Wall Street Loves Wal-Mart

This blog has shown before why low wages and benefits are bad business. A Bloomberg Businessweek article by Stanley Holmes and Wendy Zellner shows that there are better alternatives to the Walmart model. The article explains that Costco Wholesale Corp. (COST) continues to beat Wall Street expectations because Wall Street seems to be drinking the kool aid that the “Wal-Martization of the U.S. economy” is something to be desired – even as it hollows out the middle class and drags down the national economy.

Wal- Mart is appreciated by Wall Street for its poverty-level wages and denial of health insurance benefits to more than half of its 1.2 million U.S. workers because Wall Street apparently believes thatshareholders are best served when employers do all they can to hold down costs, including the cost of labor.

Beating Wal-Mart At Its Own Game

BusinessWeek compared Costco and Sam’s Club (the Wal-Mart warehouse unit that competes directly with Costco) and found that by compensating employees generously to motivate and retain good workers, one-fifth of whom are unionized, Costco wins on many measures, including:

  • Lower turnover.
  • Higher productivity.
  • Lower labor costs as a percentage of sales. (Its 68,000 U.S. hourly workers sell more per square foot than Sam’s. Costco generated $34 billion in sales with one-third fewer employees than Sam’s, which generated $35 billion last year.)
  • Costco’s U.S. operating profit per hourly employee last year was $13,647 vs. $11,039 at Sam’s Club.
  • Over the past five years, Costco’s operating income grew at an average of 10.1% annually, compared to Sam’s 9.8%.

According to Bloomberg:

The cheap-labor model turns out to be costly in many ways. It can fuel poverty and related social ills and dump costs on other companies and taxpayers, who indirectly pick up the health-care tab for all the workers not insured by their parsimonious employers. What’s more, the low-wage approach cuts into consumer spending and, potentially, economic growth. “You can’t have every company adopt a Wal-Mart strategy. It isn’t sustainable,” says Rutgers University management professor Eileen Appelbaum, who in 2003 edited a vast study by 38 academics that found employers taking the high road in dozens of industries…Says Costco CEO James D. Sinegal: “Paying your employees well is not only the right thing to do but it makes for good business.”

A Win-Win Partnership of Management and Labor

Who says labor and management must have an adversarial relationship? When they work well together, everybody benefits. Costco is a case in point.

Sam’s hourly average wage for full-timers is $11.52, and the typical Wal-Mart average wage is $9.64. Costco pay its workers  $15.97 – which is 40% more than Costco pays.

Costco also pays thousands more each year for health and retirement, including more of its workers in its health care, 401(k), and profit-sharing plans. And labor is appreciative. Rome Aloise, chief Costco negotiator for the Teamsters, which represents 14,000 Costco workers says approvingly that “They take a very pro-employee attitude.”

It’s a win-win. Costco benefits through one of the most productive and loyal workforces in retailing:

Only 6% of employees leave after the first year, compared with 21% at Sam’s.

  • Wal-Mart says it costs $2,500 per worker just to test, interview, and train a new hire.
  • Costco’s better motivated employees sell $795 of sales per square foot, vs. only $516 at Sam’s and $411 at BJ’s Wholesale Club Inc.

The Bottom Line: Ethics Pays

Here’s why Costco’s productive workforce more than offsets the higher expense. According to Costco Chief’s Financial Officer Richard Galanti, “Paying higher wages translates into more efficiency:”

  • SG&A (selling, general, and administrative costs) total just 9.8% of revenue.
  • Wal-Mart’s os 17%.
  • Target’s is 24%.

If Mitt Romney’s presidential run demonstrated anything, it’s that “efficiency experts” just aren’t good businessmen. Not only was his record campaign spend was poorly managed, but  Romney’s business history at Bain Capital demonstrates that gutting companies for their assets isn’t a viable management strategy. One of the major drawbacks of the financialization of the economy is that running a business as a going concern increasingly takes a back seat to exploitation of the workers and community for the benefit of major shareholders.

Costco succeeded through old fashioned honest business management. Holmes and  Zellner sum it up well:

Costco is also savvier than Sam’s and BJ’s about catering to small shop owners and more affluent customers, who are more likely to buy in bulk and purchase higher-margin goods. Neither rival has been able to match Costco’s innovative packaging or merchandising mix, either. Costco was the first wholesale club to offer fresh meat, pharmacies, and photo labs.

If America really wants to get serious about addressing its fiscal problems, it must first address the socio economic causes: the financialization of the economy, the corporatization of government, and the so-called “free market” policies of the 1%. Wealth must be created, rather than just redistributed from wealthy patriarch to heir and through corporate welfare. Government needs to develop a plan to wean the defense, energy and banking industries off of the public dole and redirect its efforts at supporting the kinds of business practices that created America’s middle class.