March 27, 2013 at 12:16 PM EDT
Wal-Mart Inventory and Labor Issues Could Drive Customers to Competitors (WMT, TGT, COST)

According to an article published by Bloomberg on Tuesday, discount retail giant Wal-Mart (WMT) has had troubles recently with maintaining stocked shelves and proper inventory. Customers note that the stores are becoming more disorganized and look as if someone “raided” them. Wal-Mart has historically been known as a one-stop shop for all a customer needs at a reasonable price. However, if Wal-Mart continues to have these inventory issues, it could drive potential customers to its competitors.

Wal-Mart’s Labor Issues

The most prominent reason for Wal-Mart’s recent inventory issues is the lack of available manpower needed to maintain a well operated store. Inventory itself is not necessarily the issue; Wal-Mart has one of, if not the best, supply chains in the world. The real issue is that the company does not have enough workers to help stock that inventory on shelves in the front of the store. To a customer, it looks as if stores are disorganized and unkempt.

Many business people say that hiring more workers is just too expensive. However, as Wal-Mart’s trouble shows, hiring labor is a necessary investment to maintain a prosperous, not to mention profitable, business.

Additionally, the idea that hiring more workers is just too expensive is not necessarily true, especially for a company as large as Wal-Mart. According to research done by Bloomberg Industries, if Wal-Mart were to hire five full time employees at its super center stores it would result in only a 0.5% uptick in total selling, general, and administrative expenses. These five extra bodies could tremendously useful in maintaining a well operator store, which would result in great sales and earnings.

Let’s assume that these extra workers earned minimum wage and industry standards for health benefits, the cost to Wal-Mart would total around $448 million a year. Compared to the company’s prior profit of $17 billion, and revenue of $469.2 billion, this seems like a reasonable costs. But as most know, the company is notorious is for cutting back on workers, even though they have low wages and little to no benefits.

It’s Not Just Inventory

Wal-Mart’s labor troubles aren’t just hurting its ability to maintain well stocked shelves with products that customers expect. The lack of manpower means that there are fewer employees to man checkout lines, which results in longer lines for customers.

As any consumer can attest, one of the most frustrating parts about shopping, no matter the store, is waiting in long lines. If customers continue to experience at long lines at a Wal-Mart after being unable to find the products they were looking for on disorganized shelves, not much is keeping them from finally moving to a competing stores.

The Competition is Creeping In

More and more customers are leaving Wal-Mart, where they cannot find certain products due to poorly stocked inventories, to other discount retailers like Target (TGT), Kohl’s (KSS), and especially Costco (COST), among others.

These stores, while no where near as large as Wal-Mart in terms of revenue or global dominance, do allow customers to finally have another discount retail option if Wal-Mart is not meeting expectations. Though it might be tough for Wal-Mart to take a dramatic hit in revenue and profit in the near term, there could be gradual possibility of these companies gaining market share over the long-term.

Over the years, Wal-Mart has been able to overcome labor issues because customers kept coming as the company offered its “always low price.” However, more competitors, like Target and Costco, have gained some of the market share away from Wal-Mart; it seems as though maintaining good, well-stocked, exceptionally operated stores needs to become a priority for the company.

The Bottom Line

Investors tend to like when a company announces job cuts in an attempt to get lean. However, Wal-Mart’s current inventory and labor issues shows that having a good workforce is necessary for a profitable business and most on Wall Street tend to forget this. Labor may be seen as an easy target when it comes to cost-cutting, but an understaffed and unhappy workforce could be the formula for market share dominance to finally whittle away.

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