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July 12, 2005

The High-Wage Model

CostCo. If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch:

FT.com / Business life - Pile high, sell cheap and pay well: By Jonathan Birchall: “If we have a floating inflatable ring for towing behind a boat, it will be the biggest there is . . . it will be 10ft across . . . and it will only cost $49.99,” Mr Galanti says, speaking with rapid enthusiasm in his modest office at Costco’s headquarters in the nearby suburb of Issaquah. But, in the world of US retail, it is not just Costco’s “stack ’em high, sell ’em cheap” approach to higher quality items such as organic spinach and balsamic vinegar that merits attention.

In a country where the retail industry has been convulsed over the past decade by the rise of Wal-Mart and rival discounters, Costco’s discount warehouse club is part of the revolution. But unlike Wal-Mart, whose low-cost labour model has provoked increasingly vocal criticism, Costco has managed to remain competitive while providing its workers with the highest wages and best healthcare plans available anywhere in the US retail industry.

In the anti-Wal-Mart camp, “Costco is seen as the White Knight to Wal-Mart’s Darth Vader,” says Nelson Lichtenstein, a University of California professor of labour history, who is editing a new book on Wal-Mart’s rise.

Costco was founded by Jim Sinegal, chief executive and president, and Jeff Brotman, company chairman, in 1983 – the year that Sam Walton, founder of Wal-Mart, opened Sam’s Club, a rival warehouse club. Both follow the same broad philosophy, developed for small business operators, rather than for individual shoppers: sell a limited number of items in bulk to reduce handling overheads, use mass orders to win attractive pricing from suppliers and sell membership subscriptions to boost returns and guarantee customer loyalty....

“Anything we can do to lower the expenses translates into being able to sell the merchandise for lower cost,” says Mr Galanti. “So that we are the extreme value proposition for quality goods.”... But Costco’s frugality does not extend to pay and working conditions. The average hourly wage for a full and part-time US employee is $17.41, according to the company. At Wal-Mart’s Sam’s Club, the sum for a similar employee is around $12 an hour. “It’s important to pay people a fair living wage,” says Mr Galanti, “and if you do, and it’s better than everybody else, you’re going to get better people – and they’re going to stick around longer, and we see that.”

Costco has a staff turnover rate of 17 per cent annually... compared with 70 per cent seen in the rest of the sector. Only six per cent of new staff leave within the first year, which again reduces costs. “First and foremost, it’s the right thing to do,” says Mr Galanti. “And long-term, we know it pays dividends.”...

70 percent annual turnover cannot be good--the incentives for the business to nickel-and-dime the workers is just too great when the overwhelming proportion of them aren't going to be around for long.

Posted by DeLong at July 12, 2005 03:37 PM