Business
July 21, 2005 6:10 PM   Subscribe

Costco pays its workers 42 percent more on average than its closest rival, Wal-Mart's Sam's Club. Even though this is Newsfilter, I was amazed to find that 'Wall-Street" may pressure businesses about their labor practices, and found Costco's approach encouraging these days.
posted by semmi (37 comments total)
 
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posted by jaronson at 6:17 PM on July 21, 2005


"Wall-Street"?
posted by graventy at 6:29 PM on July 21, 2005


Well, the principle of "Wall-Street" is increasing shareholder value, and paying your employees more means less profits, at least in the short term. Does the market pressure businesses to do this or that? I would say it is the behavior of shareholders, which the market merely reflects.

Of course, employee satisfaction, retention, and employees who actually feel good about the business they work for are all worth something too... Unfortunately, these are effects that are harder to quantify directly and speak to a long term rather than a short term strategy... which in a nutshell my problem with the market, I think it consistently does a poorer job of reflecting subtler and longer range effects than obvious and short term ones. Which may work out for professional speculators, but for most of us, for whom the market is simply a vehicle for long-term investment for our post work years, it would be better if the market reflected more complex and long range effects better than (in my opinion) it does.
posted by nanojath at 6:31 PM on July 21, 2005


Well, the principle of "Wall-Street" is increasing shareholder value, and paying your employees more means less profits, at least in the short term.

Yes, but it also means less turnover, and better quality service which is good for long-term profits.
posted by jonmc at 6:33 PM on July 21, 2005


Well dog my cat! And I was just wondering whether I should renew my membership. Case closed.
posted by maryh at 6:34 PM on July 21, 2005


Thanks for making those points, jonmc, I think I'll go back in time and add them to my original response and make it sound like you didn't bother to read the whole thing before responding.

Okay, done.
posted by nanojath at 6:40 PM on July 21, 2005


What would take that pressure from Wall Street off Costco?

If enough people stopped shopping at Sam's Club and went to Costco instead.

There's no good reason to ever shop at Sam's Club if there is a Costco within a reasonable distance......
posted by joedharma at 6:42 PM on July 21, 2005


Thanks for making those points, jonmc, I think I'll go back in time and add them to my original response and make it sound like you didn't bother to read the whole thing before responding.

Yes, but I did it with less words.

okay, done. ;)
posted by jonmc at 6:51 PM on July 21, 2005


There's no good reason to ever shop at Sam's Club

No need for more there. Sam Walton's grave is buzzing.
posted by Saydur at 6:52 PM on July 21, 2005


Which may work out for professional speculators, but for most of us, for whom the market is simply a vehicle for long-term investment for our post work years, it would be better if the market reflected more complex and long range effects better than (in my opinion) it does.

I think the problem is that most investors with your perspective invest via mutual or index funds rather than in individual companies. Individual shareholders are much more aware of the business practices of the company they own (and thus, more likley to become activist shareholders) while a mutual fund owner is only vaguely aware of what that fund contains. Mutual and index funds make buy/sell decisions with an eye more towards relatively near-term performance goals. Even worse, institutions, in most cases, vote the shares in the fund according to ISS (Institutional Shareholder Service).
posted by mullacc at 6:54 PM on July 21, 2005


buyblue.org
costco 99% democrat

On a side note... How can the International house of pancakes be 90% republican? Half of their customer are stoners at 3A.M. I guess maybe if half you cutomers come in smelling like burned trees I guess that makes you like the timber industry more. (creeping poltics...)
posted by Rubbstone at 7:17 PM on July 21, 2005


My fears are confirmed: I'm so verbose that people are just checking out on my comments before I actually get to my point... Good comeback, jonmc

I think your point is interesting, mullacc. I've thought before that it would be nice to have access to more mutual or index funds that are, let's say, principle-driven. I'd like my investments to better reflect ideas I have about what constitutes good business, but I don't have the time to manage my retirement accounts at that level. Given that my money is going to be in the market for probably 30-40 years, it seems there is plenty of time to play around with parameters and I'd like to diversify at least some of my money to mediums of investment that reward specific behaviors by investing in their shares on a longer term.
posted by nanojath at 7:18 PM on July 21, 2005


On a side note... How can the International house of pancakes be 90% republican? Half of their customer are stoners at 3A.M.

