Wal-Mart Vs. Costco: Which Business Does Better for Employees and Customers?
Have you seen one of the charts analyzing how much better Costco pays and treats its employees than Wal-Mart? The charts use information from 2005 or earlier. An update presents a slightly different picture, but not much.
Costco is a great place to shop, as all 61 million Costco members know. It’s also a good place to work, as shoppers can tell when they visit one of the company’s busy warehouses. Not only does Costco pay its associates more on average than Wal-Mart, it also pays more than Target, JC Penney, Sears and a number of other retailers.
As of November, 2012, Costco was #24 on the Fortune 500 list of America’s 500 largest corporations, which is ranked exclusively by gross revenue. Wal-Mart Stores is #2 on the list, behind Exxon Mobil. Oil giants Chevron and ConocoPhillips, and General Motors, round out the top five. At number six is GE, and number 7, Warren Buffett’s Berkshire Hathaway. Number 8 is Fannie Mae, the quasi-public entity that backs nearly all US home loans, and Ford, the only auto manufacturer that did not take any type of “bailout” money in 2009, is 10th on the list. Costco is the third-largest general retailer on the list, right behind grocery giant Kroger.
Anyone who’s familiar with the retail industry, particularly grocers, knows that a 3% net profit margin is highly competitive in the industry. Gross revenue or sales has nothing to do with how much the company earns at the end of the reporting period. Walmart had a 3.5% profit margin as of the end of 2011, exclusively due to the excellent performance of its international stores. US store profit declined by 4.6%.
Costco, on the other hand, reported net profits as percentage of revenue of 1.6% in 2011. This does not mean that it is “losing money.” The company also paid $1 billion in taxes earlier this year.
The tale of the updated comparisons between Costco and Wal-Mart show that the world’s largest retailer is struggling. Although it has made a number of improvements in employee pay, benefits and retention since the mid-2000s, it still struggles to keep associates on the job. Wal-Mart employees just received notices that their share of health care costs would increase between $5 and $24 per paycheck, causing some associates to drop coverage altogether.
The average annual wage of a Costco employee works out to a little over $35,000 a year. People can add $13,000 to $15,000 to that right off the top to cover employer payroll tax liabilities, direct, and indirect benefits. Welcome to the world of business planning.
Wal-Mart full-time employees are currently making a little over $26,000 a year on average. We can add about $10,000 to $12,000 to that amount for their cost.
As most who have shopped at both stores know, a different type of person typically works at Costco. Most Costco associates are more physically fit than many Wal-Mart employees and their jobs are more physical. Costco is a warehouse store, and associates have jobs that involve lifting large, bulk packages and other items.
People not familiar with business planning could see a difference in the chart in that Wal-Mart’s labor and overhead costs are 19.5%, while Costco’s are very low, only 9.6%. Many Wal-Marts are open 24 hours, while Costco has limited hours. Costco is a warehouse store which keeps overhead low. Wal-Mart isn’t the fanciest store in the world, but its costs in stocking, maintenance and inventory management have to be much higher than Costco’s.
Part of this savings has been reinvested in the Costco employee, which further strengthens the retailer, leading to their increased Fortune 500 rankings (increased revenue) between 2010 and 2011. Costco has also received a lot of favorable press for its good treatment of employees and its profitable business model. Wal-Mart, of course, has tried to emulate Costco’s approach in its Sams Club membership warehouses, which pay somewhat better than ordinary Wal-Mart stores. Sams Clubs are far from unsuccessful, but it is Costco that dominates the warehouse store landscape.
Costco is simply a well-run company with a clear vision of what it wants to sell, how it wants to sell it, and what it needs to do to operate successfully and profitably. The company long-ago realized that what one might term “reasonable” operations are the key to its success.
Costco’s vision is: “Our business is to give the customer the best value we can.” The company also has a clear code of ethics that applies to daily operations, employment relations, and above all, to customers. Costco was guided by Jim Sinegal up until last year, when Sinegal handed over the reins to Craig Jelinek, who has worked for the company since 1986. Another key figure from the Wal-Mart/Costco comparison chart is executive compensation.
Mr. Jelinek’s final compensation was $548,400, including a nearly $200,000 bonus, which had to have been tied to company performance, which was outstanding during his final year. Wal-Mart CEO Mike Duke received $1,265,775 in compensation in 2011, according to Hoovers.
I’m writing this from the perspective of a business planner who is committed to shared value and sustainable business practices. Clearly, Costco has gone a long way toward successful, sustainable operations, and maintained growth even during the serious economic downturn years of 2009 and 2010. Clearly, the company has what I would call a reasonable and responsible approach to operations.
Wal-Mart is too large a multinational corporation to begin to evaluate in a brief article. The company has made positive progress in providing associates with improved pay and benefits in recent years, and is aware of the problems it faces in terms of maintaining profitability and the serious issue of employee retention. With 2.1 million employees, they have a completely different workforce situation than Costco, with 160,000 employees. The situation is not that Wal-Mart is an exceptionally bad company. It’s that Costco is an excellent one.
Information in this article was compiled from Hoovers/D&B, Forbes, Businessweek, Google Finance, and the New York Times, as well as corporate websites and shareholder information, and covers the 2011 fiscal reporting year for both companies.
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