Gap stores made a surprise move this week and has informed its employees that over the next year their minimum wage would move up to $10/Hour. The company said that this would raise pay for 65,000 of their 90,000 U.S. employees, including those at Banana Republic and Old Navy.
How can they do this?
It seems like businesses are fighting Washington tooth and nail to keep wages as low as possible then these guys at Gap come in and voluntarily raise wages.
No… They are being shrewd business people.
Lets compare your neighborhood Gap Store to your neighborhood Walmart store… You go into Walmart and fill your cart with stuff them check out at one of the cash register. When you go to a Gap Store (or Old Navy or Banana Republic) and pick out a pair of slacks you can bet you will not get out of the store without at least one salesperson suggesting a shirt (or sweater or socks) to go along with those slacks.
And that is a fundamental difference between stores like Gap and stores like Walmart. If Gap can attract higher skilled and more motivated store employees they will sell more product.
Yes… More skills and talent will mean higher wages for those Gap employees. And… more revenues for the company. And… if the Gap computers show an employee is not generating more add-on sales for a store you can bet it will automatically print out a pink slip and that employees will be out on the street again.
This higher skilled employee resulting in increased revenues model just doesn’t work for retailers and fast food businesses like Walmart, McDonald’s, or your local grocery store.
But how will Gap pay for what could be hundreds of millions more in wages?
Not only is Gap counting on more revenue from a whole army of higher skilled and motivated workers but, for Gap, every dollar that hits their cash registers results in more profits going to the bottom line. That’s what is called “Operating Margin”. And what drives the CEO’s annual bonus.
When you look at Walmart’s and Gap’s operating margin you will see that Gap makes 131% more profit for every dollar of revenue compared to Walmart. That means Gap has more than enough cash floating around to pay these higher wages as long as revenues rise. If revenues and the bottom line don’t go up you can be assured that the next story you will hear out of Gap will be about mass layoffs.
Unless… Gap’s CEO decides to take a cut in his own pay package. But I don’t think that will happen in our lifetimes.