Thursday, July 11, 2013

If Costco Charges Such Low Prices We Think It is Because They Keep Wages and Benefits Low

We Need to Think Again

The mantra of American business is that employees, particularly hourly employees are evil.  They are not part of the solution to obtaining higher profits, they are part of the problem.  And only the diligent and sometimes extralegal vision of management keeps hourly employees from forming unions and destroying the company, society, freedom and the American way of life.

Costco begs to differ.  They march to the beat of a different drummer.  Businessweek tells us how they do it.


Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World

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.

 “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.”

Well that must be a prescription for business disaster.

Costco Wholesale (COST), the second-largest retailer in the U.S. behind Walmart, is an anomaly in an age marked by turmoil and downsizing. Known for its $55-a-year membership fee and its massive, austere warehouses stocked floor to ceiling with indulgent portions of everything from tilapia to toilet paper, Costco has thrived over the last five years.

While competitors lost customers to the Internet and weathered a wave of investor pessimism, Costco’s sales have grown 39 percent and its stock price has doubled since 2009. The hot streak continued through last year’s retirement of widely admired co-founder and Chief Executive Officer Jim Sinegal. The share price is up 30 percent under the leadership of its new, plain-spoken CEO, Craig Jelinek.

So what is the lesson here?  Well yes you can make money the old fashioned way, squeezing employees, making sure part time workers don’t have enough hours to get health care and paying millions to CEO’s, even when they fail and are fired.  But the Costco way also works.

“This is the lesson Costco teaches,” says Doug Stephens, founder of the consulting firm Retail Prophet and author of the forthcomingThe Retail Revival. “You don’t have to be Nordstrom selling $1,200 suits in order to pay people a living wage. That is what Walmart has lost sight of. A lot of people working at Walmart go home and live below the poverty line. You expect that person to come in and develop a rapport with customers who may be spending more than that person is making in a week? You expect them to be civil and happy about that?”

And the next time business says that paying a living wage, or even raising the minimum wage is economic disaster, well there is good old Costco, a counter factual example.  What to do about them?  Well maybe ignore them and nobody will notice.

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