Do Costco’s wages need to be so high?
With other retailers raising pay rates, Costco is hiking its wages even higher.
On its first-quarter conference call, Richard Galanti, Costco’s CFO, revealed that the warehouse club is raising its entry level pay to a minimum of $13 or $13.50 per hour, up from $11.50 or $12.
The $1.50 entry-level raise, the first since 2007, will cost eight cents a share on a full-year basis.
The increase comes as some retailers are raising wages due to mandated increases in minimum wage in some areas, but also because finding employees has become more competitive with the improving economy. Other retailers claim to be raising wages as part of a bigger investment in customer service.
The minimum pay scale for Walmart’s lowest-paid employees was raised to $9.00 per hour in April 2015 and to $10.00 last month. With the February lift, Walmart’s average full-time hourly wage is $13.38 an hour and $10.58 on average for part-timers.
Costco has a reputation for paying attractive wages. At the top level, hourly pay is about $22.50, which represents a “huge premium” to the marketplace, said Mr. Galanti. The upper range generally sees annual increases of 50 to 60 cents.
At the bottom range, entry-level rates were becoming less of a premium as other retailer raised their wages, Mr. Galanti implied. He also said it’s not easy work.
“You’re on your feet, you’re lifting cases, you’re pushing carts at these entry-level jobs,” he said on the call.
Raises at Costco are also frequent. On a full-time basis, workers can go from the entry level pay average to top pay in four-and-a-half years, said Mr. Galanti.
For Costco, the premium pay is more about maintaining its top-notch service than raising it. Mr. Galanti elaborated, “I would like to think that we’re not going to have less shrink or employee shrink because of it, or they’re going to be better service providers to our members. I think it reinforces what they already feel. And that’s what we’re all about.”
- Costco Wholesale Corporation Reports Second Quarter And Year-To-Date Operating Results For Fiscal Year 2016 And February Sales Results – Costco
- Costco Wholesale (COST) Q2 2016 Results – Earnings Call Transcript – Seeking Alpha
- Costco Will Raise Minimum Wage as Competition for Workers Grows – Bloomberg
- Costco Hikes Entry Level Wages for First Time Since 2007 – The Associate Press/ABC News
- More Than One Million Walmart Associates to Receive Pay Increase in 2016 – Walmart
- Why Costco is raising its minimum wage for the first time in nearly a decade – The Washington Post (tiered sub.)
Photos: Costco
Discussion Questions
DISCUSSION QUESTIONS: How important is it for Costco to keep its wages well above its competitors? Does Costco have more elasticity to pass down wage costs to consumers than other retailers?
Poll
BrainTrust
Max Goldberg
President, Max Goldberg & Associates
Paula Rosenblum
Co-founder, RSR Research
Costco runs a low margin operation like a number of retailers so they have to be as careful as any with expenses. However you have to wonder what other retailer can process a Saturday lineup as efficiently as Costco can. Somewhere in there is a link to hiring and paying the best employees.
It’s important that all retailers pay a living wage and stop trying to appease Wall Street on the backs of their hourly employees. Costco values customer service and this wage increase will help keep its employees happy, which leads to better customer service, which leads to higher sales. More retailers should follow Costco’s lead.
Funny, we’ve never really asked the question “Do retailers’ store wages need to remain so low?”
We assume they must because that’s how the retail store financial model has worked for decades. And when they eke out a minimal increase in their starting raise, there is much hand-wringing on Wall Street.
If Costco can take care of its workers, its customers and its shareholders at the same time, I say congratulations to them! It really thrills me (literally) to see “good karma” retailers doing well.
The only way to provide the highest levels of service and customer satisfaction is to operate with the best employees in the marketplace. The very best command the highest pay in the market and will work hard to keep a living wage. Costco understands this matrix and executes their business plan accordingly.
To make retailing attractive you have to pay for good employees. I shop at Costco regularly and their customer service is very good and their target audience of small business owners especially appreciate it. The basket size is much higher at Costco and their clients are expectant of smooth service and items in stock. As other retailers like Walmart raise their wages, Costco needs to look at their model and compensate employees accordingly, it is good business and good customer service.
Costco hires a better class of retail employee so they need to make sure their pay structure is higher. Just like major league baseball players get paid more than minor league players. The quality of labor at Costco is better and their labor model is more about keeping good employees rather than recycling warm bodies after eight months. As for passing wage costs to the consumer, I would certainly think they have more elasticity because they have a more reliable labor force. Other low-wage retailers are constantly short on employees, have lots of no-shows and scheduling is more difficult.
