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Costco Rules, Wal-Mart Drools

Bucking a big-box myth, a student finds remarkable variations in how two giants do business

Angela Wilson 20 Feb 2007The Athenaeum

Angela Wilson is a third year political science student at Acadia University and editor-in-chief of The Athenaeum, Acadia's student newspaper.

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[Editor's note: This year, the John H. Macdonald foundation re-launched a series of national awards for excellence in student journalism published by Canadian University Press. The Tyee sponsored two new awards: The Tyee Solutions Oriented Writing Award and The Tyee Investigative Writing Award. This article was the winner for The Tyee Solutions Oriented Writing award.]

Big-box business has a bad name.

As one-stop shopping becomes the new retail model, specialty stores can no longer compete with multi-national corporations. With employee and growth policies that are fiercely criticized by activist groups, corporations like Wal-Mart and Canadian Tire are setting industry standards.

However, emerging from the dismal landscape of the retail industry is an established and innovative competitor. Hidden behind skyrocketing stacks of bulk merchandise in warehouses across North America, Costco Corporation has been softly trying to introduce new industry standards since 1983.

The company is often lumped together with the rest of the pack when it comes to criticisms of big corporations, who stand accused of threatening local business, providing competitive prices at the cost of quality products and failing to treat their minimum wage workers with respect.

But as much as it burns to speak well of a wholesale-retail colossus, Costco may just be that friendly giant, swooping in to save countless helpless consumers from retail purgatory.

Fewer frills to share the bills

When Washington CEO Magazine did a cover story on Wal-Mart's top competitor, they heaped praise on Costco CEO James Sinegal's business style, calling it a "window into the Costco corporate culture: direct, open, modest, and frugal. There's no pretension here."

Costco is said to operate under two cardinal rules: they never sell anything at a loss, and they never raise their profits on an item above 14 per cent.

They also take care of their employees. A cashier coming in off the street earns a starting hourly wage of $9.50. After four years, that same cashier will make up to $40,000 a year.

Through the mechanism of bulk shopping, and unadorned, warehouse-style stores, Costco is able to keep prices low and revenues high.

Professor Terrance Weatherbee, a business professor at Acadia University, explains that by dispensing with many of the costs associated with classic retail inventory practices, Costco is able to re-direct cash flow to employees, and make fairer deals with suppliers. Cheap floor displays, decreased individual packaging and bulk supplies are what allow Costco to remain competitive and redistribute its wealth to things like employee development, which it maintains as a high priority within the corporation.

'Temporary associates'

Fairer purchasing policies aside, the most salient of Costco's policies is the way that it treats its employees. Apart from some of the highest wages in the industry, the company also boasts at least 14 benefit plans, including a vision plan, dental care, disability and long-term care.

Eva Notte, who does contract work selling food samples at a Costco in Montreal, has noticed a difference in the Costco employees working around her.

"The new generation are smart people. They stay there because Costco prepares the future for them. Even if employees want to start a small business, Costco helps them."

Even through a she's a contract worker for the company, Notte says that if her son wants to start a business, Costco would help make that happen.

"I worked in Maxi, and other places, and at Costco it's different," she said. "People are responsible for their work, everybody works with heart and enthusiasm. Costco looks after their employees, because they try to keep the same employees."

Costco encourages employees to be engaged and enthusiastic by alternating day-to-day tasks so that staff don't get frustrated with menial or repetitive jobs. They also pride themselves on their promotional system, which gives employees a first crack at moving up the corporate ladder, and thus helps retain their workforce.

In contrast, Wal-Mart employees make an average pay of about 31 per cent less than large retail workers on average. While the U.S. national average of workers covered by employer health insurance sits at 67 per cent, Wal-Mart's average is 47 per cent.

Nicole Schofield, personnel manager at a Wal-Mart in New Minas, Nova Scotia, has been working for the company for just over three years. She responds to accusations of high turnover rates at Wal-Mart stores with the explanation that they are "seasonal."

"We have a high turnover rate in January, because we hire a lot of temporary associates over the Christmas season, so when January comes, we let those people go."

Schofield says that Wal-Mart's wages are based on sales.

