New Law is Big Box Pain for 18 Retailers
Wal-Mart is not the only retailer that will be affected when Chicago’s new “big box” ordinance goes into effect next July. Just ask Home Depot, Lowe’s, Nordstrom, Federated Department Stores, Saks Fifth Avenue, Carson Pirie Scott & Co., Toys “R” Us and others that make up the estimated 18 companies that will now face having to raise wages and/or adjust health benefits coverage to comply.
“It’s certainly stunning,” Susan Wachter, a professor at University of Pennsylvania’s Wharton School, told the Chicago Tribune. “This clearly isn’t only going to affect Wal-Mart. It’s going to affect Wal-Mart’s competition.”
According to a Trib report, many of the big boxes operating within Chicago’s city limits pay workers below the $9.25 an hour mandated by the ordinance. Many others will now be required to offer health insurance to workers not presently covered.
Retail employees working as little as 10 hours a week will have to be covered should the new law withstand legal challenges. Benefits must be worth the equivalent of $1.50 an hour beginning next July with the figure rising to $3 by 2010.
Walgreens, which operates 135 stores in Chicago, isn’t covered by the new ordinance because its stores are not large enough. That, however, is not particularly reassuring to the drugstore chain.
“Our concern is what might happen next,” said Michael Polzin, a spokesman for Walgreens. “Anything that changes the way we have to conduct business in Chicago is going to have some impact on our operations.”
Discussion Questions: What will wage and benefit coverage mandates in Chicago mean for these retail companies in areas outside the city? Will mandated
health coverage for part-time workers, for example, force these companies to offer the same benefits to workers in other areas of the country?
Any type of artificial rise in wages will lead to inflationary pressures. When the hourly worker makes $20,000 a year, then the hourly supervisors must make (some amount) more. The salaried assistant managers must make more, and so on up to the senior store assistants (the manager will not be affected in a big box, as his/her salary is significantly higher). This increase in wages and benefits will lead to firms raising prices of goods to make up the difference. It is inevitable. Then the average monthly bills for basic goods will increase, thus negating the intended effects of creating a “living” wage. All prices go up, and the increase in wages is eroded by the increase in cost of goods. This same thing will happen if the federal minimum wage bill is passed by the Senate. Be very afraid of that one too.
The primary beneficiaries of this law will be the suburbs, especially those that immediately abut Chicago — retailers will build on the suburban side of the streets that serve as city limits. Wal-Mart has already built in Evergreen Park (95th & Western), and I understand it’s one of their best-performing stores.
I was amused by this comment by one of the aldermen when Target said they might pull out if the law passed: “If they want to lose the more than $3 billion that is not being captured in my ward, that’s a bad business decision for them.”
Based on the 2002 national Retail Census, and adding 20% or so for growth, Chicago has somewhere around $21b in retail sales annually. It also has fifty wards. What are the odds that $3b of that is in one ward?
Oh well, expecting truth (or common sense) from any politician is pretty hopeless — how much more so from a Chicago wardheeler?
It’s not unusual for chain retailers to have different pay scales in different locations. Costco should be celebrating the Chicago big box compensation ordinance: their compensation and benefits probably pass muster without any improvements needed.
If this law does pass, it probably will not be long before it spreads to other multi-billion dollar companies like Walgreens and McDonald’s. What this is is basically a tax. Chicago wants retailers to pay $10-13 for only $7 of labor. This reminds me of other tax hells such as the area along the New Hampshire and Massachusettes state line. New Hampshire has no sales tax and Massachusettes is something like 8%. Obviously this has ruined the retailers in Massachusettes near the border while those just across the line in New Hampshire are doing well. What Chicago will end up with is more vacant retail space forcing low income residents to travel further to buy products.
If mayor Daley doesn’t muster enough support to sustain his promised veto, this legislation will exacerbate the neighborhood stratification. Prices will likely rise in the neighborhoods where big boxes could remain and where residents tolerate a lofty standard of living. But in other neighborhoods, residents will cab to the suburban retail ring around the city limits, in even greater numbers than now. The issue is not neighborhood stores. They’ll probably thrive. Big boxes pull from wide geographies, regardless of where they sit. I’d love to see an economic impact study on the sales tax revenue. Maybe that’s what Daley is working on. Promises to be an interesting next few months.
The interesting thing is that this has been characterized in our local Chicago media almost exclusively as a “Wal-Mart issue.” There is more than a little speculation that the City Council, long criticized as a rubber stamp for Mayor Daley, saw this as a “no lose” chance to challenge his power as the smell of scandal draws nearer the mayor’s office. With the council members championing the cause of “the little guy,” even a loss to the mayor would seem to be a win for them. It will be very interesting to see how that plays out if the law stands and the 17 other retailers cited here decide to follow Wal-Mart to Schaumburg or where ever! Jobs? Sales tax revenue? Council members?
Increased wages and health coverage will attract Caucasian workers to jobs they previously eschewed. Illegals and minority workers will suffer as a result.
Also, just a thought, but what if these big box retailers provided their mandated health care in the form of clinics attached to their stores? Clearly, spending a dollar on health care in this fashion is more efficient than spending a dollar in the open health-care market. Kaiser Aluminum started Kaiser Permanente for their employees with this in mind decades ago.
States usually preempt their cities from passing officious legislation like this (reserving that right for themselves) but as I’m no expert in IL law, I can only offer that they SHOULD so preempt (Chi-Town’s considerable influence over Springfield notwithstanding).
This new “tax,” i.e., increased wages and higher prices in city stores, would result in 1) union bosses smiling, and 2) more customers will be driving out beyond city limits to shop for lower prices. Big box stores already have a strong draw on in-city customers for that reason.
If Mayor Daly doesn’t veto this statute, repentance will prevail. And Chicago cannot repent too soon because it may not realize how soon it may be too late.
Times change. Unions were created to ensure that minimum standards for pay, benefits and work conditions were adhered to. With the change of the US economy to primarily a service focus, unions lacked the strength in that sector or the validity to function in the previous capacity. Government, in the form of this type of legislation, is seeking to address what it considers to be a lapse in the market conditions. My guess is that other municipalities will go forward with similar regulations, that they will be crafted to stand the test of the courts and that eventually, these standards will become a fundamental part of doing business.
As with any increase in costs, some competitors are better suited to absorb or pass along those costs than others. Marginal competitors will find the additional labor costs onerous, while more robust competitors will not. End of economics and social policy lecture. My advice to retailers: don’t aggressively fight these things. Don’t support them until it becomes inevitable, and then DO support them to claim the moral high ground and the PR impact. But do not fight them. Eventually, if indeed the minimums are too low, it will be necessary to adjust. Do it now, avoid the negative brand impact, and capture loyalty. Gives you longer to alter process and adjust other costs too!