If Costco's worker generosity is so great, why doesn't Wal-Mart imitate it?

Commentary about business and finance.
June 27 2008 7:29 AM

Wage Against the Machine

If Costco's worker generosity is so great, why doesn't Wal-Mart imitate it?

Costco. Click image to expand
Costco: America's retail good guy

Nearly everyone who's looked at Wal-Mart's practices as an employer—its union busting, sex discrimination, low wages, and minimal benefits—has concluded that it's America's retail bad guy. By contrast, many who've examined the practices of Wal-Mart's competitor Costco—including New York Times labor reporter Steven Greenhouse in his recent book The Big Squeeze: Tough Times for the American Worker—conclude that it's the good guy. Costco CEO and founder Jim Sinegal repeatedly insists to Greenhouse that treating employees well is "good business."

That makes a pleasing sound bite, and assume for a moment that Sinegal's assertion is true. Why, then, wouldn't Wal-Mart do everything it could to make itself more like Costco? Now assume that Sinegal's assertion is false. Why, then, does Costco treat employees better if that's against the company's financial interests?

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It's not hard to make a case that Costco pays employees more. The most relevant comparison is between Costco and Sam's Club, Wal-Mart's membership warehouse, since both business models rely on membership fees for a large percentage of revenues. A Sam's Club employee starts at $10 and makes $12.50 after four and a half years. A new Costco employee, at $11 an hour, doesn't start out much better, but after four and a half years she makes $19.50 an hour. In addition to this, she receives something called an "extra check"—a bonus of more than $2,000 every six months. A cashier at Costco, after five years, makes about $40,000 a year. Health benefits are among the best in the industry, with workers paying only about 12 percent of their premiums out-of-pocket while Wal-Mart workers pay more than 40 percent.

Some proponents of corporate generosity argue that better-paid workers are more productive. That may be the case here, since Costco's revenues per employee are about five times as high as Wal-Mart's. (No separate financials are available for Sam's Club.) Then again, it's also the case that Costco sells more expensive stuff—high-end French wine, triple-cream brie, and Cartier watches, all of which presumably have high margins—along with the cheap toilet tissue. Take a look at the two retailers' summer offerings: While Wal-Mart sells a $199 swing set, at Costco we find a "summer fortress play system" for $1,499.99. A set of patio furniture at Wal-Mart was $199 in early summer; a patio heater at Costco is the same price. Costco's Web site promotes a $5,000 hot tub with a stereo. On Wal-Mart's site last week, the most prominent item was a $48 bike—after all, its impoverished customers can't afford gas these days.

Another theoretical benefit is that Costco employees, being better paid, are less likely to leave the company. Again, some data back that up: Greenhouse points to Costco's low turnover rate, which is 20 percent and, among employees who stay at least a year, 6 percent. Wal-Mart's is about 50 percent. But is this a business advantage for Costco? While Greenhouse points to the costs of training and hiring new employees, a widely leaked 2005 memo from Wal-Mart offers a different perspective. In it, Wal-Mart's senior vice president of benefits argued that the company's turnover rate was too low. After all, she explains, long-term employees are more expensive and not necessarily any more productive. Such reasoning—though sinister—may actually help explain why Wal-Mart's profit margins are twice as high as Costco's (3.36 percent compared with 1.75 percent).

In an interview, Costco CFO Richard Galanti told me that by offering higher pay, Costco can hire "better-quality employees." To Galanti, workers are a retailer's "ambassadors" to the public. Costco may be able to attract people with more experience, education, or a better "attitude" (e.g., a more obliging smile or the realization that it's better not to chew gum or file your nails on the job). All of that's probably true, though tough to quantify—and tougher still to measure the effects of such worker quality on Costco's business.

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