JEFFERIES: Amazon just raised its minimum wage to $15 - here are the costs and benefits
- Amazon announced Tuesday that it will increase the minimum wage for its US and UK employees to $15 starting next month.
- The wage hike will cost the e-commerce giant $1.5 billion per year and dilute earnings per share by 8% in 2019, according to Jefferies.
- The incremental cost is affordable and beneficial for Amazon, said Jefferies analyst Brent Thill.
- Watch Amazon trade in real time here.
Amazon is raising its minimum wage to $15 per hour following pressure from Sen. Bernie Sanders, and Jefferies analysts did the calculation to see the costs and benefits of the pay increase.
The e-commerce giant announced Tuesday that it will raise its minimum hourly wage in the US to more than double the federal minimum of $7.25 per hour. Starting in November, the change will benefit over 250,000 Amazon employees, as well as over 100,000 seasonal employees who will be hired at Amazon sites in the coming holiday season, the company said.
Amazon also raised its hourly minimum wage for its employees in UK, to £10.50 ($13.60) for the London area and £9.50 ($12.36) for the rest of the UK, affecting 37,000 current and seasonal employees, according to a separate statement.
Amazon's decision follows sustained pressure from Democratic Sen. Bernie Sanders, who attacked Amazon for the amount it pays its workers and introduced a bill in September called the Stop Bad Employers by Zeroing Out Subsidies Act, or Stop Bezos Act, which would put duties on mega-cap companies whose low-wage employees rely on government assistance.
To figure out how much the scheduled wage increase will cost Amazon, a group of Jefferies analysts led by Brent Thill conducted a scenario analysis based on pay-rate information collected from employment websites such as PayScale, Indeed, and Glassdoor. Companies usually don't disclose the exact salary distribution of their common positions.
The cost
By Thill's calculation, the affected 387,000 employees are paid $9 to $17 hourly in US and £6.65-£17.35 in the UK for Amazon positions such as order picker, fulfillment associate, and warehouse worker. The average hourly pay rate is around $12 in the US and £8.5 in the UK.
In an "ultra-conservative" scenario where employees are currently paid at the lowest end of the salary range, Amazon will pay an extra $3.7 billion of incremental fulfillment costs in 2019 due to the wage hike, Thill said. And in a "realistic" scenario where the majority - or 80% - of impacted regular employees earn $13 an hour, the remainder earn $12 and seasonal employees earn $10, Amazon will see $1.5 billion in extra costs on its 2019 income statement, reducing earnings per share by $2.33, or 8%, Thrill added.
The benefit
The incremental cost is affordable for Amazon because the e-commerce giant "has several high-growth, high-margin businesses that allow it to pull investments from other areas to accommodate a wage hike," Thill said.
The wage hike could also bring many benefits to the company, which should offset a good portion of the incremental cost," Thill added.
He noted that operationally, securing proper staffing levels "right before the critical holiday season could ensure Amazon does not have to incur additional fulfillment costs."
Strategically, Amazon's decision could have a ripple effect through retail, pressuring competitors to also raise their wages.
Also, Amazon could placate political pressure about its labor practices and simultaneously turn unwanted political attention to other major US retailers, which tend to pay less, Thill said.
Thill has a "buy" rating and a $2,350 price target on Amazon, 19% above its current price.
Amazon shares are up 68% this year.
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