I think that question answers itself, dude.
posted by jonmc at 7:19 PM on July 21, 2005


I worked at Cosco (then Club Price) some 15 years ago. I can say that I enjoyed that job far more than I ever thought I'd enjoy a cashier-type job. You're well paid (I started at over $7/hour in 89, and was nearly at $10 when I left in 92, despite being only part-time), if you do overtime you're actually paid for it -- they have strict 'step-up' levels for time-and-a-half and double-time -- and you're on a first-name basis with your bosses from day 1. The attrition level is quite low. I only left because I had to move for University.

So, you don't have to screw your employees to turn a profit.
posted by clevershark at 7:26 PM on July 21, 2005


Well dog my cat!
Wrong thread for that.
posted by realcountrymusic at 7:27 PM on July 21, 2005


I was amazed to find that 'Wall-Street" may pressure businesses about their labor practices

It's like high school-- at some point, ripped jeans become trendy, so everyone rushes to get ripped jeans. Now, someone might feel that ripped jeans aren't a good idea, but he knows that everyone else thinks ripped jeans are a great idea, and if he wants to gain more social stature, he'll get himself a pair of ripped jeans, and the consequences of not getting ripped jeans are going to hurt him.

Likewise, is relentless minimization of labor costs the best thing to do for a company? Not necessarily. However, at this point in time everyone believes that the best thing for a company to do is drive down labor costs as much as humanly possible, so a CEO hoping to gain approval from his colleagues and shareholders has an incentive to do that.
posted by deanc at 7:29 PM on July 21, 2005


More good commentary on Costco here.
posted by malaprohibita at 7:31 PM on July 21, 2005


I was amazed to find that 'Wall-Street" may pressure businesses about their labor practices
Is this some of that sarcasm I'm so bad at recognizing?

Wall Street does this constantly, in direct and indirect ways. Any time the board of a company wants its stock to go up in price, the usual method is massive layoffs. The Street loves that crap, because it does not care about long-term profits.
posted by Kirth Gerson at 7:50 PM on July 21, 2005


Just as impressive to my way of thinking is the ceo's salary.
posted by Mitheral at 8:02 PM on July 21, 2005


I knew I'd seen this before.
posted by Eideteker at 8:08 PM on July 21, 2005


jaronson writes "For more on this story..."

Eideteker writes "I knew I'd seen this before."

In this thread even.
posted by Mitheral at 8:20 PM on July 21, 2005


I knew I'd seen this before.

This whole topic has been covered to death on metafilter in several threads. I say this in case anyone is interested in the topic there's plenty of it on mefi.
posted by justgary at 8:30 PM on July 21, 2005


"you don't have to screw your employees to turn a profit."
ahem. id go further to say 'not screwing your employees can turn you a higher profit'. FYI - this is what rand was talking about when she said 'rational self interest'. I suppose 'differed gratification' would have ruffled less feathers.

Costco is great. we need more democrats in business and less in politics :) (less republicans too while we're at it)
posted by Tryptophan-5ht at 9:20 PM on July 21, 2005


nice post semmi, ignore the meta-police. some people just never tire of "double post!!!1"
posted by vaportrail at 10:45 PM on July 21, 2005


Regarding employee satisfaction, retention, and employees who actually feel good . . . paying your employees more means less profits, and in general the employment picture over the last few years.

I think there's been an unemployment bubble. You look at it from the corporations perspectives, if they can maintain sales and drastically cut HR expenses, their $-return graph bubbles upward. And given that it's--at some point--unsustainable, at least I would certainly hope so, to have such a crummy employment outlook, and maybe it is getting better, maybe it's gotten as good as it's going to get, nobody has those type graphs for comparison, now versus 1999, versus 1987, versus 1982.