"In December we have our biggest month of the year and in January, when our sales go down to minimal, we have to reduce our wages as well. But it doesn't really affect our full-timers or even our part-timers; we've always had good relationships with them."

Max Noseworthy, head manager at the same store, says the company's turnover rate is actually below average standards for retail.

Annual store-level employee turnover rates in Canada usually range between 11 and 49 per cent according to a 2006 Retail Council of Canada study.

"In retail in general, there's a lot of entry-level positions, and people don't stay at those things forever," says Noseworthy.

"Every job starts above minimum wage. There are no minimum-wage jobs. I'm told that the pay is very good for the standards of retail. You're not going to make $16 or $17 at retail."

Play it again, Sam's

Hoover's Inc., a business critique company, describes Wal-Mart as an "irresistible (or at least unavoidable) retail force."

Wal-Mart and Costco have been battling each other for over 20 years. With the conception of Sam's Clubs, a Wal-Mart-owned, membership-only warehouse that offers members low prices for relatively higher quality goods, the stakes have been raised.

Competition with Sam's Club has already impacted Costco. In early August 2003, Costco was forced to announce that the company expected lower fourth-quarter profits than originally predicted. This was largely due to having to cut its own prices, a necessary move in order to remain competitive with Sam's Club. Sam's Club, which is backed by Wal-Mart, had just introduced a new aggressive competitive strategy of price slashing to tackle Costco.

The result was that Costco stock prices fell more than 20 per cent a few days after the announcement was made, as investors predicted that this was perhaps the first step in Costco's fall to the feared retail monster.

Wal-Mart and Sam's Club are Costco's largest threats, and vice versa. However, the competition is certainly unbalanced. In the United States, Wal-Mart operates 1,074 discount stores, 2,257 super centres and 579 Sam's Clubs, compared to Costco's 504 warehouses. In the industry that exists today, it's huge corporations like Wal-Mart that set industry standards.

Wal-Mart offers competitive pricing and one-stop shopping, and they are able to do this mainly by being the biggest kids on the block.

Professor Weatherbee explains that Wal-Mart benefits from one-sided relationships with its suppliers.

"Business with Wal-Mart means that you can have immense success, but Wal-Mart dictates the terms of the contract and therefore the terms of that success. They have that type of leverage."

Wal-Mart buys bulk and profits by selling it in a department store format. They also experience practically no competition and so can afford to be stringent with their suppliers.

Not only is Wal-Mart competition for corporations like Costco, but its aggressive policies are also a very real threat to their competition's sustainability.

In for the long haul

If corporations like Costco are to survive, they need to remain competitive in the global market, but on whose terms?

Stock value is determined through comparative advantage, so if Wal-Mart experiences a higher return rate than Costco, they are the ones who will set industry standards, regardless of non-quantitative internal policies.

Professor Weatherbee explains that investor confidence is determined by individual firm analysis and consumer reaction, and is usually based on a comparative answer: what did you do in comparison to others? Industry leaders such as Wal-Mart are used as benchmarks, and how much weight is given to the comparison benchmarks depends on individual investors.

He continues to hypothesize that while Wal-Mart takes great advantage of the regional economics in an area by driving its business on workforces mainly consisting of students and part-time workers such as retired people, this is a short-term advantage only. With their focus on this employee base they can keep labour costs low; however, while they have a comparative advantage in labour costs right now, it can be argued that they will "run out" of employees before Costco does, as the demographics change and availability of the "ideal" Wal-Mart worker in Canada declines.

Professor Weatherbee asserts that "While Wal-Mart may be seen as the safer investment today, you could value Costco's treatment of employees and business policies, and see this as a better long-term investment."

However, with the current market setup, it is difficult for corporations such as Costco, whose return rates are hurt by high internal costs -- the result of high employee wages -- to remain competitive and attract investors.

The consumer

While it's unlikely that big-box stores like Costco and Wal-Mart will create an alluring ambiance for shoppers anytime in the near future, Costco has managed to address many of the problems for which other giant retailer corporations have often been criticized. They've done this by introducing innovative policies that redistributed the company's wealth to value things that most corporations take for granted.

Which begs the question: if Costco can find a way to make it work -- by restricting revenue growth yet maintaining a 10 per cent one-year sales growth -- then why can't other retail corporations develop similar models?

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