Costco Proves It Pays To Pay Well

Nov 24, 2003

By George Anderson

While supermarket operators are trying to hammer out deals with the United Food and Commercial Workers Union (UFCW) and others to reduce labor costs so they are more in line
with what Wal-Mart pays its associates, Costco is taking the opposite approach and looking to attract and keep the best talent with higher wages and benefit packages.

Wall Street has not been a big supporter of Costco’s labor strategy but some are beginning to see the method behind its higher wage madness.

Darrell Rigby, head of the global retail practice at consultants Bain & Co., told Reuters, “I would bet that over time, Wal-Mart will be forced to increase its compensation
and benefits.”

“As Wal-Mart continues to get larger and larger, finding and retaining high-quality employees is going to be an increasing challenge for them,” he said.

Employee turnover at Wal-Mart is just under 50 percent, according to the company, compared to 23 percent at Costco.

Richard Galanti, Costco’s chief financial officer, believes the company’s approach to compensating employees is an organizational strength, not a weakness. “We believe that employees
at other companies know that these are the best wages out there,” he said.

Moderator’s Comment: Are the wages Costco pays its employees a plus or a minus in its competition with Wal-Mart and Sam’s Clubs?

Perhaps the most interesting aspect of the Reuters piece from our standpoint was the acknowledgement that the only thing holding back Wal-Mart’s expansion
is its ability to attract qualified store management. Perhaps the supermarkets should be trying to keep Wal-Mart out of the market by bidding up the cost of talent rather than
trying to hold the line on or reduce labor expenditures.
Anderson – Moderator

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