The wage debate is heating up again.
California Gov. Jerry Brown announced today that lawmakers reached a tentative deal to increase the state minimum wage to $15 an hour by 2022 — making California the latest state to step to the forefront of a national movement to raise the minimum wage.
The “landmark deal,” as Gov. Brown’s office has dubbed it, could make California — also the most populous state in the country — the first to adopt a $15 minimum wage.
As more states join the fray and more workers demand higher wages, understanding the potential implications becomes even more critical.
Here are three ways a wage hike could impact retail.
More Disposable Income … For Certain Consumers
According to Cowen and Co. analyst Oliver Chen, a higher minimum wage will put more money in the hands of low-end consumers — a boon to retailers like Ross Stores Inc., Wal-Mart Stores Inc. and Target.
“Ross Stores’ traffic and comps stand to benefit from a healthier low income consumer given the retailer’s exposure to a lower household income customer, lower average unit retail of $10 versus [The TJX Companies Inc.’s] $14 to 15, and exposure to consumers on government subsidies,” Chen wrote in January. “Specific to 2016, Ross is more likely to benefit than other retailers from California’s minimum wage increase to $10 from $9 and steeply declining unemployment as 25 percent of Ross stores are located within the state.”
Cowen and Co. analyst John Kernan pointed out that millennial shoppers — which includes some college students and young adults — could also be the beneficiaries of high wages. Such consumers also comprise the major shopping base for Foot Locker Inc. and other specialty retailers.
Whether higher income could compel some consumers to convert to higher end retailers and brands is another possible consideration.
For now, Chen said he expects a wealthier low-income consumer to propel ongoing positive traffic trends and comps into 2016 at big-box retailers Wal-Mart and Target.
Justification of Retail Price Hikes & Layoffs
Several quarters after announcing its own wage hike, Wal-Mart began to blame the investments for subsequent declines in profits. In January, Wal-Mart also announced that it would close 269 stores — a move that would impact 16,000 associates — to tighten up its portfolio. And although the firm didn’t blame higher wages for the store closures and possible layoffs, insiders continued to question the sustainability of across-the-board wage hikes.
If retailers, which may have factored in certain costs for paying their employees on an annual or longer-term basis, are mandated to increase wages, they may rethink their expenses in order to accommodate the change.
Often, prices on retail goods and services may be higher and layoffs could also ensue. Some reports have already blamed higher minimum wages for slower job growth in certain cities.
As expected, many investors tend to keep a close eye on the expenses of the companies in which they have a vested interest. As such, when expenses rise to levels they are no longer comfortable with, some investors may jump ship.
That’s not to say that certain stakeholders are not in support of higher wages for employees; however, abrupt changes in SG&A expenses could take a toll on investor sentiment. Furthermore, when there is a major stock sell-off for large publicly traded companies — Wal-Mart is one example — the economic implications could be larger in scale.