Are Walmart’s Profit Too Small to Raise Worker Wages?

 

Since last summer, workers at some of the largest and highest-profile low-wage employers in the U.S.—like Walmart and McDonald’s—have joined an open struggle for higher wages, better working conditions, and an end to abusive (and sometimes illegal) treatment.

 

It seems that commentators unsympathetic to workers employed by Walmart are cherry-picking the figure that makes the workers’ demands seem least reasonable.

 

Predictably, this movement has met with a pushback from politicians, think tanks, and commentators whose sympathies are with the employers. Part of the standard defense has been that, unlike the giant industrial companies of yesteryear, today’s big retail and services employers just can’t afford to pay higher wages. Conservative business commentator Megan McArdle, for example, argued that “employers don’t necessarily have a lot of profits to give up. Walmart’s $446 billion of revenue last year was eye-popping, but its profit margins are far from fat—between 3% to 3.5%.” Economist Richard Vedder, an associate of the American Enterprise Institute (AEI), likewise, wrote that “profit margins [in retail trade] are extremely small. Take Walmart. Last year the company made about $17 billion on sales of $469 billion. Profits were about 3.6 cents on each dollar of goods sold.” AEI’s Michael Strain was quoted as saying that Walmart is “not some tech company with a massive profit margin.”

The figures are not made up. This year’s Fortune 500 list, on which Walmart ranks first by total revenue, lists the company’s profits as a percentage of revenue at 3.6 percent. (McArdle cites 2011 figures, but the story they tell is much the same.) Walmart, however, ranked seventh among all Fortune 500 companies in total profits, only behind two oil companies, three financial companies, and Apple. Its profits were higher than those of tech giants including Cisco, Oracle, Intel, IBM, Microsoft, and Google! The top ten on the Forbes 400 ranking of the richest Americans, meanwhile, includes names like Bloomberg, Buffett, Gates, Walton, Walton, Walton, and Walton.

So how do we square these “extremely small” profit margins with the company’s enormous total profits and the vast personal fortunes of its founder’s heirs?

Profits as a percentage of revenues are simply misleading as a measure of Walmart’s profitability. Superficially, this measure makes sense as a way to put a company’s profits in proper scale. In the course of a year, a company takes in a certain amount of total revenue. Part of these revenues cover the costs of doing business; what is left over is profit. In effect, then, this way of measuring the profit margin takes profits and divides them by the sum of profits and costs. The bigger the costs relative to the profits, the lower the result. That seems sensible enough. Indeed, it is a widely cited metric of a company’s performance (which is why it’s in the Fortune 500 entry for each company).

Where’s the problem, then?

Well, total revenues (or total costs) are not always a good measure of a company’s true costs. This is especially true for retail companies, like Walmart, whose total revenues are very high compared to the capital it actually has to tie up to secure those revenues. A retail company’s main assets are its buildings and fixtures and its inventory of goods. Capital is tied up long-term in the buildings and fixtures. The inventory, on the other hand, is sold off quickly. The revenues from those sales are used to buy more goods, which are, in turn, sold off, and so on. Walmart turns over its entire inventory about 8.5 times per year. It’s more correct, then, to think of the costs to Walmart’s owners of this inventory as, say, $40 billion that is tied up for a year (and used more than eight times over to acquire a total of around $350 billion in goods).

So what does this mean, in terms of Walmart and its employees?

Well, to begin with, it seems that commentators unsympathetic to workers employed by Walmart and other giant, corporate, low-wage employers are cherry-picking the figure that makes the workers’ demands seem least reasonable. If we read between the lines just a little, however, it’s clear that Walmart could increase workers’ wages substantially.

Vedder notes that Walmart had total profits of $17 billion! Its enormous total sales (over $450 billion), which he cites as a way to make the sum of $17 billion seem small, were the way it achieved these enormous total profits on low margins per sale. McArdle, meanwhile, comments that reducing Walmart’s profit margin (as a percentage of total revenues) by 1 percentage point would make it possible for each employee to get a raise of “about $2,850 a year, which is substantial but far from life-changing.”

Well, that might not seem like much to a highly paid pundit, and it might not change the lives of low-wage workers enough, but it sure would be a start.


Alejandro Reuss is co-editor of Dollars & Sense.