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WEEKEND EDITION: Minimum-wage Hike Faces Hurdles But Stands To Lift Big Retailers
Dow Jones

WASHINGTON (Dow Jones) -- It's all about who gets the bigger paychecks.

A federally mandated raise for the nation's lowest-paid workers could mean bigger business for some of the best-known retailers.

Democrats, set to take control of both chambers of Congress, have vowed to make a hike in the minimum wage a top priority come January. And analysts say a boost, while likely to be fought by business groups and some retail-industry lobbyists, would benefit some value-oriented stores.

That's because many minimum-wage earners are struggling to make ends meet, so any extra dollars in their pockets are likely to be spent rather than saved.

"And where are they going to spend it? Wal-Mart (WMT) , Dollar General (DG) , Family Dollar (FDO) and Dollar Tree (DLTR) ," said Howard Davidowitz, chairman of retail consulting and investment-banking firm Davidowitz & Associates.

After all, it was Lee Scott, CEO of Wal-Mart, who made headlines last year when he declared that the world's largest retailer -- itself a frequent target of labor and anti-poverty critics -- favored a raise in the minimum wage.

Scott's stance drew criticism from minimum-wage opponents, some of whom argued that Wal-Mart was merely turning to the government in an effort to crank up wage pressures on competitors.

But analysts say Wal-Mart's logic is sound.

Last week, analysts at Banc of America upgraded Dollar General Corp. to a buy from neutral, noting that higher minimum wages have historically benefited the retailer, which has also seen a more buoyant sales outlook as a result of a stronger overall employment picture and declining pressure related to high energy costs.

That said, some low-end retailers and other establishments could feel some heat from wage pressures, said Richard Hastings, retail analyst at Bernard Sands LLC, the credit consulting firm.

"It's wherever you've got lower margin, fast turnover. That's where things tend to be sensitive to things like this," Hastings said. That would include convenience stores, gas stations and supermarkets.

Restaurants

Restaurants and hotels also are likely to feel some impact.

"To the extent that you have these state-mandated or potentially federally mandated increases, your costs are going to go up and you are either going to have to be able to pass these costs along to customers or your profitability is going to go down," said John Owens, an analyst who covers the restaurant industry for Morningstar.

The Economic Policy Institute, a think tank that favors a higher minimum wage, estimates that only 14.9 million people would be affected by an increase in the minimum, a figure that includes workers making slightly above the current floor that would be likely to get a pay bump.

The federal minimum wage has stood at $5.15 since 1997. Sen. Edward Kennedy, D-Mass., who is in line to chair a key Senate labor committee, has vowed to press ahead early with legislation that would boost the federal minimum to $7.25 over three years. Incoming House Speaker Nancy Pelosi, D-Calif., says a minimum- wage hike will be among legislation House

Democrats will pass within the first 100 hours of the next Congress.

Bush position

A deal with the White House seems within reach.

President Bush, speaking to reporters the day after voters ended 12 years of Republican rule, said that a minimum wage hike could be an area where the administration and Democrats could potentially find "common ground," provided future legislation included some safeguards for small businesses.

Recent efforts to boost the federal minimum wage have failed. Last summer, Senate Democrats sank a Republican-backed measure that tied a minimum-wage increase to legislation to permanently cut the estate tax, a move vehemently opposed by Democrats. Kennedy has vowed to move a "standalone" minimum-wage measure in the next Congress.

Analysts say the relevance of the federal minimum wage has been eroded. More than 20 states and dozens of local governments already mandate minimum wages above that level. And on Election Day this year, voters in Ohio, Missouri, Montana, Nevada, Arizona and Colorado handily passed referendums to hike the minimum wage, trumping opposition from business groups.

Opponents argue that higher minimum wages force employers to cut some jobs or to at least throttle back job creation. Backers of an increase counter that any negative impact on the labor market is more than offset by higher wage levels.

Business groups and lobbyists will undoubtedly continue to argue their case against a wage hike. At the same time, they're also looking for ways to blunt the impact of an increase if it occurs.

"We are hopeful that if there is [an increase] that it does include some small-business offsets that are targeted to-minimum wage employers, so that some of those cost repercussions can be mitigated," said Brendan Flanagan, vice president of government relations for the National Restaurant Association.

Led by the restaurant association, a posse of trade groups, dubbed the Coalition for Job Opportunities, aims to wring some concessions out of upcoming legislation. While internal discussions are still under way, business lobbyists are likely to look for sweeteners such as accelerated depreciation for restaurant buildings to help offset any negative wage impact, Flanagan said.

In the restaurant industry, fast-food chains appear capable of passing along some price increases, said Morningstar's Owens. The picture may not be as rosy for casual-dining establishments such as Applebee's International Inc. (APPB) ; Chilli's, a chain owned by Brinker International Inc. (EAT) ; and OSI Restaurant Partners Inc.'s Outback Steakhouse (OSI) , he said.

"It's probably been one of the more difficult times for casual dining restaurants in maybe 15 years. So when you're losing customer traffic, increasing prices doesn't sound like a great idea," Owens said.

Nevertheless, a higher minimum-wage scenario isn't casting much of a shadow over the restaurant industry's long-term prospects.

Labor rates rise every year, and minimum wage hikes could push them up a bit more next year than in previous years, Owens acknowledged. "But over time," he added, "I think these types of things even out."


  (END) Dow Jones Newswires
  11-24-06 1451ET
  Copyright (c) 2006 Dow Jones & Company, Inc.
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