The High-Wage Model

CostCo. If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch:

FT.com / Business life - Pile high, sell cheap and pay well: By Jonathan Birchall: “If we have a floating inflatable ring for towing behind a boat, it will be the biggest there is . . . it will be 10ft across . . . and it will only cost $49.99,” Mr Galanti says, speaking with rapid enthusiasm in his modest office at Costco’s headquarters in the nearby suburb of Issaquah. But, in the world of US retail, it is not just Costco’s “stack ’em high, sell ’em cheap” approach to higher quality items such as organic spinach and balsamic vinegar that merits attention.

In a country where the retail industry has been convulsed over the past decade by the rise of Wal-Mart and rival discounters, Costco’s discount warehouse club is part of the revolution. But unlike Wal-Mart, whose low-cost labour model has provoked increasingly vocal criticism, Costco has managed to remain competitive while providing its workers with the highest wages and best healthcare plans available anywhere in the US retail industry.

In the anti-Wal-Mart camp, “Costco is seen as the White Knight to Wal-Mart’s Darth Vader,” says Nelson Lichtenstein, a University of California professor of labour history, who is editing a new book on Wal-Mart’s rise.

Costco was founded by Jim Sinegal, chief executive and president, and Jeff Brotman, company chairman, in 1983 – the year that Sam Walton, founder of Wal-Mart, opened Sam’s Club, a rival warehouse club. Both follow the same broad philosophy, developed for small business operators, rather than for individual shoppers: sell a limited number of items in bulk to reduce handling overheads, use mass orders to win attractive pricing from suppliers and sell membership subscriptions to boost returns and guarantee customer loyalty....

“Anything we can do to lower the expenses translates into being able to sell the merchandise for lower cost,” says Mr Galanti. “So that we are the extreme value proposition for quality goods.”... But Costco’s frugality does not extend to pay and working conditions. The average hourly wage for a full and part-time US employee is $17.41, according to the company. At Wal-Mart’s Sam’s Club, the sum for a similar employee is around $12 an hour. “It’s important to pay people a fair living wage,” says Mr Galanti, “and if you do, and it’s better than everybody else, you’re going to get better people – and they’re going to stick around longer, and we see that.”

Costco has a staff turnover rate of 17 per cent annually... compared with 70 per cent seen in the rest of the sector. Only six per cent of new staff leave within the first year, which again reduces costs. “First and foremost, it’s the right thing to do,” says Mr Galanti. “And long-term, we know it pays dividends.”...

70 percent annual turnover cannot be good--the incentives for the business to nickel-and-dime the workers is just too great when the overwhelming proportion of them aren't going to be around for long.

Comments

[Dirk]

Never been to a Costco. Aren't they one of those membership stores, where only certain people are allowed to shop? I hate places where you have to have a membership card to get in the door. I will gladly pay extra to avoid having to purchase a "membership" at a retailer.

[Matt]

"CostCo. If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch:"

Agree. If you know how to do it, then Brad DeLong 2008

[sd]

CostCo certainly does pay its employees more than Wal-Mart does. It also employees far, far fewer people per dollar of revenue served than Wal-Mart. CostCo can afford to pay high wages and still turn a profit (though its performance has of course lagged Wal-Mart's over time by a wide margin). But it can do this because it operates a business model that is not nearly as labor-intensive as traditional retail.

An economy where CostCo were the dominant retail format would be an economy with higher unemployment (because the retail sector itself would create fewer jobs), and significantly less consumer choice. You may enjoy shopping at CostCo. But if you tried to live for a year only on the groceries you can buy at a CostCo you'd go crazy. CostCo creates the illusion of massive abundance by offering a significant number of products that a typical Safeway or Kroger does not. Its a "treasure hunt" concept that makes people excited to shop there. But this masks the fact that a CostCo store carries tens of thousands fewer SKUs than a traditional grocer. The same dynamic applies in their non-food categories.

And as for the statement:

"If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch"

Like, maybe, the late 1990s labor market (tightest in decades), when Wal-Mart was growing profitably at double digits and (according to some analyses) single handled accounting for about 10% of the growth in US economy-wide productivity? Please.

Liberal Wal-Mart hatred has propogated the feeling that Wal-Mart simply must have emerged out of nowhere once George Bush was elected to quickly seize the dominant position in US retail. In fact, Wal-Mart was performing better under the Clinton administration than it has under the Bush administration - not that that has anything to do with politics. The trends underlying Wal-Mart's growth are deep and powerful, and indeed, hit European retail decades ago (Carrefour, anyone? Mercadona? Aldi?).

[sd]

hj:

I have no desire to put anyone in any place in particular. But I think the subject of Wal-Mart engenders a lot of sloppy thinking. That's a shame, because love them or hate them they are the biggest retailer in the US (including the biggest player in food retailing after entering that market VERY recently), the biggest retailer in Mexico, the biggest retailer in China, etc. Anyone who wants to understand the US economy must understand Wal-Mart and its peers very well. And its hard to understand Wal-Mart when you make them into the bogeyman at every turn.

