Workers walk through the garden center at a Home Depot . store
Scott Olson/Getty photo
In last quarter’s earnings report, warehouse at home forecast flat sales and lower profits for 2023, partly because consumers aren’t spending as much on home improvement products as they did during the pandemic, a favorable time. beneficial to this sector. The company predicts, another impact on its profitability is the decision invest 1 billion dollars this year to increase hourly wages for each of its frontline workers.
Raising wages at the same time as sales are falling may seem like an illogical strategy, but Home Depot executives predict it will actually boost the major retailer’s industry leadership position. . “We plan to continue to capture market share,” Chief Financial Officer Richard McPhail told analysts during the February earnings call. One reason, he said, is the “unique advantage our bloodied associates give us over our competitors,” alluding to Home Depot’s signature colors and terminology. company’s frontline employees.
While Home Depot made a splash with billion-dollar wage increases, it followed similar moves by other major retailers that also espoused the benefits of investing in a paid workforce. high salary.
A year ago, February, Target put a new starting salary from $15 to $24 an hour for its so-called team members and expand access to healthcare benefits, at a cost of $300 million by 2022. I know that those investments lead to a more cohesive team and then that team builds more guest trust and loyalty, which in turn drives our growth across the company. company,” said Melissa Kremer, chief human resources officer, last fall when Target was named 12th on Fortune’s 100 Best Companies to Work for.
In January, Walmart announced it is minimum hourly wage increase for its store employees to $14 from $12 and up to $19 an hour, establishing an average wage of $17.50 an hour. “Retaining talent and establishing career opportunities for our associates remain central to our growth ambitions,” said Chief Financial Officer John David Rainey. “We’re confident we can make the investments needed to stay competitive in a tight labor market while increasing our profitability.”
Though it’s difficult to draw a straight line from labor costs to sales, profits, and market share — and so are retailers. Big investment in automation — maintaining a loyal and satisfied workforce can be seen as a wise strategy in the context The battle is going on for talentand even if persistent inflation and rate hikes are expected to diminish what has been strong consumer spending.
Despite Home Depot’s strong performance on Wall Street, Morgan Stanley analyst Simeon Gutman said he was a bit surprised by the $1 billion spend. “The investment community largely thinks that Home Depot is already at the top in terms of wages,” he said, noting a series of pay hikes in recent years. And the fact that the company is predicting less positive sales this year is another thing that raises eyebrows. “The [home improvement] The environment seems to be weakening, not accelerating, and so investing in rising wages at this point opens up more questions and surprises. But if you look at Home Depot for years, you’ll be fine with that.”
Ann-Marie Campbell, executive vice president of US stores and international operations at Home Depot, said the pay rise is only part of the investment story in affiliates. “We know that the key to having an engaged and committed workforce is to invest in people and in their growth,” she said.
The company also kicked off the new year with a new store leadership structure, creating new management positions and increasing the number of managers on the floor at any given time. “This is a meaningful investment that we believe will position us well in the market,” she said.
“Basically, what they’re doing is reinvesting in the key competitive advantage of their business model, which is service in their stores,” said Brian Nagel, analyst at Oppenheimer.
Gutman said market leaders like Home Depot, Walmart and Target are so large that they are in a better position than mid-sized competitors to invest in their workforces. “They’re doing the right thing in a tight labor market, showing leadership and not just thinking about the 12-month timeframe. They’re thinking about 12 to 36 months.”
The theory of efficient wages
The notion that maintaining an enthusiastic, well-compensated workforce is good for business is at the heart of what labor economists call the efficient wage theory, which gives that paying employees above the minimum wage increases productivity, retention rates, and loyalty. That, in turn, is reflected in customer satisfaction and goodwill relative to the competition.
“Giving customers a compelling reason to shop in your stores requires giving them real value,” said Zeynep Ton, a professor at the MIT Sloan School of Management in Cambridge, Massachusetts. and good service, and that would not be possible without motivated and empowered staff.” has studied retail operations for over 20 years. “Any retailer that wants to win needs to make sure they attract and retain the right employees, and design their jobs so they can be productive and serve customers.” And in a tight labor market, it’s getting harder and harder to keep talent [if] you don’t pay enough to live on and [offer] little chance for growth and success.”
In addition to the efficiency pay theory, there is significant empirical evidence that underpaying interferes with employees’ ability to focus on their work and be productive, says Ton, who explains the topic in her forthcoming book, “The Case for Good Jobs.” ”
“It also leads to revenue and attendance issues,” she said. “The bottom line is that the employee turnover and low-wage costs of companies are a lot higher than what executives might think, both financially and competitively.”
It’s hard to say when and whether Home Depot will make a clear profit from its massive spending on its frontline workers. Despite that, CEO Ted Decker said during the February earnings press conference, “We listen back… to what our founders had to say: that if we were interested in the… their associates, they will care about the customer and everything will take care of itself. That’s what this investment is all about.”
