Costco's Dilemma: Is Treating Employees Well Unacceptable for a Publicly-Traded Corporation?
By Ann Zimmerman
First published by the Wall St. Journal, March 26, 2004
Editor's note: This article illustrates the
challenges that face any corporate executives who attempt to resist
market pressures to cut employee pay and, indirectly, why "corporate
responsibility" initiatives have severely limited potential.
Please see our article "Inherent
Rules of Corporate Behavior" if you'd like
to explore this topic further.
When it comes to workers, companies can be accused of not paying
enough -- or paying too much.
Wal-Mart Stores Inc.'s parsimonious approach to employee compensation has made
the world's largest retailer a frequent target of labor unions and even Democratic
presidential candidate John Kerry, who has accused the Bentonville, Ark., chain
of failing to offer its employees affordable health-care coverage.
In contrast, rival Costco Wholesale Corp. often is held up as a retailer that
does it right, paying well and offering generous benefits.
But Costco's kind-hearted philosophy toward its 100,000 cashiers, shelf-stockers
and other workers is drawing criticism from Wall Street. Some analysts and investors
contend that the Issaquah, Wash., warehouse-club operator actually is too good
to employees, with Costco shareholders suffering as a result.
"From the perspective of investors, Costco's benefits are overly generous," says
Bill Dreher, retailing analyst with Deutsche Bank Securities Inc. "Public
companies need to care for shareholders first. Costco runs its business
like it is a private company."
Costco appears to pay a penalty for its largesse to workers. The company's shares
trade at about 20 times projected per-share earnings for 2004, compared with
about 24 for Wal-Mart. Mr. Dreher says the unusually high wages and benefits
contribute to investor concerns that profit margins at Costco aren't as high
as they should be.
Costco, which opened its first store in 1983 and now has 432 locations,
disputes the contention that it takes care of workers at the expense of
investors. "The
last thing I want people to believe is that I don't care about the shareholder," says
Jim Sinegal, Costco's president and chief executive since 1993, who owns about
3.2 million Costco shares valued at $118 million. "But I happen to
believe that in order
to reward the shareholder in the long term, you have to please your customers
and workers."
Costco vs. Wal-Mart
Comparing some workplace statistics, as
reported by the companies.
Employees covered by company health insurance
Costco 82%
Wal-Mart 48%
Insurance-enrollment waiting periods (for part-time workers)
Costco 6 months
Wal-Mart 2 years
Portion of health-care premium paid by company
Costco 92%
Wal-Mart 66%
Annual worker turnover rate
Costco 24%
Wal-Mart 50%
Worker pay, benefits and job quality have been hot topics in the
retail industry. While employees in many fields are worried about generally
stagnant job growth and spiraling health-care costs, already-meager
retail wages also are threatened by retail-pricing pressure, partly
fueled by Wal-Mart's growing dominance in toys, electronics, groceries
and other categories. Grocery workers in California recently waged
a brutal four-month
strike to protest health-care cuts that large supermarket
chains were imposing to stay competitive with Wal-Mart.
Hourly retail pay grew only 1% in the 12 months ended last month, according
to the Bureau of Labor Statistics, compared with a 1.7% gain for private-sector
jobs overall.
Wal-Mart last year added 99,000 jobs in the U.S., making it the country's biggest
job creator, and nearly all those positions pay by the hour. And since Costco
and Wal-Mart's larger Sam's Club warehouse chain increasingly are competing
head-to-head on everything from turkeys to tires, the companies have to pay
close attention to each other.
Editor's note: Numerous studies show nearly the same number of jobs are eliminated as are created by Wal-Mart. To call the company a "job creator" requires counting only one side of the ledger.
Wal-Mart spokeswoman Mona Williams says the company's "entire package of wages,
benefits and career opportunities is at least as good as that offered by Costco," including
bonuses, company-paid life insurance and a discounted Wal-Mart stock-purchase
program. Sam's Club has a "cost advantage" over Costco, she adds, because it
can "leverage efficiencies" from Wal-Mart in areas such as merchandise sourcing
and logistics, keeping basic membership fees a third cheaper than Costco's.
Costco has won a reputation for having the best benefits in retail, a sector
where labor costs account for about 80% of a typical company's total expenses.
[Editor's note: we're unsure of the source for this claim,
but we question its accuracy]
Costco pays starting employees at least $10 an hour, and with regular raises
a full-time hourly worker can make $40,000 annually within 3½ years.
Cashiers are paid $10.50 to $17.50 an hour.
Wal-Mart doesn't disclose its wage rates, since they vary by location. According
to a recent study funded by Wal-Mart, cashiers at its Supercenters in Las Vegas
were paid $7.65 to $11.45 an hour. Supercenters are Wal-Mart's discount grocery
and general-merchandise stores.
Costco also pays 92% of its employees' health-insurance premiums, much
higher than the 80% average at large U.S. companies. Wal-Mart pays two-thirds
of health-benefit costs for its workers. Costco's health plan offers
a broader range of care than Wal-Mart's does, and part-time Costco workers
qualify for coverage in six months, compared with two years for Wal-Mart
part-timers.
"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," says Richard Galanti, Costco's chief financial officer.
Costco has several advantages over Wal-Mart that help it extend such unusually
generous pay and benefits. Costco has a more-upscale reputation than Sam's
Club, helping it attract shoppers with higher incomes. The average Costco
store rings up $115 million in annual sales, almost double the Sam's Club
average. And Costco, which charges $45 to $100 for yearly memberships, doesn't
spend any money on advertising.
Costco says its higher pay boosts loyalty: Its employee turnover rate is
24% a year. Wal-Mart's overall employee turnover rate is 50%, about in line
with the retail-industry average. Wal-Mart doesn't break out turnover rates
at Sam's Club. High turnover creates added expense for retailers because
new workers have to be trained and are not as efficient.
Some critics still aren't convinced that lower turnover is worth what it
costs Costco in higher wages and benefits. "Their benefits are amazing, but shareholders
get frustrated from a stock perspective," says Emme Kozloff, a retail analyst
at Sanford C. Bernstein LLC.
Surging health-care costs have forced Costco to make more aggressive moves
to control expenses. Moreover, Costco last year raised employees' contribution
to about 8% of their health-care costs, up from 4.5%. It was the company's
first rise in employee health premiums in eight years. Mr. Sinegal, the Costco
CEO, said the company held off from boosting premiums for as long it could,
and didn't give in until after it had lowered its earnings forecast twice
last year.
Costco also is looking to employees for ideas that could improve efficiency.
One suggestion that Costco implemented at stores was to install pneumatic
tubes at check-out areas to speed the movement of cash to a store's back
office.
Mr. Galanti says company officials want to boost Costco's pretax income closer
to 4% of sales, compared with 3% now and 5% at Wal-Mart, without cutting
pay. In its fiscal second quarter ended Feb. 15, Costco's net income rose
25% to $226.8 million, or 48 cents a share. Revenue rose 14% to $11.55 billion.
Some longtime Costco fans say the company should stick to its generous wages
and benefits. "Happy employees make for happy customers, which in the long run
is ultimately reflected in the share price," says John Bowen, an investment
manager in Coronado, Calif., who has held Costco shares for eight years.
© 2004 Dow Jones & Company, Inc.
The New York Times also published an informative report on this topic.
If you liked this article, we also suggest: Beyond Wal-Mart
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