But it seems like there is, or has been that unemployment bubble, and the money (integrate under the bubble) for the corps must be staggering. If HP lays off 15000 people, and their average compensation package (considering benefits) is a modestly estimated $50k/year, and they maintain that 15000 person shortfall for 5 years, that amounts to $3.75 Billion.

Then there's those nonsensical economic questions, such as, where does that money go? Maybe 10000 people out of that will find employment elsewhere, probably at a discount, but just considering, that's still 1/3 = $1.25b. Maybe that third is married women or similar and will find a societally favorable role outside the workforce.

Maybe some measure of all that gets put into the market caps. So, some corporations have more capability to raise capital, and firms like Charles Schwab have more assets under management. But those guys are just like any other bank, they aren't sitting on a pile of cash. Largely I guess it just goes to the corporations, they are the ones decreasing expenses while maintaining revenues, and as free market capitalists we must remain stalwart that employing people is merely a side effect of business operations.

Anyway here's hoping it's a "bubble" and that we didn't go from the Information Age to the Bean Counting age, without any public announcement on it.
posted by nervousfritz at 11:04 PM on July 21, 2005


Please note I was not calling "double post". The [!] is quite effective for that. I just meant to link to a related discussion. And I missed the elipsis, thanks Mitheral!
posted by Eideteker at 4:51 AM on July 22, 2005


I, being a good Democrat, switched to Costco precisely for this reason. They are a union shop.

Yes, but it also means less turnover.
Exactly. I am almost always checked out by Sara, the girl I went to the first day I joined. I have yet to see a surly person at Costco, while it was the rule at Sam's Club.
posted by Doohickie at 7:25 AM on July 22, 2005


I don't think I've been checked out ONCE by an employee at Costco. Maybe I need nicer shoes, or a better haircut.
posted by myeviltwin at 8:20 AM on July 22, 2005


The key to understanding how and why investors put pressure on companies to reduce costs is the concept of fiduciary duty. The board of directors of a company are representatives of the owners (investors) and have an obligation to strive to increase shareholder value. Failure to do so (note it's the striving that's important, not succeeding) is not merely a faux pas that can get the board kicked out, it is an actionable breach of contract that may result in the members of the board being held personally liable, and in egregious cases (such as fraud) is criminal. So if a company has unnecessary employees, it is the board's responsibility to see that they are laid off. If a company is unnecessarily paying too much for any of its costs, including labor, it is the board's responsibility to see that it is reduced.

Of course, these decisions hinge on the definition of "unnecessary." COST shareholders are presumably happy to pay their employees more if it keeps Costco's customers coming back (acquiring a new customer is much more expensive than getting more money from an existing customer), so the higher labor costs are necessary and COST's board's fiduciary duty is being met.

As to why more companies don't think that way, shortsightedness of investors (who are often focused on quarter-by-quarter results) is one reason. Differing business models is another. Costco's business model revolves around having the best service and low prices on (typically) ONE item in each product category. As #2 in the market, Sam's Club must offer something Costco does not in order to compete. This can be lower prices, or a somewhat wider selection of items (which leads to lower volume on each, leading to higher cost of goods and a higher risk of making a wrong pick and ending up with unneeded inventory), or more convenient stores (perhaps paying higher site acquisition costs for its stores than Costco), or any of a number of other things, which may increase their other costs and necessitate a correspondingly lower labor cost to be profitable. It can also be market differences: people who shop at Sam's Club may tolerate a lower quality of service in exchange for what they perceive to be the best price, while those shopping Costco may not, even if things cost a bit more. (This is good old fashioned price discrimination, like when an outlet mall sets up shop well outside a city and offers exceptional deals to people willing to drive an hour to get them.) And of course, investors in Wal-Mart (which owns Sam's Club) know that the company's forte is cost reduction and so that's what they expect management to do -- and that becomes the board's fiduciary responsibility.

