notes on Cascio, Wayne F. 2006. “Decency Means more than ‘Always Low Prices': A Comparison of Costco to Wal-Mart’s Sam’s Club.” Academy of Management Perspectives 20 (3). 26-37
Wal-Mart’s focus: lowest possible prices, always. Company’s core values seem to drive its exploitative and even illegal behavior.
How do they get their low prices? “Low wages for its employees, unrelenting pressure on suppliers, products cheap, in quality as well as price, offshoring jobs.”
Jim Sinegal, Costco CEO and cofounder, started the retailer in 1983 with a single store outside of Seattle, WA.
Costco business model:
Sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships, aim for upscale shoppers, don’t advertise.
A typical Costco store stocks 4000 types of items — as in, 4 different brands of toothpaste. A Wal-Mart, in contrast, stocks more than 100,000 types of items, with maybe 60 types and sizes of toothpaste. Narrowing the number of options increases the sales volumes of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers.
Among warehouse retailers, Costco is #1 in market share. Its code of ethics puts taking care of customers and employees over rewarding shareholders.
Costco pays the highest wages in its industry, and labor costs account for about 70% of its operating budget — it’s spending 40% more than Wal-Mart on employees.
You’ve got to want to get the very best people that you can, and you want to be able to keep them and provide some job security for them. That’s not just altruism, it’s good business.
Employee turnover at Costco is unusually low. An employee with more than 2 years of service cannot be fired without the approval of a senior company official. The company requires itself to promote internally for 86% of openings in top positions (although this incidence is in reality as high as 98%)
One of the things Wall Street chided us on is that we’re too good to our employees…We don’t think that’s possible.
Wall Street analysts on Costco:
Whatever goes to employees comes out of the pockets of shareholders.
Costco runs its business like it’s a private company.
Costco still has a very high share prices — because so many people love the company. “It’s a cult stock.”
Its “magic lies in its ability to lift productivity, to compete on employee smarts, management savvy, and constant motivation, rather than to skimp on pay and benefits.”
It’s absolutely not true that all those companies that are not being nice to their employees are simply stupid. Nor is it just about good guys and bad guys. There are systematic reasons people adopt the practices they do — companies that compete on price don’t necessarily need the same level of skills in their workers as do their higher-end counterparts.
Why do people shop at Costco? Their consumer base is different from Wal-Mart’s — Sam’s Club shoppers tend to be looking for price, whereas Costco’s are looking for quality.
Costco sets a strict cap on its profit margin per item — usually about 14% (compare to a typical department store markup of 30%)
Costco offers high-quality merchandise at low prices, and it does not hesitate to lean on its suppliers — all its suppliers — to ensure that it is getting as good a deal as any other retailer. What it sacrifices in margin it makes up in volume.
85% of Costco workers have health insurance, compared to about half at Wal-Mart and Target.
Another benefit of good employee relations — less shrinkage. Shrinkage is “a combination of employee theft, shoplifting, vendor fraud, administrative error.” Not having to deal with employee theft, plus low levels of turnover (aka less new employee training) means lower operating costs all around.
Wal-Mart employees are basically prevented from organizing, while Costco negotiates with unions.
While shareholders may do just as well with either strategy over the long run, it is important to notes that the cheap-labor model is costly in many ways. It can lead to poverty and related social problems, and transfer costs to other companies and taxpayers, who indirectly pay the healthcare costs of all the workers not covered by their frugal employers.