[camille roy]

As someone who shops at Costco and I LOVE IT I must say these put downs are ignorant horse pucky.

Costco knows how to make warehouse shopping tasty, interesting, and fun. To be honest, it is the most fun place to shop, even here in San Francisco, because of the combo of high quality and low prices. I'm not a person who loves to shop, either. Costco provides quality at all levels and if you don't appreciate that - YOU have a problem.

For example, in San Francisco you can get sushi trays and artisan bread and locally roasted coffee for eye-crossing prices. They seem to be able to go to the local producers and buy for our particular area. Very smart.

And Mr WalMart who sez,

"But it can do this because it operates a business model that is not nearly as labor-intensive as traditional retail."

Are you telling me that Wal-mart is labor-intensive? In China, maybe. I don't notice much in the way of service out on the floor in this country.

Really the whole Costco model is just smart, face it. And anyone who *cares* about the American worker must favor the Costco model over the Walmart model, because one gives workers a living wage and benefits and one gives workers a nasty-ass time, and gets 70% turnover to show for it.

[nate]

Some notes based on glance at financials at Yahoo Finance:

* For the previous 3 fiscal years, revenue may be growing faster at Costco than at Wal Mart from 1st to 3rd previous fiscal year (companies have different fiscal year ends)

* margins are lower at Costco that at Wal Mart. This is due to gross margins. Costco makes up some ground on overhead. Overall, net income as % of revenue is around 1.8% at Costco, vs 3.5% at Wal Mart.

* Interest expense as a % of revenue at Costco is lower than Wal Mart. Wal Mart may be using leverage and tax shields more - dunno (i did not look at the balance sheets).

I shop at both stores. If you have enough volume ($s) in purchases at Costco, the membership can pay for itself (rebate).

SD has interesting analysis.

Who has a business model more complementary to the internet?

[jerry]

Fair Trade Brad, and stopping the subsidy of pollution, child labor, and the giving back of the labor laws are parents died to gain for us.

[Bob McBob]

I only shop at CostCo. They have all the food I want. Seriously.

[jerry]

I know what you mean. $1.50 for a polish and sauerkraut with a refillable coke. Wish they could get a concession stand at the stadium.

[Atanu Dey]

Camille said it all.

I have been shopping at Costco since 1984 (then there were two -- Price Club and Costco) and I cannot say how much I enjoy going to Costco. I would even drag my out of town visitors there. I say, if you cannot find it in Costco, you can probably do without it (with apologies to Garrison Keillor.)

[ash]

Walmart thrives on Chinese crap. Without Chinese crap, they go toes up, pretty much. Put it another way: the deficit subsidizes Walmart, effectively. (It's a long chain, but it's there.) China wins, Walmart wins, George Bush wins, equities traders win, everybody else eventually winds up in the tank. Up front or on the back end when those T-bills come due, or those 'global companies' become Chinese companies.

And the Chinese are not dumb enough to let gratitude or sentimentality get in the way of progress. (The Japanese and the Koreans are in a different boat. Militarily, we own them.)

The distinction here, is that I would very much prefer not to go to war with China and the best way I know to do that is not to trash your manufacturing base and otherwise mortgage your economy to a bunch of neo-fascist ex-(? Heh) communists. Such that you have leverage. That is all. Fix that and I'm for all the free trade you can stand. Ya know, we buy stuff, and then we sell them stuff and then they buy stuff...

70 percent annual turnover cannot be good--the incentives for the business to nickel-and-dime the workers is just too great when the overwhelming proportion of them aren't going to be around for long.

TRU (remember them?) was running 100% turnover subannually. I know of a popular vet clinic in a medium box pet store where the nurses on average turn over faster than that. (By 100% turnover I mean employees leaving in a year is larger than the number of employees total. Although some may stay for much longer than that.) It is interesting to me that companies that operate on this scheme (including the early 90's trick of firing people (they make something up) with an excess of benefits) tend to go into the tank. Yet around here, they ALL do that. Which also includes forcing off-clock hours and thus no-OT, lunch and break skipping and all that. In fact, I don't know of a retail company that turns over at a sub-100% rate. (I guess Costco makes one. Where's #2.) This is why customer service sucks, and there are lots of jobs, relatively, but wages do not grow.

So far as I know of, this started being the situation in the middle 80's and has gone downhill since.

That is why, additionally, those factory jobs are better than sweeping floors. Boredom is one thing, psychosis another.

ash
['Welcome to the echo boom!']

[fouro]

SD, two fundamentally different retail worldviews at play here, and let's not get started about distribution and supply chain ethics/methods and the ugly vendor boardrooms and balance sheets that it begets. By the way, WMT is not the comparitive for same store sales or sales per square foot--Sam's Club is. That, and operating profit per employee.

