The CEO of Canada’s largest grocery and drugstore chain has warned his shareholders that minimum wage hikes across Ontario and Alberta will cost his company an additional $190 million in expenses next year.
“We are flagging a significant set of financial headwinds and the organization is mobilizing all of its resources to see whether or not it can close that gap,” said Loblaws Companies Ltd., CEO Galen G. Weston earlier this week.
Ontario is set to raise minimum wage from $11.60 an hour to $14 by January 1, 2018, and then to $15 an hour the following year. Alberta’s minimum wage will be $15 an hour by 2018 — it is currently $12.20 an hour.
Just for context: at a wage of $15 an hour, on a regular 40-hour work week, an Ontario-based Loblaws employee will take home a grand total of $31,200 in before-tax income. After taxes and other deductions like EI and CPP (assuming the employee is permanent), the employee’s annual net salary will amount to just $25,877.
That is indeed, a far, far cry from Galen G. Weston’s personal compensation, which was estimated to be over $5 million in 2016 alone. In Mr. Weston’s world of course, $5 million is a mere drop in the bucket — the net worth of the Weston family overall, who control more than 200 food and clothing companies across Canada, the U.K. and Ireland (think Selfridges, Holt Renfrew) was at a healthy $10 billion as of 2016, according to Forbes Magazine.
Loblaws, to its credit, is one of Canada’s largest private sector employers, employing more than 192,000 full-time and part-time jobs in the country, according to details in its 2016 annual report. There is no denying that with a labour force that large, a minimum wage hike in Ontario and Alberta will pose a significant financial threat to the company’s bottom line.
But the company has been on a spectacular growth trajectory of late — this quarter it reported a profit of $358 million, $200 million more than a year ago. In 2016, Loblaws net earnings were $990 million; a year prior they were only $589 million. It’s worth adding that the grocery business is not an easy one. Margins are generally very thin, and profits don’t tend to ever run into billion-dollar territory.
Loblaws, according to many retail analysts, has done well because it has been ruthless about cutting costs and improving efficiencies — the sharp increase in self-checkout counters at Shoppers Drug Mart locations across Canada is an example of that.
For shareholders at least, Loblaws short-term game is one worth being part of. But in the long-run, Weston’s disdain of minimum wage hikes might be slightly misguided. The more money people earn, the higher their purchasing power.
Consumers, according to economist Armine Yalnizyan, are being squeezed by stagnant wages and rising housing costs. “That means less truly disposable income for actually buying goods and services,” she said in a debate on CBC recently.
It’s a concept known amongst economists as “wage-led growth”. In fact, Henry Ford famously attributed to this concept, declaring that in order to run a profitable, sustainable company, his employees needed to make enough that they too, could afford to own a vehicle.
“People living on low incomes have a higher propensity to consume locally than higher income earners. That means the increasing the share of wages going to lower income people could boost consumer demand, lower indebtedness, dampen income inequality and generate business investment in order to meet that demand and make a profit,” according to a 2016 paper on minimum wages by the Canadian Centre for Policy Alternatives.
For companies like Loblaws, boosting local consumer demand is paramount to its continued profitability. Sure, $190 million a year in additional costs is a financial drag, but think about how much more the company could make in the long run if a significant chunk of Canada earns a healthy living wage.