Employee Shortage Shows Why Walmart Is Investing So Heavily in Ecommerce

Dismal revenue and sales growth is not the only reason why Walmart Stores Inc. (NYSE: WMT) is spending so heavily on ecommerce these days. The retail giant seems to be facing a serious labor shortage that could threaten its future while raising serious doubts about the prospects for American retailers.

A recent Reuters’ analysis confirmed something that many consumers have long suspected: Walmart simply does not have enough employees. The discount king’s footprint grew by around 45% in the last decade, yet its employee base grew by around eight percent.

That explains why customers sometimes have to spend up to half an hour searching for an employee when they need help at Walmart. It also appears to be the root cause of some of Walmart’s most glaring deficiencies, such as empty shelves, out of stock merchandise, long checkout lines, overaged produce on the shelves, and declining same store sales.

Reuters’ numbers indicate that the average Walmart employee has to deal with about 34% more store space. From a practical standpoint, that means a lot of work is not getting done at Walmart.

Why Walmart’s Customer Service Stinks

It also benefits competitors like Kroger (NYSE: KR) and Costco Wholesale (NASDAQ: COST), which are well known for high levels of customer service. One problem that Walmart is facing these days is that competitors like Costco and Kroger have figured out how to provide the kind of deep discounting customers want while delivering a fairly high level of customer service.

A big reason for these chains’ success has been their willingness to pay employees more and to offer benefits. Another has been their willingness to maintain a higher level of staffing, which increases expenses but retains customer loyalty.

This creates a dilemma for Walmart, which notoriously pays its employees very little. One result of this was that Walmart was effectively running a retail training school rather than a store. Employees would go to work there, get some experience and understandably move on to someplace like Kroger that offered higher wages and good benefits.

Walmart’s Current Dilemma

Another problem was that Walmart often had to settle for lower quality staff: the people that either got fired from Kroger or could not get a job there in the first place. Walmart has tried to rectify this by increasing starting wages to $10 an hour and hiring 8,000 new “department managers” (a euphemism for stockers) in the U.S. Whether that can help and if Walmart can fill those positions remains to be seen.

Such hiring could create a world of problems for Walmart, including unionization. Much of Kroger’s success seems to be in its ability to work with unions; many of its supermarket brands are union shops. Walmart has so far dodged the union bullet in the United States even though it has been plagued by labor unrest for years.

Another potential nightmare facing Walmart is the $15 an hour minimum wage movement, which is gaining ground in the United States. Seattle is among the cities that have adopted a $15 an hour minimum wage. Some prominent Americans, including U.S. Senator and presidential candidate Bernie Sanders (I-Vermont) and billionaire Nick Hanauer, have been pushing this solution.

Since Walmart employs 1.4 million people in the United States, the hit it could take from such increased wages could be enormous. This could force it to increase prices at a time when it faces increased deep discounting from some aggressive rivals, particularly Kroger and Amazon.com.

Why Walmart’s Labor Woes Explain Its Ecommerce Push

These labor woes explain Walmart’s ecommerce push and its plans to spend $2.7 billion on online retail in the next few years. One of ecommerce’s biggest benefits is far lower labor costs.

For example, instead of shipping goods from a distribution center to a store and shelving them—both labor-intensive processes—online orders simply stay on the shelf at a fulfillment center until they get shipped out. A big advantage to that is that one fulfillment center employee can service hundreds or thousands of customers all over the country or the world.

Something else to remember is that nobody cares if a fulfillment center employee is rude, surly, arrogant, badly dressed or mean, because he or she does not have to interact with customers. Fulfillment centers can hire a lot of people that would never make the cut in traditional retail, so the potential labor pool is much larger. A fulfillment center can hire workers that speak poor English, have lots of tattoos on their arms or use a lot of profanity, because they do not interact with customers.

The Real Advantages of Ecommerce: Outsourcing and Automation

Another advantage is that ecommerce is far easier to automate than brick-and-mortar retail. Amazon is already using robots at many of its fulfillment centers. Customers in a store might object to a robot; ecommerce customers that never see the robot will never object to its existence.

This could also put Walmart at a competitive disadvantage. Seeking Alpha contributor ARK Investment Manager calculated that Amazon (NASDAQ: AMZN) could cut fulfillment center costs by up to 20% by employing Kiva robots. Naturally, Amazon will try to pass that savings on to customers and undercut Walmart’s prices.

One nightmare Walmart could soon face in the near future is that Amazon prices on many goods could be lower than its prices even with the cost of delivery added. If that were to occur, there would be no reason for customers to make the trip to Walmart.

The final benefit of ecommerce is that it often enables a retailer to effectively outsource customer service. In most ecommerce transactions, the actual customer interaction is outsourced to the delivery service, such as UPS or the USPS. All the retailer has to do is ship the package in a timely manner.

Many Amazon and some Walmart transactions are increasingly handled by outside suppliers selling through those companies’ systems. The supplier is tasked with fulfilling the order and providing customer service. This, of course, reduces expenses further while providing additional revenues.

Basically, Walmart is trying to reduce its labor costs by investing in ecommerce. Online retail is far easier to automate and outsource and, in the long run, much cheaper than brick and mortar.

The end result of this investment is quite clear: At some point in the near future, Walmart will start reducing its brick-and-mortar footprint significantly. It will start closing stores and make the retail apocalypse far worse by reducing the number of employees.

This makes Walmart a potentially good long-term value investment even if it is not exactly the most socially responsible of companies. Expect to see the retail landscape change beyond recognition because of the growing labor shortage and the rise of ecommerce.

One has to wonder how smaller retailers that lack Walmart’s resources will be able to survive in this brave new world of ecommerce, robots and deep discounting. My guess is that America will soon be full of empty store fronts and former Walmart workers because of these developments.

Disclosure: The blogger holds a long position in Kroger. He also conducts retail sales through Amazon.com.