Wednesday, December 18, 2013

Costco vs. Walmart

An article appeared in Forbes a few months ago by Rick Unger: Walmart Pays Workers Poorly And Sinks While Costco Pays Workers Well And Sails-Proof That You Get What You Pay For. To someone who loves to shop at Costco and refuses to enter a Walmart, this is a must-read.

Unger points out that Costco is thriving while Walmart has been suffering over the past few years. He suggests that Costco may be outperforming Walmart because it pays its employees a much, much higher wage than is available at Walmart, and better-paid employees are more efficient than poor, depressed employees.

"Costco’s most recent quarterly earnings report reveals a fairly healthy eight percent rate of growth in year-on-year sales—including a five percent rise in same store sales. What’s more, with membership fees rising from $459 million in the same quarter last year to $528 million this year, it’s pretty clear that a significant number of customers are moving over to the retailer to do their discount shopping."

"Meanwhile, Costco’s primary competitor, Walmart, saw an anemic 1.2 percent rise in sales, while other competitors such as J.C. Penny and Target experienced even greater disasters in their sales results."

"In an identical economy, how do we explain Costco’s growth vis-à-vis the failures over at Walmart?"

"Here’s a crazy thought—might it have something to do with the fact that Costco pays nearly all of its employees a decent living (well in excess of the minimum wage) while Wal-Mart continues to pay its workers as if their employees don’t actually need to eat more than once a week, live in an enclosed space and, on occasion, take their kids to see a doctor?"

Perhaps happy workers create a better environment for shoppers than unhappy workers.

"Walmart service now pretty much sucks—and customers don’t like it."

"Without enough employees to get the basic work of a retail operation done—and with those on site being paid a wage so low that it is difficult to expect much in the way of pride or motivation—Wal-Mart merchandise remains stacked on pallets in the warehouse rather than making it to the floor where customers can find the products they want. At the same time, check-out lines are painfully long and annoying as the overall shopping experience continues to deteriorate."

Brad Stone provided a profile of Costco CEO Craig Jelinek in Bloomberg Businessweek: Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World. Stone quotes Jelinek on Costco’s philosophy with respect to employees:

"I just think people need to make a living wage with health benefits," says Jelinek. "It also puts more money back into the economy and creates a healthier country. It’s really that simple."

"In February, Jelinek set Costco’s convictions in ink, writing a public letter at the behest of [Ralph] Nader, urging Congress to increase the federal minimum wage for the first time since 2009. ‘We know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty’…."

Stone provides this background on wages and benefits.

"Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, Walmart said its average wage for full-time employees in the U.S. is $12.67 an hour, according to a letter it sent in April to activist Ralph Nader. Eighty-eight percent of Costco employees have company-sponsored health insurance; Walmart says that "more than half" of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employees well in the belief that a happier work environment will result in a more profitable company."

When the economy stumbled, other retailers cut back on hours and jobs. Costco responded by giving its workers a raise.

"As the economic downturn worsened in the fall of 2009, Costco, like every other retailer, started seeing declines in same-store sales. Macy’s, Best Buy, Home Depot, and Office Depot, were resorting to layoffs and wage cuts, but Sinegal [former CEO] approved a $1.50-an-hour wage increase for hourly employees, spread out over three years."
Stone provides a profile of one Costco employee to illustrate how the company’s policies affect its workers.

"Joe Carcello has a great job. The 59-year-old has an annual salary of $52,700, gets five weeks of vacation a year, and is looking forward to retiring on the sizable nest egg in his 401(k), which his employer augments with matching funds. After 26 years at his company, he’s not worried about layoffs. In 2009, as the recession deepened, his bosses handed out raises. "I’m just grateful to come here to work every day," he says.

Nelson Lichtenstein provides insight into the workforce Walmart strives for and what working conditions are like in his book The Retail Revolution: How Wal-Mart Created a Brave New World of Business.

"Wal-Mart itself admitted, or rather boasted, that only 7 percent of the company’s hourly associates try to support a family with children on a single Wal-Mart income....To staff its stores, the company purposely seeks school-age youth, retirees, people who want a second job, and those willing or forced to work part-time.."

A very small fraction of workers make it into a management track. For the others, it is to Walmart’s advantage for them to go away as soon as possible. There is no advantage to experience in Walmart jobs. They are constructed in such a way that any healthy individual can perform the tasks. The reason they focus on the types of people described above is because they want them to work for a while and then leave. There will always be someone else they can hire at entry level wages with no benefits.
Walmart’s treatment of its employees has straddled a fine line between mean spiritedness and criminality. Any number of law suits have demonstrated that Walmart encourages its managers to cheat employees by modifying time cards or by instructing them to punch out and then continue working. This is referred to as working "off-the-clock." If one is foolish enough to complain she can easily be rewarded with shortened hours or enough variable shifts to induce her to quit.

"Although both K-Mart and Target proscribe overtime pay and squeeze their managers and workers to keep labor costs in line, neither has been the subject of a class-action ‘off-the-clock’ suit. Wal-Mart, on the other hand, was defending itself against seventy-five such suits as of December 2008 when the company announced a settlement, perhaps costing as much as $640 million, in sixty-three of those wage and hour lawsuits covering hundreds of thousands of workers in some forty-two states."

Walmart does not have to treat its employees this way. It does what it does because that is the way it believes workers should be treated. A study of Walmart’s wage structure by the Center for Labor Research and Education at the University of California at Berkeley concluded that Walmart could impose a $12 an hour minimum wage for its employees and cover the increased wages with a 1.1% increase in prices. Would mighty Walmart come tumbling down if prices went up 1.1%? Would anyone even notice if a 98 cent object suddenly cost 99 cents?

Economists like to argue that lower prices are always beneficial. Walmart arrives at low prices by creating a workforce that requires taxpayer support in the form of Medicaid, food stamps, Earned Income Tax Credits, and free lunches for school children in order to survive. That is a strange way to run an economy. It is a strange way to allow anyone to run a public company. Costco has demonstrated that such draconian employment practices are not necessary, and are probably counterproductive.

As the economy slowly improves, Costco is out performing it while Walmart is underperforming.

Perhaps there is some justice in the world—and some hope for the future.

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