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Wal-Mart’s D.C. wage battle: A shortsighted skirmish

FORTUNE — Even the hardest-won business victories can prove bittersweet. Wal-Mart may very well learn that lesson in the coming weeks in Washington D.C.

The retail behemoth has engaged in a game of chicken with D.C.’s city council over a living wage bill it passed on July 10 requiring large retailers operating in the district to pay its workers a “living wage” minimum of $12.50 an hour (minimum wage in D.C. is $8.25 an hour). As it happens, Wal-Mart had laid out plans to open six stories there, creating an estimated 1,800 much-needed jobs in the area (the unemployment rate in D.C. is at 8.3% as of May 2013).

In response, Wal-Mart (WMT) struck back with force, publishing an op-ed in
The Washington Post
stating that it would put the brakes on three of its planned DC stores and reevaluate whether it should go forward with three locations already under construction. The retailer is a seasoned warrior when it comes to wage battles, and it was able to beat back similar living wage efforts in Chicago back in 2006. And there are plenty of signs that taking the offensive will pay off once again, as D.C. Mayor Vincent Gray presently weighs whether or not to veto the bill.

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“The D.C. council is on the defensive. They are having to defend their vote,” says Michael Robinson, executive vice president at Levick, a strategy and communications firm based in D.C., arguing that the promise of jobs — even low wage ones — and cheap consumer goods will prove too attractive to D.C. residents and politicians to care about the wage issue. “I think the D.C. council does this at its own peril.”

But it’s worth taking a second look at the logic behind Wal-Mart’s argument against the living wage bill in D.C., as this battle will most certainly be part of a longer war between the retail giant and cities across the U.S. in the years to come. Indeed, Wal-Mart has singled out America’s urban core as a prime market for expansion, and the company is in need of such a silver lining. The Bentonville, Ark.-based retail giant has suffered from same-store sales declines in the U.S. over the past few years (for the first quarter of 2013, the decline was at 1.4%).

“You’re not playing fair”

Wal-Mart is claiming that it is being unfairly singled out among other retailers in D.C. “It creates an unlevel playing field, especially when two of our largest grocery competitors — Safeway (SWY) and Giant — are exempt from the law,” says Steven Restivo, a spokesman for Wal-Mart.

True, companies like Safeway and Giant have been exempt from the bill, but that’s because those two employers work with unions that periodically renegotiate labor agreements on behalf of workers. In fact, the union representing both grocery chains in D.C. reached such an agreement with the companies last spring. Average wages for cashiers at these stores are $12, according to The Washington Post(Granted, average wages for all full-timers at Wal-Mart in the U.S. are $12.78, according to the company’s website). Wal-Mart is not a union shop.

“We’ll have no choice but to raise prices”

Wal-Mart claims that its slim profit margins (3.6% for fiscal year 2012) bind its ability from simply eating the costs of a boost in wages. The retailer would be forced to increase prices, weakening what is arguably its strongest competitive advantage and harming the lower income consumers who benefit from Wal-Mart’s low prices, the thinking goes.

But a 2011 study from UC Berkeley’s Center for Labor Research and Education throws some cold water on this thinking. The study asserts that if Wal-Mart were to increase its corporate minimum wage to $12 an hour for its U.S. workers and opted to pass 100% of the additional wage costs onto its customers, that would only amount to an additional $0.46 per shopping visit for the average customer ($12.49 more a year, assuming 27 shopping trips per year, at a total annual spend of $1,187). As for the workers? They’d earn an estimated $1,670 to $6,500 in annual income (before taxes) than they would otherwise, according to the study.

It’s also good to keep in mind that U.S. taxpayers pay for those low, low Wal-Mart prices by propping up federal support programs (see under: food stamps, Medicaid, etc.) for those low income Americans who struggle to make ends meet. As the federal government pays increased attention to its budget shortfalls, living wage efforts will grow stronger.

Falling down the slippery slope

So, if the estimated costs of boosting wages would translate into a seemingly meager rise in prices, why would a massive organization like Wal-Mart put up such a fierce fight?

“If they allow themselves to be hijacked in Washington, who is to say that won’t happen in Philly? Or L.A.? Or Oakland?” Robinson says. “There’s a reason Israelis don’t negotiate with terrorists, because negotiating with terrorists leads to more terrorism.”

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The wage battle between Wal-Mart and D.C. has garnered an international audience. Wal-Mart knows this very well. The stakes are high and the outcome will set a precedent for the retailer’s future negotiations with cities across the country. The question is whether Wal-Mart wants to earn a reputation for throwing public tantrums and threatening to pull out of cities when it doesn’t get its way, especially given the company’s interest in expanding into urban areas.

In the end, though, the city will probably strike an agreement with the retail behemoth, and all parties will lose a little. “I suspect that they will somehow cut a deal. There’s too much to gain and too much to lose,” says Levick’s Robinson.

Wal-Mart’s hardball will likely let it save face this time around, but now is the time for the company to take a long, hard look at its long-term wage game plan.