I opened a gaming and comic book store along with a friend of mine when I was a junior at Bowling Green State University. Our startup capital was $10.000 in cash and credit, which, being college kids, meant I had to go homeless to put up my part of the capital. We used the money to pay for all the legal costs, lease on a location, initial inventory and fixtures, etc. Our ability to stretch that $10.000 rested upon two factors:
- The fact that Sam Goody had just gone bankrupt and was liquidating its stores, allowing us to get some cheap fixtures; and
- Walmart’s affordable prices on a lot of items.
When ‘The Gamers Lounge’ first opened due to some real guerrilla marketing, we had a line around the door and a packed house. We quickly made up our initial investment. While as rookie entrepreneurs we made a few mistakes which led to the enterprise’s initial demise, we would never have been able to get it started if not in part for Walmart. The friend I opened the store with has since opened a similar, successful venture called ‘POP!’ in Ohio. You should check it out if you’re ever in the area. On the other hand, I went to New York and worked in corporate training on Wall Street. I have also dabbled in online enterprises.
So when I hear people slam Walmart for what it pays its employees, I realize that I have personally been on the other side of the story. For example, many people criticize Walmart for having a portion of its labor force on government assistance. They imply that Walmart is hoarding its profits and letting the government pick up the tab for its employees. But this is patently untrue. First, a couple of basic points:
- Walmart adds value with its cheaper prices, so when placing its locations it will look for areas that are price sensitive. This means areas which already have limited income.
- It will hire from the community within which the store is located. Naturally, then, many of the employees were probably already getting government assistance before working at Walmart, and would’ve worked somewhere else if there were better opportunities available which they qualified for.
Another obnoxious talking point is people pointing to the Walton family’s net worth ($147 billion) as indicative of the fact that Walmart has the means to pay its employees more. This notion is based in the utmost financial illiteracy:
- Net worth is not a pool of cash; it’s what you get when you take the assumed value of someone’s assets (which is usually only a small portion of cash) and subtract all their debt. So net worth is what a person would have if they could sell all their assets at what they think they are worth, and paid off all their liabilities.
- The value of an asset isn’t some absolute number. Many assets, like real estate and ownership in private companies, don’t have an active market that can be used to find its value, unlike publicly traded stock or bonds. So how do you figure out what something is worth when there isn’t an army of buyers telling you what it’s worth? You use theoretical valuation techniques based on assumptions about the cash flow of an asset, and the return potential investors would want. But does that mean you can actually sell an asset at that price? Maybe, and maybe not.
- The Walton family’s net worth includes the value of Walmart itself. The company’s valuation is based on assumed future profits and a magical discount rate which I won’t get into, since this is not a finance class. How much the Waltons have in cash is unknown, but it will be far less that $147 million. It will also not be Walmart’s money, but the Waltons’ own personal cash. It is common knowledge that these two are separate.
The money with which Walmart is apparently supposed to pay its employees more comes from its profits and its operations in the prior year. But that is also the money that it will need to build more stores and hire more employees. So let’s take a look under the hood to see what Walmart’s profits are, and what it does with those profits.
What are Walmart’s Profits?
The main thing you should take away from the images above is that the annual earnings per share for Walmart is $5.11.
What’s does that mean?
If you took all of Walmart’s sales, which was almost $500 billion, and subtract all their costs (rent, utilities, payroll, etc.), you’d have a profit of $5.11 for every share of ownership that exists in the company. So what is the total profit? This is the money that can possibly be used to give employees the desired raise.
How Many Shares Exist in Walmart?
According to YCharts there are about 3.6 billion shares of ownership in existence among all the owners of Walmart. So if each of those shares earned $5.11 of profit, the total profits in 2014 must be $18.396.000.000 (5.11 x 3.6 billion).*
(* I did this calculation before I noticed, as shown in the images above, that Walmart’s net income was $16 billion. So technically I overshot it because it is more than likely that new shares in Walmart have been created since the report was created last year. Treat this as a learning moment in the trickiness of following a company’s financial history. But I will finish my illustration to make my point.)
What can Walmart do with its Profits?
With these profits the company can do various things, such as give raises, hire more people, open new stores or pay the shareholders a dividend (actual cash for their investment).
Let’s say Walmart didn’t open more stores or hire more people in 2015, and chose not to pay any investors any dividends. If we divided the number above evenly across its 1.2 million employees (refer to the first image which mentions how many employees Walmart has), it would result in a $15.330 annual raise for that year. This, again, assumes that Walmart will not grow its staff or locations, and that its sales and non-payroll costs will remain the same as the year before. These are all really bad choices/assumptions for any company hoping to be around for the foreseeable future (prices generally don’t go down, and if don’t grow you generally shrink).
(* If you use the $16 billion in profit number, then you get a $13.333 raise.)
Doesn’t Walmart Hire People?
As mentioned in the first image, Walmart hires about 600.000 people per year. So if we took the 2014 profit number and reinvested it purely into that number of new employees in 2015, it would allow Walmart to pay each employee $30.660 per year. This is in line with what many Walmart employees would make at their wage full time. But do keep in mind this is impossible since a part of those profits have to go into the development of new locations and other expansions of operations. This illustrates to a large extent that Walmart does spend a significant, if not most of its profit, on growing the company and giving new employees an income – quite contrary to the picture painted of a nefarious Walmart which greedily hoards its money.
(Note: using the $16 billion profit number, this really works out.)
So? What about Poverty?
So we can show that Walmart doesn’t have the power that many people think it has to suddenly end poverty. But does that mean we should just not care about poverty? Not at all. There is plenty that leads to poverty that can be fixed without strong-arming business which simply wish to serve their customers. Among them are:
- We can rethink our views on monetary policy, which while not creating “general” price increases, has had great a affect on the prices of food and energy which make up a lot of the expenditures of the poor. To understand how this happens, go to learneconomicsnow.com where I have several videos on monetary policy, such as this one I made on monetary policy and inequality.
- We can look at licensing requirements, which make it harder for the poorest to pursue higher income fields. Middle class people can afford the time it takes to study and prepare for a licensing exam, but some people have families which they need to take care of, and therefore get stuck in a cycle of lower paying jobs because they can’t take the time to get licenses. Learn more about my thoughts on this by watching this video on income inequality and income mobility.
- Also, we can rethink the incentives in our higher education system. Watch this old video where I explain to college kids why they are unemployed.
Walmart is not an enemy to progress and economic development. For example, my mother brought up a good point, saying that Super Walmart makes it easier to do shopping since everything is under one roof. They don’t spend as much on gas and food is cheaper. So it helps curve the food and energy price increases we’ve seen over the years. Walmart, like any business, simply caters to the consumer (that’s us), and in so doing contributes substantially to our welfare.
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