Finally, we shop at Costco, and far from subsisting on frozen burritos and 55 gallon drums of peanut butter, I'm cutting and freezing prime steaks from the rack and eating far too much other varied stuff for my own damn good. All cheaply. Anyway, blogged this a year ago...from Business Week:

The Costco Way: Higher wages mean higher profits. But try telling Wall Street

Costco Wholesale Corp. (COST ) handily beat Wall Street expectations on Mar. 3, posting a 25% profit gain in its most recent quarter on top of a 14% sales hike. The warehouse club even nudged up its profit forecast for the rest of 2004. So how did the market respond? By driving the Issaquah (Wash.) company's stock down by 4%. One problem for Wall Street is that Costco pays its workers much better than archrival Wal-Mart Stores Inc. (WMT ) does and analysts worry that Costco's operating expenses could get out of hand. "At Costco, it's better to be an employee or a customer than a shareholder," says Deutsche Bank (DB ) analyst Bill Dreher.

...Costco actually keeps its labor costs lower than Wal-Mart's as a percentage of sales, and its 68,000 hourly workers in the U.S. sell more per square foot. Put another way, the 102,000 Sam's employees in the U.S. generated some $35 billion in sales last year, while Costco did $34 billion with one-third fewer employees.

Bottom line: Costco pulled in $13,647 in U.S. operating profit per hourly employee last year, vs. $11,039 at Sam's. Over the past five years, Costco's operating income grew at an average of 10.1% annually, slightly besting Sam's 9.8%. Most of Wall Street doesn't see the broader picture, though, and only focuses on the up-front savings Costco would gain if it paid workers less....

Source--Businessweek: http://tinyurl.com/acg9t

[BC]

It does look like the high-wage strategy is working, and I dearly, dearly hope that it keeps doing so. But I wonder if Wall St's concerns (cited by fouro) have less to do with the impact of the high-wage strategy right now, and more to do with the limitations this strategy might place on Costco's ability to stay flexible and maintain profit growth going forward. How quickly can they cut or otherwise shift labor costs if there are major changes in technology, retail market structure, inflation, inventory costs, etc etc etc?

After all, locking in high wages and benefits guaranteed the airlines a loyal, skilled, motivated workforce - until deregulation happened and forced a quarter century of wildly fluctuating profits, labor strife and many trips to Chapter XI.

[MTC]

"CostCo. If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch."

And after Costco eats Walmart's lunch, I would like to have a pony.

[fouro]

Ponies: Aisle 4, past the lobster tank and custom birthday cakes.

BC:

"After all, locking in high wages and benefits guaranteed the airlines a loyal, skilled, motivated workforce - until deregulation happened and forced a quarter century of wildly fluctuating profits, labor strife and many trips to Chapter XI."

Hmm, all except one: LUV

Maybe we credit that to Kelleher's and King's insistence that "wh're gonna have fun" as they scribbled their idea on the back of a napkin in a Texas departure lounge. Somewhat the same promise that Sinegal and Brotman made way back when.

I'm winging from memory here, but what costco and southwest share is their revulsion at the artificiality and inert "professionalism" businesses insist on harumphing about. Too many companies, it seems, have an odd "grown-ups behave this way," 'Way X' let's call it. They then get mired in systems and language and imagery that dooms them to be "stodgy" and inarticulate--stymied--when faced with change. We all admit to not wanting to be our boring-old parents, then we go and duplicate their blinkered businesses mistakes.

Methinks that Costco has a handle on their ops and where things are going, simply because they have the skills and most important, they know what moves product. It ain't chasing prices into the basement but balancing what they know of shopping males and females, novelty, quality and the mystical value proposition. They have finesse and ears on both sides of their brain. The other guys eat steroids and sit on a massive REIT.

[kharris]

"70 percent annual turnover cannot be good--the incentives for the business to nickel-and-dime the workers is just too great when the overwhelming proportion of them aren't going to be around for long."

My first thought was sort of chicken-and-egg. Yes, Wal-Mart has little incentive to pay well with that rate of turn-over, but workers have little incentive to stay at that rate of pay. Vicious cycle. My second thought was that this is the labor model Wal-Mart has chosen, and given the success of the firm, it isn't going to change. Vicious cycle is wrong, because this is no longer an experiment in retail. Much of what Wal-Mart does has worked, and is now very intentional. Costco has made a different choice. I'm glad to see Costco's more labor-friendly choices paying off, too.

[No Preference]

Great post, Camille.

"I don't notice much in the way of service out on the floor in this country."

One of the fascinating (to me) revelations in Barbara Ehrenreich's "Nickeled and Dimed" is that Walmart (and other retail) staff are not primarily on the floor to help customers, but to put back the merchandise that we leave sitting around.

I highly recommend the book.

