October 27, 2007 —
In recent years, Wall Street has increasingly looked at Wal-Mart’s business plan as the ideal for ‘big box’ companies. This attitude has caused other major retail corporations to copy Wal-Mart—what BusinessWeek called ‘Wal-Martization’—in order to lower labor costs and increase profit margin. Yet, in July 2005, the New York Times ran a story with the title: ‘How Costco Became the Anti-Wal-Mart.’ According to the Times, Costco's average pay is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. Yet, some argue that Costco is really no better than other ‘big box’ companies, regardless of their treatment of employees.
At Costco, no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more. A typical Costco store stocks 4,000 types of items, including perhaps just four toothpaste brands, while a Wal-Mart typically stocks more than 100,000 types of items and may carry 60 sizes and brands of toothpastes. Narrowing the number of options increases the sales volume of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers.
Besides paying considerably more than competitors, Costco contributes generously to its workers' 401(k) plans, starting with 3 percent of salary the second year and rising to 9 percent after 25 years. Costco also has not shut out unions, as some of its rivals have. The Teamsters union, for example, represents 14,000 of Costco's 113,000 employees.
According to many critics of the ‘big box’ economy, Costco is just as guilty as Wal-Mart and others at changing the landscape of many local economies, driving out independent businesses and disrupting local communities. And yet, in today's economy, just how applicable is the Costco model to the rest of the retail business? Costco has a particular niche: Selling to upscale customers. Like Wal-Mart, Costco is very aggressive with its suppliers and many question whether the Costco model would work if the company had to cater to shoppers who were more price-sensitive? Or would the competition from Wal-Mart and its knock-offs force it to adopt similar labor policies?