The Costco Challenge: An Alternative to Wal-Martization?
by Moira Herbst
Critics believe that Wal-Mart should play the role General Motors
played after World War II… [and] establish the post-world-war middle
class that the country is so proud of. The facts are that retailing
doesn’t perform that role in the economy. Retailing doesn’t perform
that role in any country.
—Wal-Mart CEO Lee Scott, April 2005
To workers and union leaders, it is a familiar refrain. These days, the
story goes, consumers demand low prices, meaning goods must be produced
and sold cheaply — and retail wages must be kept as low as possible.
Companies like Wal-Mart insist they’re feeling the squeeze and must pay
workers poverty wages — even while netting $10.5 billion in annual
profits and awarding millions to top executives.
But there’s another company that is breaking the Wal-Mart mold: Costco
Wholesale Corp., now the fifth-largest retailer in the U.S. While
Wal-Mart pays an average of $9.68 an hour, the average hourly wage of
employees of the Issaquah, Wash.-based warehouse club operator is $16.
After three years a typical full-time Costco worker makes about
$42,000, and the company foots 92% of its workers’ health insurance tab.
How does Costco pull it off? How can a discount retail chain pay
middle-class wages and still bring in over $880 million in net
revenues? And, a cynic may ask, with Wal-Mart wages becoming the norm,
why does it bother?
A number of factors explain Costco’s success at building a retail chain
both profitable and fair to its workers. But the basic formula is one
the labor movement has been advocating for decades: a loyal,
well-compensated workforce means a more efficient and productive one.
The Union Difference
Though only about 18% of Costco’s total workforce is unionized, union
representation creates a ripple effect and helps determine labor
standards in all stores. The Teamsters represent about 15,000 workers
at 56 Costco stores in California, New York, New Jersey, Maryland and
Virginia. Workers are covered by West coast and East coast contracts,
negotiated in February and April of last year.
“The agreements lock in wage and benefits packages that are the highest
in the grocery and [discount] retail industries,” said Rome Aloise,
chief IBT negotiator for Costco and Secretary-Treasurer of Local 853 in
San Leandro, Calif.
Costco passes on similar compensation packages to its non-union
workers; the contracts act as templates for other stores’ employee
“The union contracts raise the bar and set the standard for all
employees,” explained Aloise. “Still, while the company extends wage
and pay raises to non-union employees, only union members enjoy
benefits like seniority-based promotions, a grievance procedure and
minimum hours for part-time workers,” he added.
The Payoff of Better Pay
Strong union representation isn’t the only reason Costco jobs are so
well compensated; the company itself has an unusually forward-looking
Costco CEO Jim Senegal has said: “We pay much better than Wal-Mart. That’s not altruism. It’s good business.”
Chief Financial Officer Richard Galanti explained: “From day one, we’ve
run the company with the philosophy that if we pay better than average,
provide a salary people can live on, have a positive environment and
good benefits, we’ll be able to hire better people, they’ll stay longer
and be more efficient.”
A 2004 Business Week study
ran the numbers to test Costco’s business model against that of
Wal-Mart. The study confirmed that Costco’s well-compensated employees
are more productive.
The study shows that Costco’s employees sell more: $795 of sales per
square foot, versus only $516 at Sam’s Club, a division of Wal-Mart
(which, like Costco, operates as a members-only warehouse club).
Consequently Costco pulls in more revenue per employee; U.S. operating
profit per hourly employee was $13,647 at Costco versus $11,039 at
The study also revealed that Costco’s labor costs are actually lower
than Wal-Mart’s as a percentage of sales. Its labor and overhead costs
(classed as SG&A, or selling, general and administrative expenses)
are 9.8% of revenues, compared to Wal-Mart’s 17%.
By compensating its workers well, Costco also enjoys rates of turnover
far below industry norms. Costco’s rate of turnover is one-third the
industry average of 65% as estimated by the National Retail Foundation.
Wal-Mart reports a turnover rate of about 50%.
With such rates of employee retention, Costco’s savings are
significant. “It costs $2,500 to $3,000 per worker to recruit,
interview, test and train a new hire, even in retail,” said Eileen
Appelbaum, Professor at Rutgers University’s School of Management and
Labor Relations. “With Wal-Mart’s turnover rate that comes to an extra
$1.5 to $2 million in costs each year.”
Other analysts of the retail industry agree that happier,
well-compensated workers help generate bigger profits. George Whalin,
president of Retail Management Consultants in San Marcos, Calif.,
disagrees with many of Wal-Mart’s critics, but said: “There’s no doubt
Wal-Mart and many other retailers could do a better job taking care of
their employees. The best retailers do take care of their employees —
Nordstrom’s, Costco, The Container store — with fair pay, good benefits
and managers who care about people. You have fewer employee issues,
less turnover and more productivity. It lessens costs to the company.”
Still, Wall Street analysts intent on cutting up-front labor costs tend
to frown upon Costco’s model. “Costco’s corporate philosophy is to put
its customers first, then its employees, then its vendors and finally
its shareholders. Shareholders get the short end of stick,” said
Deutsche Bank analyst Bill Dreher.
