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Brick-and-mortar retailers are looking forward to years of competitive pain

Nicole Sinclair
·Markets Correspondent

As brick-and-mortar retailers struggle to compete with online rivals like Amazon (AMZN), higher wages are making it increasingly challenging to do business.

“The cost of labor has increased over the last several years, but recent inflation levels appear to be accelerating,” Barclays analyst Matthew McClintock said.

As McClintock points out, many retailers have announced plans to raise their minimum wages over the past few years--including Wal-Mart (WMT), Gap (GPS), Target (TGT), Costco (COST), and L Brands (LB).

Meanwhile, from 2014 to 2015, 20 states increased their minimum wage levels, which could also put pressure on retailer employee compensation levels, according to McClintock. For example, Connecticut has a planned raise to $10.10 by 2017 from $8.70 in 2014.

Urban cities are also seeing more pressure to boost minimum wages, as San Francisco has passed a minimum wage hike to $15 an hour by 2018 with raises in the works at other states.

And, the U.S. Department of Labor submitted a final rule revision on March 15th to increase the standard salary level for required overtime pay to about $50,000 per year from $24,000 per year currently, which could take effect as early as this summer, according to McClintock.

While McClintock notes that retailers have largely offset increasing costs with productivity improvements, he believes the low hanging fruit has been picked “and future inflationary pressures may ultimately end up being pass through in the form of lower profitability levels.”



Plus, he points out that labor is already lean across many retailers, which means that cutting employees may be difficult to do.

 

In their efforts to compete defend against online competition, brick-and-mortar retailers have increased their focus on customer service. And McClintock notes increased staffing levels, higher training costs, and higher wages to retain highly-trained are costly.

These additional investments come alongside minimum wage upward pressure in the U.S., upping pressure on retailers going forward.