The Exchange

Walmart and the middle class, sinking together

The Exchange
A customer shops for turkey at a Walmart store in the Porter Ranch section of Los Angeles
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A customer shops for turkey at a Walmart store in the Porter Ranch section of Los Angeles November 26, 2013. REUTERS/Kevork Djansezian

It was once General Motors (GM) whose fortunes reflected those of the middle-class Americans who bought its products. Now, that bellwether Goliath is Walmart (WMT).

The giant retailer has become a microcosm of the middle class, since both are mighty yet struggling, and both may be going even further downmarket. Walmart, for instance, reported 2013 sales of $476 billion, which was a scant 1.5% higher than sales from the prior year — basically no gain at all when accounting for inflation. Consumers’ personal income rose at almost the same puny rate in 2013, a year in which some segments of the economy surged but a large portion of the middle class remained disturbingly stagnant.

Walmart’s problems stem from the transformation of the U.S. economy and the strains those changes are causing on ordinary people. A few examples:

A chronically weak job market is pinching lower-income consumers — some of whom can’t even afford to shop at Walmart anymore.

The digital revolution has left Walmart at a disadvantage against etailers such as Amazon (AMZN), which has 7 times’ Walmart’s online revenue, and a much smaller physical footprint to manage.

The "barbell economy"

The emerging “barbell economy” — growing clusters of high- and low-income consumers, with fewer in the middle — has driven many of Walmart’s customers either to higher-end department stores or to deep discounters such as dollar chains.

A cutback in federal subsidies, such as food stamps and extended unemployment benefits, is taking money out of consumers’ pockets and shaving Walmart’s bottom line as well.

With Walmart tied so closely to the fortunes lower-middle-class Americans, it’s no exaggeration to say that, as goes Walmart, so goes America. And vice versa.

Like many struggling Americans, Walmart has plans to rejuvenate its performance and assure its relevance. It has invested more in its website and e-commerce infrastructure, to compete better with Amazon. It also plans to open more small, neighborhood outlets that shoppers might visit for a handful of items, in contrast to the warehouse-sized stores that can take an hour or more to navigate. There have even been rumors Walmart could buy a discount chain such as Family Dollar (FDO), giving it a sudden, large presence in the thriving lower end of retail.

Walmart also seems to be tentatively considering whether to raise pay for many of its workers, in response to pressure on both politicians and big companies to hike the federal minimum wage, which has been set at $7.25 an hour since 2009. Walmart sales associates earn about $9 an hour on average, or $16,000 per year for a full-timer, according to workers’-rights groups. That’s less than the federal poverty rate for a family of four, which suggests many of Walmart’s own workers can barely afford to shop there.

A century ago, Henry Ford famously doubled the pay of his workers — to $5 per day — to reduce turnover and make his production lines more efficient. That move had the added benefit of raising living standards for Ford workers and helping establish the modern middle class.

Even though Walmart is the nation’s largest employer — with 1.3 million U.S. workers — it seems highly unlikely it could achieve anything similar to what Henry Ford did. Global competition gives retailers little room to raise costs without giving away pricing advantages. And fading demand for lesser-skilled workers lacking a college degree leaves few companies with a real incentive to raise wages, aside from earning a bit of public goodwill. Before Henry Ford doubled wages, his workers often left for other blue-collar jobs in a booming industrial economy. Most Walmart workers lack such options.

Walmart remains a well-run company with significant resources, just as the American middle class remains a potent economic force, if harnessed effectively. The question is whether they will help each other reclaim prosperity, or become one more legacy of a better past.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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