[Dubblblind]

Yes kharris, it is thought number 2, not a vicious cycle but a very conscious decision by Walmart to abuse it's employees as a business model for the sake of maximizing wealth for the Walton family. And 'sd' suggests that liberals are *making* Walmart "into the bogeyman at every turn", nothing like a good laugh in the morning to start the day.

[save_the_rustbelt]

My biggest beef with Wal-Mart is that the company seems ot have bought an exemption from labor laws - at least during the Bush administration.

Wally Wal-Mart will pay anything to lawyers to keep out unions, rather than pay the help.

I have also dealt with the workers comp department (on behalf of health providers), and Wally clearly has a policy of tossing injured workers overboard.

Establish a fair and level playing field and see what happens.

[burritoboy]

SD,

You know all these facts, yet somehow fail to mention that, in fact, the stock market has already spoken: Costco stock has out-performed Wal-Mart's by over 40% over the past 5 years.

Nate,

Yes, Wal-Mart is much more levered - Costco has minimal long-term debt and very low levels of short-term debt. Wal-Mart has a magintude more debt.

[Jonathan W. King]

sd writes:

> But this masks the fact that a CostCo store carries tens of thousands
> fewer SKUs than a traditional grocer. The same dynamic applies in their
> non-food categories.

And *this*, I think is a way more important trend than most people may realize.

So it's interesting that you use the term "traditional grocer" to describe the kind of retailer (i.e., the supermarket) that CostCo is competing with. A traditional grocer of the old mold had nothing lke thousands of SKUs to offer for sale. An urban mom-n-pop grocery in a place like New York City probably only had hundreds of different items. They didn't have space for tens of thousands, and most shoppers didn't have time or interest in rooting around for tens of thousands of items either.

The original innovation here was the supermarket, which sought to replace both small general grocery stores and the old produce/butcher/fish monger/whatever specialty food stores you used to have to negotiate. This made them bigger, and being bigger meant they could offer more competing products, which could lower costs. They also had larger volumes. But at some point, supermarkets began to become a victim of the SKU explosion. Their costs went up as the selection of (now mostly pre-prepared foods) got greater.

Wal*Mart is obviously a mega-SKU kind of store. Very interestingly, Sam's Club is not, and the same company runs both kinds of outlets. Wal*Mart did teach us that you needed a serious investment in IT that you actually used to really operate a 100K SKU kind of store. You're basically forced to be robotic.

What's news and is interesting is not the fact that CostCo or Sam's Club don't have tens of thousands of SKUs. The real news (to me) is that places ranging from Aldi's to Trader Joe's (same company, yes, I know) have found that the small SKU/smallish store format is also wildly popular. Now, I don't know what the average TJ's clerk gets paid, but I do know they are about 1000 times more informed about the products they sell than the average Wal*Mart employee. And there is a market for that.

The endpoint for any mega-SKU retailer almost has to be some combination of internet retailing, or a place like Wal*Mart, which is what it is. Now, there is one maybe very interesting exception: people really do like bookstores with lots of books. But that's probably because, unlike at WalMart or your grocery store, they can park themselves in front of the 100 titles they're interested in at the moment, and then park themselves in a nice chair to pick the final candidate. Amazon is trying really hard to make online bookshopping like that, but there may be a limit to what they can do with their current format.

[Samuel Knight]

I grew up partly in Arkansas and remember when Walmart employees actually were good. I also remember the Buy America strategy and the basic decent stuff they had.

They're awful now and that reflects the cheapo strategy of Walmart overall. What that ignores of course is the basic "best value" concept. What is the best value to the customer - cheap, bad stuff, or good, not too expersive stuff? What do customers want a few well-informed employees, or many ignorant employees? Obviously the latter in both cases.

On the SKUs (Stock Keeping Units, if memory serves, basically every item in every different type of package). SKUs are a hidden enemy - they're tough to keep track of and tough to keep neat. And generally people don't value the huge number. And they defeat specialization - the abililty to focus on what you are really good at. Specialty retailers like Costco, Trade Joe's and others can simply hit their niche better. They will NOT replace the old style grocery store - but they will add a huge value to their customers.

And yes that Costco treats its people better is a good thing. We shouldn't patronize places that treat people shabbily. All the better that it makes sense too.

BTW - Cosco is mis-spelled in the title.

[Karlsfini]

jm, there's no reason to believe they find a better job, just a different one. A growing underclass of Americans now moves from one unbearable McJob to another.

[fouro]

Do you have too many blogs/news sites to keep up with now? Welcome to the world of the retail consumer. Choice paralysis. An intersting phenomenon that comes just as WMT was really getting its IT train rolling. As I said earlier, just not as clearly: Walmart's (And Home Depot's etc.) fascination with tech and process only wedded them further to an already old idea: Mass and volume.

