longer-term benefits outweigh it, Chen added.
"In the short term, you have gross margin, SG&A [selling, general, and administrative expenses] and expense pressure; long term, you have happier employees, and which should translate to happier customers," Chen said.
Home Depot CEO Edward Decker had a similar message to investors in the company's earnings release, saying that the labor investment is "enabling us to attract and retain the level of talent needed to sustain the customer experience we strive to deliver."
Martis said big companies like Walmart and Home Depot can take the hit after coming out of the pandemic in a strong position.
As far as seeing if other retailers raise wages, Chen said, "Every retailer has to be very competitive on a market by market basis."
Martis has a similar view. "If Target and Kroger want to remain competitive, they're going to have to follow suit...Out of those two companies Target is in a much better position for this because they were also a big winner during the pandemic, so it's a company that can take the risk."
Target (TGT) announced a new starting wage range of $15 to $24 last February.
For smaller retailers, it gets tricky though, she said. "For a smaller retailer, that's when you get in trouble. That's when that might hit their margins harder."
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
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