Who’d a-thunk it? Retailers like Wal-Mart make location decisions based on labor costs?

From Mark Perry.

"Wal-Mart announced last week that it is closing all of its 102 Walmart Express stores in the US, and 45 of its regular Walmart stores around the country. As Wal-Mart decided strategically which 45 US-based stores to close, “It can’t be a coincidence that Wal-Mart’s scalpel targeted stores in places that have among the highest minimum wages in the country,” explained Jed Graham in his Investor’s Business Daily article yesterday “Wal-Mart Jolts High-Wage Havens: Oakland, L.A., D.C.“:

Oakland, whose $12.55-an-hour minimum wage is currently second to none, lost its one and only Wal-Mart. Los Angeles, which in June approved a gradual hike in the minimum wage to $15 an hour, lost its two Wal-Marts. One of them had opened in Chinatown in 2013, providing residents there a full-service grocery store after decades of trying to attract one. Los Angeles County, which followed the city’s lead in setting a path to a $15 minimum wage, lost a Wal-Mart that opened in 2013 in Altadena, an unincorporated part of the county where the wage hike will apply.

Here’s how SFGate reported the demise of the Oakland Walmart, which closed last Sunday (emphasis mine):

In Oakland, employees and city officials expressed shock, and some speculated that the city’s minimum-wage law played a part in the decision to shutter the store there. The Walmart in San Jose, which also boosted the minimum wage, will shut as well. The two stores in San Leandro, which has no minimum-wage law that supersedes the state’s, will remain open.

“I think it really is a little discouraging,” said Oakland Councilman Larry Ried. “The minimum wage in the city of Oakland played a factor, was one of the factors, they considered in closing the stores.” The loss of Walmart deals a significant blow to Oakland as the giant retailer ranked among the city’s top 25 sales-tax producers.

To help better understand how “Wal-Mart’s scalpel targeted stores that have the highest minimum wages in the country,” consider the map above showing three Walmart stores along a 5-mile stretch of Interstate 880. The northern most Walmart store is in Oakland, where the minimum wage is $12.55, and the other two Walmart stores are in San Leandro where the state minimum wage of $10 an hour applies.



Normally, when a major retailer has three stores along a 5-mile segment of a major thoroughfare and it decides to close one store, wouldn’t the logical choice be to close the store in the middle location so that it could best serve the customers in that area and minimize driving times, ceteris paribus? Seems like that would be the logical decision for a retailer like Wal-Mart, except that in this case the ceteris paribus condition doesn’t hold because the Oakland store is located in a jurisdiction where the minimum wage is $12.55 an hour, more than 25% (and $2.55 an hour) higher than the other two stores in nearby San Leandro where the minimum wage is $10 an hour. Given the reality that Wal-Mart operates on razor-thin profit margins (only 2.8% last quarter), a 25% difference in labor costs for entry-level workers can be the difference between a store that turns a profit and a store that barely breaks even, or loses money.

Bottom Line: Largely due to Oakland’s $12.55 an hour minimum wage law there’s now a lot of suffering there: a) 400 workers at the Oakland Walmart have lost their jobs (except for those who can get placed at another Walmart), b) Oakland residents have lost access to a conveniently located Walmart store, and will now have to drive further to the closest Walmart to get the cost-savings from “everyday low prices” on groceries, clothing and household goods, and c) the city loses tax revenues from one of its largest sales-tax producers. As cities, counties and states around the country continue to raise labor costs for retailers and restaurants with minimum wage legislation, there  will likely be more locations like Oakland that find out the hard way that their well-intentioned policies are really “economic death wishes” that act as very effective “business and job repellents.” In reality, the “Fight for $15 [or $12.55]” will more likely be a “Fight for $0” as many of the displaced, unemployed workers at the Oakland Walmart are now finding out.

Related: See CD post from last October: Who’d a-thunk It? Higher minimum wages actually affect a company’s plans on where to expand? about Buffalo Wild Wings plans for an aggressive national expansion of 100 new stores around the country – except for cities like Los Angeles, San Francisco and Seattle with pending minimum wages of $15 an hour."