I agree Jonathan, people will and are looking to replace quantity with quality. Personal agency, whether human or net-algorithm based is the deal. It's a demographic split tho--the bottom 3rd of incomes don't have the dimes or the inclination to worry about nuanced product knowledge. They will buffer then maintain WMT's fall to flatness as they follow Sears and A&P the way of behemoths.

[pebird]

FWIW:

“stack ’em high, sell ’em cheap”

the correct retail lingo is:

“stack ’em high, watch 'em fly”

The fact that they are stacked high makes them cheap by definition.

/Grumble Grumble

[scottynx]

[jm, there's no reason to believe they find a better job, just a different one. A growing underclass of Americans now moves from one unbearable McJob to another.]

It's a "growing underclass of Americans" because we are rapidly augmenting our underclass with massive unskilled immigration. What kind of jobs are unskilled english illiterates are going to do besides Mcjobs? If Brad Delong is right that Costco would beat Walmart in a tight labor market, then massive unskilled immigration is partially to blame for Walmarts success.

[pebird]

"70 percent annual turnover cannot be good"

Cannot be good for whom?

Wal-Mart's store business model is designed around high-turnover - 70% is no surprise to them, they expect it and have processes in place to manage it. BTW, with incentives WalMart store managers easily make 6 figures - one of those incentives is to keep labor costs below budget - even with the high turnover.

[Emma Anne]

SD, I think it is perfectly possible for Democrats/progressives to become quite educated about Walmart and as a result hate it even more. Here's some info from the latest Working Families newsletter:

(quote)

Wal-Mart has racked up huge fines for child labor law violations. The rich company reportedly makes children younger than 18 work through their meal breaks, work very late and even work during school hours. Several states have found Wal-Mart workers younger than 18 operating dangerous equipment, such as chain saws, and working in dangerous areas like trash compactors. (The New York Times, 1/13/04; The Associated Press, 2/18/05; The Hartford Courant, 6/18/05)

Wal-Mart pays poverty-level wages and fails to provide affordable health insurance to more than 600,000 employees. That means Wal-Mart workers and their families have a hard time paying the bills and getting the health care they need. (Wal-Mart annual reports; BusinessWeek, 10/2/03)

Wal-Mart has a shameful record of paying women less than men—discriminating against moms. Wal-Mart paid full-time male employees $5,000 more than women on average in 2001. Some 1.6 million women are eligible to join a class-action lawsuit charging Wal-Mart with discrimination. (Richard Drogin, Ph.D., 2/03; Los Angeles Times, 12/30/04)

Wal-Mart sells products made by young people in other countries who work in horrible conditions over long hours for little money doing dangerous jobs. In Africa, workers who make clothing for Wal-Mart are forced to put in too many hours, are yelled at by their bosses, are not paid enough to take care of their families and can’t even take breaks to use the bathroom. Wal-Mart refused to investigate stories that shoes and jeans from Asia were being made by workers in forced labor camps. (Cleveland Plain Dealer, 11/14/04; China Labor Watch, the National Labor Committee and Clean Clothes Campaign reports)

Wal-Mart can afford to do better. Wal-Mart—America's largest private employer—raked in $10 billion in profits last year. CEO Lee Scott landed nearly $23 million in total compensation last year alone. Wal-Mart has no excuse for its behavior.

(end quote)

[Redleg]

Sd,
You sure schooled the Professor with your keen analysis. Too bad you had to do it by knocking down a straw man.

First, Delong is not advocating that the retail sector should adopt Costco's business model- he just wants to illustrate how a company like Costco can invest in its workforce and receive a fine return on investment. Employment policies and practices are just a part of the overall business model.

Second, Delong didn't say that the Walmart became the big monster it is under the Bush administration. I haven't heard any liberal, Democrat, or progressive suggest that- although some have said that Walmart fits nicely into what the GOP model of modern major retailer.

Third, Delong doesn't need me, a lowly assistant professor of management, defending him.

[tavella]

sd: "You may enjoy shopping at CostCo. But if you tried to live for a year only on the groceries you can buy at a CostCo you'd go crazy."

I could live on Costco groceries quite well for a year. Have you been in the fresh foods section of one lately? A vast variety of food, including prepared. I agree that they aren't in the same category as a grocery store or a Walmart grocery, but that's because of:

A) Size. The megasize packages everything comes in don't work so well for singles, and

B) Variety within category. Part of the SKU explosion has been levering brand names into a zillion different spinoffs. If you want breathmints, you'll find them; but if you want specifically Altoids Licorice breathmints, you'd be better off going somewhere else.

Where Costco really lacks is in specialty or gourmet foods, but I wouldn't go to Walmart for those either.