But Costco’s stock has quadrupled in the past ten years, and has in the
past year inched closer to Wal-Mart’s per-share-price. In fiscal year
2004, Costco recorded record sales and earnings. While Wal-Mart
continues to profit and expand, its stock has lost value — in recent
months it is 16% off its 52-week high — as sales have been more
sluggish as gas prices cause customers to cut back on driving to and
from the store. The negative publicity around the company has also
caused some damage.
Of course, other factors besides low turnover and employee productivity
are responsible for Costco’s efficiency. The company has a wealthier
customer base than Wal-Mart’s; these customers buy higher-margin goods,
purchase in bulk and have steadier spending habits. Costco also saves
millions because it does not advertise.
More Than Hot Air
Besides the efficiency of its workforce, another reason Costco can
afford to pay more is that it cuts the fat from executive paychecks.
The overall corporate philosophy is that workers deserve a fair share
of the profits they help generate — not just a pat on the back or a new
job title like “associate.”
For example, while CEOs at other major corporations average 531 times
the pay of their lowest-paid employees, Sinegal takes only 10 times the
pay of his typical employee. His annual salary is $350,000, compared to
about $5.3 million awarded to Wal-Mart’s Lee Scott.
After California Costco workers ratified their Teamster contract last
March, CEO Jim Sinegal said Costco workers are “entitled to buy homes
and live in reasonably nice neighborhoods and send their children to
That the company’s stated ideals match up with workers’ paychecks helps explain employee loyalty at Costco.
Originally from El Salvador, 28-year-old Cesar Martinez has worked at a
Redwood City, Calif. Costco for 10 years, serving as a Teamster shop
steward for seven years. His pay is now up to $19.42 an hour, which he
estimates brings him $43,000 per year.
“There’s a feeling here that the company takes care of its employees
and wants to share the profits. We feel compensated fairly,” Martinez
“I’ve stuck with it so long because I like the job. And the salary is
solid and we have a pension that gives me security into the future.
That’s important to me,” he added.
By contrast, some Wal-Mart employees experience the supposed care for
“associates” as empty rhetoric. Forty-two-year-old Rosetta Brown, a
Sam’s Club employee in Chicago, Ill., for example, stands back each
morning when managers and associates gather for the Sam’s Club cheer.
“I refuse to do it,” she said. “I don’t believe the company lives up to what they’re cheering for,” she said.
Rosetta, mother to five children ranging in age from three to 25, does
not feel well compensated at $11.34 per hour after five years. She is
also suing Wal-Mart, parent company to Sam’s Club, for costs associated
with a herniated disc she suffered when she said she was locked in
while working the night shift.
Twenty-seven-year-old Jason Mrkwa, who works as a frozen foods stocker
in Independence, Kansas, also stands back when it’s cheer time at his
store. But he insists he doesn’t hate Wal-Mart: “I’m not another
disgruntled employee. I like my job. I just feel cheated with the pay I
get.” He started at $7 per hour five years ago, and now makes just
$8.53 per hour.
Julie Molina, 38, has worked at Costco’s South San Francisco store for
19 years. “People stick around — most people in my store have been
there ten years more. No one in retail makes as much as we do. Plus
it’s a good working environment.”
Molina attributes the positive working environment in large part to the
Teamsters’ presence. “It works really well now. When problems arise
management comes to the union for advice. But without the union I’m not
sure what would take place. Would they treat us like Wal-Mart treats
its workers? You hear horror stories,” she said.
Of course Costco is not paradise — “On a local level, some managers
don’t play fair — they might harass workers, fire them unreasonably or
pattern bonuses unfairly. That’s where union representation is the real
advantage,” explained Rome Aloise.
Into the future, the question will be which model of employee
compensation predominates in retail — the high road of Costco or the
low road of Wal-Mart.
“When companies like Wal-Mart are setting the standard, we have to ask:
Do we want to live in a country where the largest employer pays below
poverty-level wages, whose workers cannot afford health care?” says
Paul Blank, chief spokesperson of Wake Up Wal-Mart,
the United Food and Commercial Workers’ new campaign to change the
company’s practices. “Or do we want Americans to enjoy a decent income
and a sense of security in return for their work?”
Costco v. Wal-Mart: How They Stack Up
Wal-Mart: 1.6 million associates
Costco: 113,000 employees
Wal-Mart: 1.2 million
U.S. Union Members
Net Profits (2004)
Wal-Mart: $10.5 billion
Costco: $882 million
CEO Salary + Bonus (2004)
Wal-Mart: $5.3 million
Health Plan Costs
Wal-Mart: Associates pay 34% of premiums + deductible
Costco: Comprehensive; employees pay 5-8% of premiums
Employees Covered By Company Health Insurance
Employee Turnover (estimate)
Sources: Wal-Mart, Costco, Business Week, Forbes.com
© 2005 Labor Research Association
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