Costco Takes the High Road to Grafton!

It's well know that poverty level wages subsidize Wal-Mart's low prices!

Wages are so low that Wal-Mart's employees qualified for $2.5 billion in federal assistance in 2004.

Earlier this week the Milwaukee Journal Sentinel reported Wal-Mart is also shortchanging Wisconsin, failing to pay over $17 million in state and local taxes between 1998-2000.

Wal-Mart’s tax avoiding schemes shift the burden for funding schools, fire protection, public health, infrastructure maintenance, workforce development and public safety to property tax paying homeowners.

The state is trying to recover its losses in court and Senators Robeson and Decker have introduced combined reporting legislation that would close the loophole Wal-Mart is using to avoid paying its fair share.

While that case unfolds, Milwaukee area consumers can use the power of the purse to send a message to Wal-Mart that we do not appreciate their tax dodging shenanigans, low pay and unfair labor practices.

There’s a new boy in town-Costco- that competes head to head with Wal-Marts’ Sam’s Club. In fact, Costco same store sales are growing faster than any other club shopper, 6.2% so far this year.

Maybe that’s because as the MJS reports: ”The employees seem more helpful at Costco.”

And why are Costco's employees more engaged? Perhaps because they average $17 an hour, while Wal-Marts’ average $10. And unlike Wal-mart’s employees, 92% of Costco employees can afford the company’s healthcare benefits.

Costco employees earn more because they have a union-the Teamsters that represents 13,800 of the company’s 127,000 employees. That’s only 17% of Costco’s total workforce. But union representation creates a ripple effect that helps set labor standards for all Costco employees.

Costco’ labor agreements lock in wage and benefits packages that are the highest in the grocery and discount retail industries. And Costco passes on similar compensation packages to its non-union workers.

Costco’s executive management recognizes that Wal-Mart/Sam's Club competes based on low prices and low wages-a low road corporate strategy. They recognize that in the labor market, like all markets, you get what you pay for. So Wal-Mart’s low wages attract less skilled and motivated employees. The result is low levels of service.

So while Costco’s prices are roughly equivalent, it competes on the basis of service and productivity. Costco attracts more skilled and dedicated employees by paying them fairly. The result is better service and higher productivity.

As Costco CEO Jim Senegal has said: “We pay much better than Wal-Mart. That’s not altruism. It’s good business.”

Costco’s CFO Richard Galanti elaborated: “From day one, we’ve run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we’ll be able to hire better people, they’ll stay longer and be more efficient.”

Henry Ford understood this a century ago.

Ford doubled his employees’ wages to $5 a day in an effort to solve a 300% absenteeism rate. Voola! Bad jobs turned into good ones and turnover plummeted. An added benefit was that Ford employees could actually buy the cars they produced.

A 2004 Business Week study compared Costco’s business model to Wal-Mart's. The study confirmed that Costco’s employees are more productive. They sell more: $795 of sales per square foot, versus only $516 at Sam’s Club. Consequently Costco generates more revenue per employee; U.S. operating profit per hourly employee was $13,647 at Costco versus $11,039 at Sam’s Club.

The study also revealed that Costco’s labor costs are actually lower than Wal-Mart’s as a percentage of sales.

By compensating its workers fairly, Costco enjoys rates of turnover far below industry norms, one-third the industry average of 65%. Wal-Mart's is about 50%.

High employee retention rates save Costco’s money. It costs $2,500 to $3,000 per worker to recruit, interview, test and train a new hire, even in retail. Wal-Mart’s turnover rate cost the firm an extra $1.5 to $2 million in costs each year.

Of course, other factors besides low turnover and employee productivity are responsible for Costco’s cost advantage. For example, Costco saves millions because it does not advertise.

Costco can also afford to pay more because it cuts the fat from executive paychecks. Its overall corporate philosophy is that workers deserve a fair share of the profits they help generate — not just a pat on the back or being called “associate.”

While CEOs at other major corporations average 531 times the pay of their hourly employees, Sinegal takes only 10 times the pay of his typical employee. His annual salary (2004) was $350,000, compared to $5.3 million awarded to Wal-Mart’s Lee Scott.

After California Costco Teamsters ratified a contract a few years ago, CEO Jim Sinegal said Costco workers are “entitled to buy homes and live in reasonably nice neighborhoods and send their children to school.”

Costco's high road strategy including union representation, decent pay and fair treatment leads to better service, increased employee productivity and loyalty.

Costco has now opened in Grafton. Its entry into the Milwaukee market poses a question to all of us-do we want to live in a country where the largest employer pays below poverty-level wages and cheats on its taxes? Or, do we want Americans to enjoy a decent income and a sense of security in return for their work?

If you believe the latter, take a trip out to Grafton and let your money do your talking.