[Jason]

The above post has really hit the matter on the head. Wal-Mart (up until this point) has been all about providing inexpensive goods and services to primarily poor, rural areas. That is not in and of itself bad. The real problem is that the underlying economic systems have basically created a very vicious cycle here. Basically, people in rural regions become dependant on WM. The smaller, local retail business and services cannot compete on price, and shutter. Local, regional, and national manufacturing/production is either shuttered or squeezed mercilessly, so source as much as possible to meet WM demands (hint: there are NO other outlets). Both of these increase the number of marginaly employed people. WM then swoops in and provides the devil's bargain: work here and you'll at least have job. In many rural areas, a job at WM is *the best* that can be gotten. Used to be you could go and be a mechanic or something if stuff got really bad. Not now. The only diversity in rural employment is in areas that WM doesn't deal in: Farm equip/chemcials, construction, gov't, and utilities. Rather than being vibrant, the economy stagnates into a sort of unpleasant malaise.

This is not theory, this is actually seeing it happen in real time.

[sd]

Redleg:

1) Mr DeLong explicitly set up a comparison between CostCo and Wal-Mart, implying that the former's success with a high-wage labor model indicated that Wal-Mart could and should do the same. The difference in business model between CostCo and Wal-Mart is very much germane to the discussion. CostCo's "warehouse club" retail format requires significantly fewer employee hours to operate than a traditional big box retail format. It takes a guy with an electric pallet mover 15 minutes to go to the storeroom, pick up a pallet with 100 cases of widget X, and take it to the sales floor, while it takes a stockboy 4 times that long to stock as much product throughflow onto store shelves. If CostCo operated a traditional retail format with their current labor structure, they would not be profitable and they would not have the cash to fuel growth. And the CostCo format will never be a mainstream format. The economics only work out in situations where a massive amount of product can flow through a single "box" in a typical week/month/year. Warehouse clubs are a compelling, growing, and attractive business, but they are a niche business, and always will be.

2) Mr. DeLong's statement: "If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch" very much implies that Wal-Mart's success is due to prevailing economic conditions, convenienetly ignoring the fact that the company thrived in the late 1990s, during the tightest labor market in a lifetime.

[Jason]

I would also like to point out that regardless of your feelings on WM, there are many, many jobs that are much worse. I'm certainly *not* defending WM labor practices, but ANY WM retail job is better than almost any job in the low end food service sector. One reason why I don't eat at fast food establishments or buffets (other than obvious quality and nutrition issues). Still, a company worth multiple hundreds of billions of dollars should treat employees better across the board.

[just pete]

Jake, when WalMart lifts its head from the welfare trough and adheres to the rule of law, I will cease criticism.

[nate]

As a sidebar, it is interesting to note how much wealth Wal Mart generated (for the founder and shareholders and other stakeholders) on such thin margins (net income 3-4% of revenue). Biotech or retail?

[Auros]

Does anybody have a link to the series of articles (I think in NYT) doing a similar comparison between two steel mills on opposites sides of the same city, one of which used a business model of abusing its workers, the other of high wages and benefits, and ended up having similar profit margins?

[GuidoMerkens]

It is worthwhile to note that Costco has fewer warehouses than Sam's and is generally located in urban/suburban places. Average wages tend to be higher in such places and there are more shoppers and more money to be spent, so WalMart/Sam's and Costco can peacefully coexist.

Where I live in upstate NY (Binghamton) there is a Sam's but no Costco. Same for Syracuse, Rochester, Buffalo, etc., etc. The nearest Costco is 2 hours away in Westchester county. In my neck of the woods, $12/hour isn't terrible pay; in fact, it probably goes as far as $17/hour in Westchester, or Long Island or the 5 borourghs, where all the Costcos are located. So I imagine at least some of that $5/hour differential has something to do with urban vs. rural wages in general. I'm not saying the Sam's doesn't have warehouses in urban/suburban areas, they do. But it does seem that Costco has, up to this point, avoided the rural areas.

I would like to see a Costco in our neighborhood, but only because more choices are better, not because I hate WalMart/Sam's.

[nate]

http://finance.yahoo.com/q/bc?t=my&s=UALAQ.OB&l=on&z=m&q=l&c=AMR

[nate]

http://finance.yahoo.com/q/bc?t=my&s=COST&l=on&z=m&q=l&c=wmt&c=%5EGSPC

Wal Mart, Costco, and S&P (per yahoo)

[Dave L]

SD: "CostCo can afford to pay high wages and still turn a profit (though its performance has of course lagged Wal-Mart's over time by a wide margin). But it can do this because it operates a business model that is not nearly as labor-intensive as traditional retail. An economy where CostCo were the dominant retail format would be an economy with higher unemployment (because the retail sector itself would create fewer jobs)..."

Hmmm - this sounds like an argument for low productivity as a jobs-creation strategy.

I assume that SD was just straining to make an additional point, but on the chance that he wasn't, let's remember that 1) the labor made redundant by CostCo can be utilized elsewhere, raising total output; and 2) the higher wages earned by CostCo employees will re-emerge as higher demand.

