By Tom Ryan
Continuing to put its employees needs over investors, Costco Wholesale Corp. last week announced plans to increase wages for its hourly service workers in its U.S. stores.
When the raises kicked in March 8, scale for service assistants, such as parking lot attendants, was bumped up to a range between $11 and $18.30 an hour from the $10 to $17.50 previously paid. For service clerks, including cashiers, the scale range increased to between $11.50 and $20 an hour compared with $10.50 to $19.17 before.
At the top of the scale, which typically takes about four and a half years, employees will receive an "extra check" of at least $2,200 every six months.
The last time Costco raised entry-level wages was six years ago. "We always want a wide gap between us and the competition," Coscto's CFO Richard Galanti told the Seattle Post Intelligencer. "It shows in the quality of our employees...It's what our founders want to do in paying a family wage."
But the timing could have been better at least in the eyes of investors.
The retailer reported a 16 percent drop in second quarter profits. Although the earnings slide was expected due in part to one-time charges to tighten its consumer-electronics return policy, Costco also lowered its third quarter profit forecast--causing shares to lose 2.5 percent of their value last week.
Some investors have long contended Costco is too good to its employees, with shareholders suffering as a result.
"From the perspective of investors, Costco's benefits are overly generous," Bill Dreher, an analyst at Deutsche Bank Securities, told The Wall Street Journal back in 2004. "Public companies need to care for shareholders first. Costco runs its business like a private company."
Costco pays some of the highest wages at retail, provides excellent benefits, and has even shown a strong willingness to work with unions. Fans claim this enables the chain to attract and retain good employees. Strong customer service may be part of the reason Costco appeals more to higher-income shoppers than Sam's Club and B.J.'s.
But investors--as ‘investors'--claim they have rights too, and companies should be primarily working for their behalf.
"Costco seems to do a little more than what shareholders would like," said Edward Weller, an analyst at ThinkEquity Partners. "But Costco likes to keep it simple and likes to have their employees treated well."
Costco's top line growth also remains healthy. U.S. same-stores climbed five percent in the quarter, and membership renewals in the period reached almost 87 percent, an all-time high.
But investors are hoping a more a mean and lean approach--including a tighter lid on worker costs--could help more of Costco's revenues trickle down to the bottom line. Over the holiday quarter, Costco's net margins of 1.7 percent paled in comparison to Wal-Mart's 4 percent rate.
Mr. Galanti declined to detail how the wage increases would impact future profits, but he said lifting entry-level wages could cost the company up to $3 million a month.
"That's the cost of doing business," Mr. Galanti said. "There are other expenses we can offset."
But that probably won't make many on Wall Street happy.
"Given that it sounds like they haven't done it for a number of years, it's about time," said Dan Geiman, a financial analyst at McAdams Wright Ragen, of the raises. "But it will impact their earnings. That's something to watch out for."
Discussion Questions: Do you think Costco is being overly generous to its store employees and not doing right by shareholders? How important is the wage element in both the competitiveness of a retailer and its top and bottom line performance?