Do “Hero Wage” laws during the coronavirus pandemic lead to supermarket closures? The short answer is, “Rarely.” That still doesn’t make such laws good policy.
The more nuanced answer is that these laws might nudge some locations out of business, generally locations that were already losing money. National chains close store locations all the time, concurrently opening new locations elsewhere.
In other words, increased costs might contribute to a location closing, but worker salaries are rarely the primary reason for closing a grocery store. Usually, the store faces other challenges before the increased labor costs expedite an already likely decision.
Yes, for some businesses these pandemic-inspired “Hero Pay” or “Essential Worker” laws are the difference between a meager profit and going out of business.
Grocery Store Owners Say That Pandemic Hazard Pay Laws Are Putting Them Out of Business
City-level requirements that grocery stores pay wage premiums during the pandemic could prompt layoffs, price hikes.
Christian Britschgi
2.19.2021 10:55 AMIn court filings in a federal lawsuit challenging Seattle’s hazard pay ordinance, two franchise owners of Grocery Outlet, a discount grocery chain, said the city’s mandated $4-per-hour wage premium is forcing them to operate at a loss.
Steve Mullen, an owner of a Grocery Outlet in Seattle’s Madrona neighborhood, said that the hazard pay law is costing him an additional $20,000 in labor costs each month.
“The store does not make that much on a monthly basis and [the hazard pay ordinance] will push the store into a significant deficit,” said Mullen in court filings tweeted out by independent Seattle journalist Kevin Schofield. “I cannot continue to operate a store that is consistently unprofitable. If losses occur as predicted, I will likely be forced to close the Madrona Grocery Outlet store.”
It’s the same story for Michael Sandberg, the owner of a Grocery Outlet in Seattle’s Lake City area, who said the city’s new law will increase his costs of employing his current 22 employees by about $10,000 a month.
“The store does not make nearly that much” per month, wrote Sandberg in a court filing for the same lawsuit. “Paying the mandatory hazard pay will cause the Lake City Grocery Outlet store to go into the red.”
Most people don’t understand the struggles of local markets. Operating a grocery store today almost necessitates scale. Larger chains survive. Geographically isolated independents survive. Chains use scale to maintain low prices in an extremely price-sensitive business. Independents rely on being the one-and-only store in a community, usually with higher prices and smaller stores.
One chain has attracted a lot of criticism for closing stores after communities require higher salaries during the COVID-19 pandemic. Kroger has taken heat for closing poor performing stores and citing the Hero Pay of Long Beach, California, as a factor. Kroger offers a good overview of the grocery store and supermarket business model.
The following table provides an overview of Kroger’s financials as of 2020, as a baseline:
| Description | Value in 2020 | Change |
|---|---|---|
| Revenue | $122.29B | 0.36% |
| Net Income | $1.66B | -46.66% |
| Net Margin | 1.36% | -46.67% |
| Cash on Hand | $399M | -6.99% |
| Change in Cash | -$30M | -136.59% |
| Cost of Revenue | $94.44B | 0.09% |
The first thing to notice is that Kroger net income fell dramatically in 2020. When income is slashed almost in half, the cost of revenue (total direct operating expenses) needs to be slashed. Though not finalized, estimates for 2021are $132 billion in revenues, a 8.35 percent increase year-over-year, and a five to seven percent increase in net income. But, that’s after net income cratered the previous two years.
Politicians love to say things such as, “Kroger had more than $122 billion in revenues!” Or, they cite the annual net income. “Kroger made $1.66 billion in 2020!”
Let’s do some basic math and divide 1.7 by 122, for a net profit margin at Kroger of a mere 1.36 percent. Those profits were among the worst by net income margin among major corporations.
If $1.66 billion in net income sounds like a lot, divide it by the number of employees for earnings per worker hour. Kroger has approximately 453,000 workers. That means Kroger earns $3,664.46 per employee. Again, compared to other large companies, that’s abysmal. All of $916.11 per quarter per employee. Apple, by comparison, earns $115,000 per employee.
Kroger’s “record” 8.35 percent increase in revenues for 2021 might be short-lived. Why would management assume this one-year anomaly is the new normal? That would be negligent, since data already suggest a decline in grocery sales for 2021.
From CNN: Now companies say the pandemic-time boom is over. Kroger, the largest supermarket chain in this country, said Thursday that it expects comparable sales, or sales at stores open for at least one year, to decline by 3% to 5% this year. Sales increased 14.1% in 2020.
Large Numbers are Small per Employee
The Hero Wage laws quickly consume the profits of a grocery store. A chain as larger as Kroger could, at least temporarily, survive on half its profits. However, what people don’t realize is that Kroger only has $400 million on hand at any time for many reasons, from dividend payments to supply chain issues.
Take that entire $400 million and you could give every employee $883 for the year. Yes, $883 would help a lot of people, but that’s a mere $17 per week – about four hours of the extra hero pay. Once you pay out the $400 million, the corporation technically isn’t liquid and would need to make some tough choices.
The CEO of Kroger does receive $14 million annually. Take everything from the CEO of Kroger and give it to the workers. $14 million / 453,000 would be $21 more per year for each worker. Less than 40 cents per employee per week.
Grocers have the narrowest margins of any major business Discounters work on a 1.5 percent margin. Traditional grocers often struggle at 3 percent. High-end grocers at 5 percent.
The chains rely on “placement” spifs and other offsets. Grocers work with economists and data scientists to do all they can with placement and design.
Quoting the data site Grocery Strategy:
Conventional grocery stores have a profit margin of about 2.2%, making them one of the least profitable industries in the US. But they make their money by selling in large volume & multiple locations. However, stores in natural, organic, and gourmet niches tend to see bottom-line profit margins of closer to 5-10%.
What about Costco? They pay higher hourly wages.
True, but our Costco has converted half the check-out lanes to self-service, the food counter is a self-service kiosk, and the bakery cut both staff and the number of items offered. Costco aggressively cuts costs. They don’t invest in the shopping experience or try to offer variety. What they have is what you get… in quantity.
You cannot compare Costco to a basic Safeway or Ralph’s supermarket. The customers are different. The membership fees and other revenue supports also help the warehouse model of Costco.
Traditional grocers compete on price. Consumers, even high-end consumers, will drive extra to save $0.50. Economists have noted even a slight rise in prices changes purchases. In grocery store studies, a 15 percent price increase cuts sales 30 percent. Imagine that. People say they want to workers to be fairly compensated, but those same customers want lower prices. A dime and a nickel are enough to make someone switch products or even change stores.
Grocers will evolve, especially if they have to raise salaries. We see this now.
Even cart theft can wipe out profits. That’s why urban stores charge a small fee or block carts. Wheel locks and other annoyances. They cannot afford extra loss.
I’ve studied product pulls at a Safeway location. Try as they might, about 20 percent of dry cereals get pulled for expiration and discounted or donated. Reducing that to 10% would be huge. That’s why during the pandemic stores reduced the number of cereal varieties to the best of the best sellers.
A $4 hourly raise for all workers on top of minimum wage increases in California pushed the salaries at some grocery store locations to $22.50 hourly. That salary is only part of the costs, since taxes, insurance, and other invisible payroll costs also increase with wages. A $22.50 employee is easily a $30 per hour cost, or more. That was just too much right now for poor performing locations.
Consumers aren’t at fault. These are often low-income areas with few grocery choices.
A Universal Basic Income might have helped. That’s basically what the EU did by paying stores, and then stores added the grants to salaries.
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