[sd]

Dave L:

I'm not trying to say anything about the optimal tradeoff between productivity and employment. I'm sure CostCo's employees are "better" by most measures than Wal-Mart employees. More skilled, better educated, more motivated, etc. And I'm sure that CostCo gets better employees because they pay them well and treat them well. But its simply not the case the the productivity gap between CostCo and Wal-Mart workers is entirely a function of the differences in human resources policies between the two companies. Rather, the lion's share of the productivity gap is the result of the differeing operating models between the two businesses.

It is certainly the case that a $50M per year CostCo store operates with fewer man-hours of labor than a $50M per year Wal-Mart store. But if you replaced the Wal-Mart store's man-hours with the CostCo store's man-hours you could not keep the Wal-Mart store operating. It doesn't matter how much more skilled, or better motivated, or more stable the CostCo workforce is. Traditional retail formats require more man-hours of labor than do warehouse clubs. Its inherent in the different business models. It takes more time and effort to stock shelves with individual boxes of product than to put a pallet on the floor and let customers pick boxes themselves. It takes more time and effort to stock 250 varieities of boxed pasta and rice than it does to stock Kraft Mac & Cheese and Uncle Bens in 8-pack cartons. It takes more time and effort to have cashiers ringing up sales in $20 increments than it does to have cashiers ringing up sales in $200 increments. It takes more time and effort to make merchandising decisions for 100 stores in a metro area than it does to make those same decisions for 20 stores in a metro area. It takes more time and effort to break down pallet loads of product from manufacturers at a centralized DC so that you can ship 1/8 of a pallet load to each of 8 stores than it does to have the manufacturer just deliver one pallet load to each store.

These CostCo vs. Wal-Mart comparisons, so beloved of liberals who see Satan himself behind every action taken by Bentonville's retail empire, are fantasyland exercises. Yes, CostCo employees are treated better than Wal-Mart employees. Goldman Sachs employees are treated better than Wal-Mart employees. Does that "prove" that Wal-Mart could pay its workers $100K per year and still turn a profit? Hell no. Because Wal-Mart and Goldman Sachs aren't in the same fricking business. And neither are CostCo and Wal-Mart, despite the fact that sell some of the same stuff to some of the same people.

Traditional retail formats are a different business from warehouse clubs. And despite the healthy growth of warehouse clubs in recent years, they aren't going to be taking the place of traditional retailers anytime soon. Customers LIKE have the choice of 30 varieties of beer rather than 15. They LIKE having the choice of 20 varieties of pasta sauce rather than 7. They LIKE being able to buy groceries in smaller sizes because they like eating different things from week to week. They LIKE shopping stores with bright lights, gleaming aisles and small, intimate shelves. They LIKE buying most of their groceries 5 minutes from their house and most general merchandise 10 minutes from their house rather than both 20 minutes from their house.

If you want to compare Wal-Mart to Target to show how evil Wal-Mart is, fine. At least Wal-Mart and Target operate in roughly the same business. But you don't see those comparisons so often because Target employees, while better paid and better treated than Wal-Mart employees, are still paid realtively low wages and turn over at a relatively high rate.

P.S. Guidomerkens above makes an excellent point. If you adjusted Wal-Mart and CostCo wages by the average cost of living for the average store in each company's portfolio, much of the difference would evaporate.

[anne]

Interesting discussion. The answer does not seem to be Wal-Mart becoming CostCo but more ample state minimum wage and medical coverage laws which Wal-Mart routinely and most often successfully opposes.

[anne]

SD

What might be ways you would suggest to improve wages and benefits at Wal-Mart and comparable retailers?

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4795&u=133|6|...

Black-throated Green Warbler
New York City--Central Park--Wildflower Meadow.

[Dubblblind]

"I am tired of people writing about "fair" wages. If Wal-Mart wants to pay its workers $12 an hour and have 70% turnover, that is its own business."---Jake---

Well, not exactly Jake, it turns out to be our business too.

http://www.pbs.org/wgbh/pages/frontline/shows/walmart/transform/protest.html

"Wal-Mart's healthcare premiums are...high for the average associate's salary [...] Critics say Wal-Mart's healthcare benefits are often so poor and the coverage is so expensive that many employees chose to go without it and instead get their coverage through state programs like Medicaid and or hospital charity.

"A November 2004 New York Times article cites a study in Georgia that found 10,000 children of Wal-Mart employees were in the state's healthcare program at a cost to taxpayers of $10 million a year. The same article describes a hospital in North Carolina that found that 31 percent of its 1,900 patients were Wal-Mart employees on Medicaid, and an additional 16 percent were Wal-Mart employees with no insurance at all. And in California, a study released in August 2004 by researchers at the University of California at Berkeley determined that the healthcare expenses of uninsured Wal-Mart employees were costing the already economically-strapped state $32 million a year in taxpayer funds."

Contrast that with this from Brad's post:

Costco has managed to remain competitive while providing its workers with the highest wages and best healthcare plans available anywhere in the US retail industry.