I was shopping in Costco just yesterday and was thinking about how knowledgeable and friendly the employees we encountered were. There are two other warehouse stores between home and Costco. Neither has employees at the service level of Costco. My semi-intelligent guess is the cost of 8 cents a share will be more than made up for by increased sales created by the employees on the sales floor. Training has to play an important role in the hiring process. You can tell the Costco employees are prepared to serve the customers.
Let’s look at the wage increase in another way. Costco’s turnover is reported to be between 16 and 19 percent. Walmart’s turnover is reported to be between 45 and 50 percent. So Walmart and other retailers may be paying less in the way of salary but if the were to look at the entire cost of employee training and productivity they would find that Costco actually has a lower cost base.
Retailers who pay peanuts end up with monkeys.
More elasticity to pass down wage costs to consumers? Doubtful given pricing transparency everywhere. It is more likely that this decision will attract more customers who are keenly attuned to the difficulties of making ends meet at lower pay scales. And the membership fees are a large part of their profit formula.
Have you ever really looked at who the competitors hire at the low end of the scale, their higher turnover rates and the total lack of engagement with customers?
Costco has a winning approach for the long term.
It seems Costco treats employee compensation as a quasi-branding issue. As part of walking out their brand promise to the marketplace, they promise an efficient shopping environment, good prices and above-average service.
Paying a wage that compares well to competitors seems consistent with this brand image and makes fulfilling that brand promise more practical to execute in practice.
Costco is addressing the Achilles’ heel of most retailers and it should benefit them if employees acknowledge the policy with commitment and pride in their job.
Having spent seven years at Costco, I can tell you paying higher wages to attract higher quality, more qualified, more dedicated and loyal, more career focused employees, works. Just look at Costco’s track record and performance over the past 20 years, etc.
Costco drives what they call internally the “membership productivity loop”:
A work force that is high-quality, more qualified to offer great member service, more dedicated and loyal and more career-focused to drive the business in the clubs/warehouses/stores, remains an essential factor to optimizing that “membership productivity loop.”
Costco is a cult brand among upper-income families, it’s important that the people who work there be able to relate to the customer base. Higher wages also reduce turnover and save on training costs. Let’s hope that other brands follow Costco’s lead.
Costco’s revenues per associate (i.e., labor productivity) is nearly three times as high as its competitors. If you take care of your workers, they will take care of your customers. And your customers will take care of your business. This is Costco’s secret sauce.
Costco has always paid higher wages than supermarkets. First, it saves money with very low turnover. Second, its employees are there for members, not taking up space. This means not just anyone walking off the street can get a job at Costco. Third, the Costco business model is different than typical food retailers. Just think of all the savings from not having to stock units onto a shelf. They sell larger sized packages which reduce the labor cost per pound or cube.
And don’t forget the membership fee.
Costco also has a higher ration of full-time to part-time employees. It is looking for people who want a career with Costco, not just a job. Therefore they must pay a living wage.
Costco has no more elasticity than any other retailer on pricing. Price is the primary driver for Costco customers, followed by the treasure hunt experience.
How refreshing that the comment on this premium is coming from internally — almost as a boast — rather than some “activist” shareholder complaining people are overpaid.
Back on point, I think the question is misleading. Costco is paying more, but they’re getting more too, so on a “performance/$ales” basis (however you might measure that), their labor costs are probably same/lower than the laggards.
Costco knows what it is doing. A wage increase fits with its brand. The retailer offers quality products with a best in class return policy. And on the employee side, it also offers more than most competitors in terms of benefits. I’d be interested to see the turnover rate at Costco compared to other retailers. Retaining and hiring top performing employees isn’t always cheap and Costco is one retailer that isn’t afraid to take on that cost. It will be interesting to see which retailers follow their lead.
Taking care of its employees is a Costco Brand attribute and one of the reasons to believe on the brand promise. For instance, consumers believe Costco’s good customer service can be directly attributed to employee compensation that is superior to other retailers. So, it’s very important.
Costco’s business model allows them to absorb the cost, or structure the wage increase and prevent it from becoming a visible cost increase to consumers.
Is it any wonder Costco does as well as they do and remain beloved? If you take care of your employees it shows in everything you do, including sales.
‘Nuff said. For my 2 cents!
Part of it is public image — the fact that they pay an outstanding wage sits very well with the upscale image they portray and the upscale customers they want to attract who spend more money.
It’s nice to go into Costco and see a lot of the same employees that have been there for years.
Look at the better quality of employees they have over Walmart.