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2007 Winners - Solutions-oriented writing (1st place)
Costco rules, Walmart drools: The friendly giant of retail/wholesale
By Angela Wilson
Athanaeum, 16-Feb-06 (Acadia University)
Big business has a bad name. Specialty stores can no longer compete with multi-national corporations as one-stop shopping becomes the new retail model. Corporations like Wal-Mart and Canadian Tire are setting industry standards, with employee and growth policies that are fiercely criticized by activist groups.
However, emerging from within this dismal-looking retail industry is an established and innovative competitor. Hidden behind high stacks of bulk merchandise in warehouse stores across North America, Costco Corporation, a company which blurs the line between wholesale and retail has been softly trying to introduce new industry standards since 1983.
The criticisms of big corporations usually follow the same thread: they threaten local business, they provide competitive prices at the cost of quality products, and they treat their employees like minimum wage workers. Costco is usually thrown into this mix, although mistakenly so.
As much as it burns to love a wholesale/retail giant, Costco may be just that friendly giant who swoops in to save countless helpless consumers from retail purgatory.
The Costco way
When Washington CEO magazine did a cover story on Wal-Mart’s top competitor, they described James Sinegal, CEO of Costco Corporation’s business style as 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 & they never raise their profits on an item above 14%.
They also take care of their employees. A cashier starting off the street earns a starting hourly wage of 10.50$. After four years, a cashier will make up to 40 000$ a year.
Through the mechanism of bulk shopping, and warehouse style stores, Costco is able to keep prices low and revenue high.
Dr. Terrence Weatherbee, Business Professor at Acadia, explains that by dispensing with costs associated with inventory, Costco is able to direct cash flow to employees, and make fair deals with suppliers. Cheap floor displays, little individual packaging, and bulk supplies allow Costco to remain competitive and redistribute its wealth to places like employee development, which holds a place of high priority within the corporation.
The Costco team
Perhaps the most distinguishing feature of Costco’s policies is the way that it treats its employees. Costco boasts some of the highest wages in the industry, and at least 14 benefit plans including a vision plan, dental care, disability, and long-term care.
Eva, who does contractual work selling food samples at a Costco in Montreal, comments on Costco’s employees that, “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. If my son wants to start a business, Costco will help him.
‘I worked in Maxi, and other places, and at Costco it is different. People are responsibility for their work. Everybody works with heart and enthusiasm. Costco looks after their employees, because they try to keep the same employees.”
One of the things that Costco does to keep employees engaged and enthusiastic is alternating day-to-day tasks so that staff do not get frustrated with menial or repetitive jobs. They also pride themselves in promoting from within and helping dedicated employees move up on the corporate ladder.
In contrast, Wal-Mart employees make an average pay of about 31% less than large retail workers on average. While the US national average of workers covered by employer health insurance is 67%, Wal-Mart’s average is 47%.
Nicole Schofield, Personnel Manager of the Wal-Mart in New Minas, has been working there for just over three years. She responds to accusations of high turn-over rates at Wal-Mart stores by explaining that, “Our turn-over rates are really seasonal. We have a high turn-over rate in January, because we hire a lot of temporary associates over the Christmas season, so when January comes we let those people go.
‘All of our wages are done based on sales, so 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 Wal-Mart store, states that, “Our turn-over rate is actually below minimum standards for retail. There’s a high retail rate in general for all retail but for us, the turn-over rate here is not bad at all. In retail in general, there’s a lot of entry level positions, and people don’t stay at those things forever.
"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$/hr at retail."
The Competition
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 twenty years. With the conception of SAM’s clubs, a Wal-Mart organization which 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 that 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, who is of course backed by Wal-Mart, had just introduced a new aggressive competitive strategy of slashing its prices to tackle Costco.
The result was that Costco stock prices fell more than 20% a few days after the announcement was made, as investors predicted that this was the first step in Costco’s fall to the feared retail monster.
Wal-Mart and SAM’s club are Costco’s largest threats, as Costco is theirs. However, the competition is certainly unbalanced. Wal-Mart operates 5 700 stores, compared to SAM’s club’s 550 and Costco’s 470. In the industry that exists today, it is huge corporations like Wal-Mart who are in the position to set industry standards.
Wal-Mart offers competitive pricing, and one-stop shopping. They able to do this mainly by being the biggest kids on the block. Well, more like the biggest kids on every block combined into one intensely terrifying bully.
Dr. 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. They have that type of leverage.”
Wal-Mart buys in bulk and profits by selling it in a department store format. They also experience practically no competition and are stringent with their suppliers.
Not only is Wal-Mart competition for corporations like Costco, but their aggressive policies are also a very real threat to their competition’s sustainability.
The Market
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.
Dr. Weatherbee explains that investor confidence is determined, among other things, by individual analysis and consumer reaction, and it is 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 you give the comparison benchmarks depends on individual investors.
Dr. Weatherbee hypothesizes that “Wal-Mart drives its business on students and retired people. They take advantage of regional economics and keep jobs relatively simple so that their labor base is different. They have a comparative advantage right now, but you can argue that they will run out of employees before Costco does.”
While Wal-Mart may be seen as the safer investment today, an investor who values Costco’s treatment of employees and business policies, could see this as a better long-term investment.
However, with the current market set-up, it is difficult for corporations such as Costco whose return rates are hurt by high internal costs (the result of things like high employee wages), to remain competitive and attract investors.
The Consumers
The allure of wholesale shopping is not something that is boasted about. Goods are provided in bulk, at competitive prices, with little consumer choice, and sometimes at questionable quality. It is not a format that services every consumer, and for anyone who has shopped at immense stores like Costco, the experience can be more than a little frustrating.
But Costco has managed to address many of the problems that other corporations are criticized for. They have introduced innovative policies that redistributed the company’s wealth to value things that most corporations take for granted. If Costco can find a way to make it work by restricting revenue growth, but maintaining a 10% 1-year sales growth (in comparision with Wal-Mart’s 11.3% growth), then perhaps other retail corporations should be expected to develop similar models.