[nate]

If it is lots of SKUs and variety that you want, and if you are in the market for footwear, consider checking out the following site and the Google ads (scroll to bottom too):

http://njk42.blogspot.com/2005/07/sandals-and-flip-flops.html

Note this is my blog. hopefully this is okay-

[anne]

Absent unions, the only counter balance to the problems pointed to at Wal-Mart appears to be state regulation. But, as the largest American, Wal-Mart for all its contribution to productivity growth and low consumer prices is a labor force problem.

[Sebastian Holsclaw]

"Critics say Wal-Mart's healthcare benefits are often so poor and the coverage is so expensive that many employees chose to go without it and instead get their coverage through state programs like Medicaid and or hospital charity."

And if these unskilled people were unemployed they would be getting welfare AND be on Medicaid.

[nate]

Professor DeLong and others may want to check out the following in more detail:

http://store.audiotech.com/The_Human_Equation_Building_P_P388.cfm

"Stanford Professor Jeffrey Pfeffer examined highly successful public firms for the 20 years 1972-1992 and found that the five top performers (Plenum Publishing, Circuit City, Tyson Foods, Wal-Mart, and Southwest Airlines) had none of these characteristics. What, then, enabled these firms to achieve an average stock market appreciation of 18,400%? - Each of these top companies puts its people first."

[nate]

the .cfm got chopped off the URL in the previous post...

anyways, it was a reference to

The Human Equation: Building Profits by Putting People First (Transcript)

Author: Jeffrey Pfeffer

[fouro]

Thanks for the recco, nate. I'm familiar with Circuit City and Southwest, but Tyson and Walmart lumped in gave me whiplash. I'll have to check it out. Book like that might perhaps fall on some deaf ears around these parts, tho. It seems many are more comfortable slinging numbers or Biz Roundtable ideology alone and not plugging a sincere curiosity about a "people" variable into the mix. Too "squishy" I guess. Too bad.

[boing!!!]

The 92 date indicates the period when Sam Walton was still alive and the propaganda was sort of true. The heirs have been riding on it for years. The Tysons sold out to ConAgra.
The fact is that capitalism is amoral and capitalists are actively immoral-unless restrained by regulation of the religious or legal variety. This is the story of political economy.
WalMart has working against it a number of factors-employee theft is rampant, employees who actually know how to run the store are few and worn out, the merchandise is often shoddy to the extent it is broken in the store or dirty, and there is a class backlash against people who shop there. It is a place to buy disposable things for a camping trip or a kid's dorm room for some, but for others it is the stepping stone to class shift. You can have the surround sound dvd player and decoder, maybe even with a brand name on it. It will last under a year and you will buy another one. The clothes will dissolve in the washer. The food and other commodities are often the same but sometimes they throw in some hidden changes to lower costs, like increasing the trans fats and so on, because the costs stay low and most people can't afford to bitch or don't see a problem.

[fouro]

Venus and Mars, Boing!. Costco is run by a Democrat, Bentonville is elephant country. Business modelling is ideology.

Yeah, I bought a GE deep fryer from WMT (look for the teenie tiny "Manufactured for Wal-Mart Stores" in the bottom right rear corner of the box). It crapped out 6 months later after light use. Drag it back to the store, lather rinse repeat. 4 months. Spoke to a client about it and got his treatise on "separate but equal" lines, different tolerances and guages of metal used, cost savings on switches and so forth.

Totally anecdotal for our purposes here, but hey, I trust him because his shit doesn't break and he coherently explains why he thinks WMT is Darth Vader to American manufacturing's Alderaan. Seems the commies at VF, Coleman, Vlassic, Newell and others feel the same way.

[Northern Observer]

Where I work we supply both bemoths.

I think that WalMart will have trouble growing their comparative advantage from here on in for three reasons:

1- Chinese sourcing is becoming more and more available to mid size retailers.
2- State governments are getting fed up with WalMart abuse of labor law and Medicare programs.
3- Logistics technology is improving for all retailers

From this perspective Costco has more choices available to adjust to a changing market tastes, especially because their customer is solidly middle class. WalMart will increasingly face more and more mini Wal Marts in all their markets. Watch closely for the success or failure of WalMart to reach "higher value" customers in the next 3 years. It will be very telling.

[nate]

http://njk42.blogspot.com/2005/08/west-end.html

what do you think of frederick jackson turner?

[leek]

"The fact is that capitalism is amoral and capitalists are actively immoral-unless restrained by regulation of the religious or legal variety."

Capitalism is confused with corporatism by both the left and right. The left assumes the right's pro-capitalism means they're pro-corporatism (which some are), and the right assumes the left's attack on capitalism means they're pinkos who believe everyone is entitled to being idle couch potatos living on welfare.

Good explanation:

http://www.strike-the-root.com/51/weebies/weebies1.html