No doubt some people choose Costco over Sam's Club because of their labor policies. To the extent that that actually happens, it is one of Costco's competitive advantages. Why doesn't Sam's Club adopt the same policies and destroy Costco's competitive advantage? One possibility is that they calculate that it would not bring them significantly more business; people who care about that sort of thing are already Costco customers and unlikely to switch. And assuming Sam's Club did start paying similar wages, if you care about these things, would you prefer Costco, which has been doing it forever, or Sam's Club, who only did it because they were forced to to compete with Costco? You'd pick Costco, obviously, and this constitutes a "moat" (a sustainable competitive advantage) for Costco, giving Sam's Club no reason to even try compete on labor practices.

Of course, if the companies' labor policies were similar, then it would be a competitive advantage for neither of them, and then both companies would have an incentive to reduce labor costs, which could lead to a "race to the bottom" that ends up with both companies paying Sam's Club-style wages. In other words, be careful what you ask for!
posted by kindall at 8:47 AM on July 22, 2005


Of course, if the companies' labor policies were similar, then it would be a competitive advantage for neither of them, and then both companies would have an incentive to reduce labor costs, which could lead to a "race to the bottom" that ends up with both companies paying Sam's Club-style wages.

Isn't that like saying, "If Costco were Sam's Club, then it would be Sam's Club?"

Anyway, I know someone who works at Wal-Mart. His stories of management bungling and spurious, instantaneous punishment for imagined infractions are sobering. He told me that he was "coached" for "not meeting productivity goals" (his job is stocking pet food) by being given a day off and told to write a page-long essay about how he could do better! Yet Wal-Mart is the only place really hiring in this town.

If Costco moved here, oh what a glorious day that would be.
posted by JHarris at 10:27 AM on July 22, 2005


No, it's like say "If Sam's Club were like Costco, both would eventually be like Sam's Club." I left out the part where it was Sam's Club adjusting their labor practices to be more like Costco's, rather than the other way around. Then neither has any competitive advantage and you get the "race to the bottom."
posted by kindall at 10:42 AM on July 22, 2005


I shop at CostCo and wouldn't set foot in a Sam's Club. Partially because they treat their employees well and partially because they have things I like and want at really pretty excellent prices.

Its nice that investors are starting to grok the fact that you don't have to exploit your workers to make money and that, in the long term, treating them well will pay unseen dividends across every spectrum of the company.

CostCo excels because they don't let the bottom line dictate their business practices.
posted by fenriq at 10:46 AM on July 22, 2005


I just checked out their website... I was a little disconcerted to notice that they sell urns and caskets from their homepage.
posted by JHarris at 10:47 AM on July 22, 2005


kindall, if Sam's Club is elevating their practices to be more like CostCo then how is that a race to the bottom? If CostCo were emulating Sam's Club then I can see it but I don't see Sam's Club trying to be more like CostCo as a race to the bottom, more like trying to race to the top.
posted by fenriq at 10:49 AM on July 22, 2005


jharris, why would that concern you? Were you unaware that people don't live forever and some get buried while others have their remains burned?
posted by fenriq at 10:50 AM on July 22, 2005


Sweet, those caskets are only $924. Sounds like I've figured out what I'm gonna get put in. I'd go for the cardboard box, but my family says that's too cheap.
posted by shepd at 1:31 PM on July 22, 2005


The problem with your theory about the race to the bottom, kindall, is that most people who shop at Costco probably don't even know about the better wage structure, much less choose it based on such socialist choices. Rather, I think they choose Costco over Sam's club for similar reasons that people choose Target over Walmart. There are other indicators of higher quality and/or a better shopping experience that are offering a competitive advantage to Costco. Simply paying their employees more will not improve Sam's Club's inventory choices (which is focused on cheap) or make the store's layout less crowded. There will still be a niche for Costco as long as there is a niche for Target (which is doing just fine alongside the Walmart juggernaut.)
posted by dness2 at 2:25 PM on July 22, 2005


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