This past Saturday, the new Costco Wholesale Store opened its doors in Carrollton. The membership-only bulk retailer is a plum acquisition for New Orleans, revitalizing an empty commercial lot and capturing more retail commerce within the city. It also stands as a comfortable monument to domestic consumerism, where you can buy a gallon tub of mayonnaise because, gosh darn it, we’re Americans.
Although this opening is undoubtedly a blessing, Costco has become something of a political truncheon in recent years. You see, Costco has situated itself as the poster child for high retail wages, placing other national retailers, particularly Walmart, on the defensive.
You see, while Walmart pays its average employee only $13 per hour, compensation at Costco totals over $20 per hour, and with far better benefits. President Obama has highlighted Costco as an example of a company that grows the middle class while growing its profits. Costco has certainly managed to thrive in spite of refusing to treat its workforce like a gaggle of latter-day Bob Crachets. Since 2009, its sales have risen 13% annually, and profits have risen 15%.
So does this mean we should run WalMart out of New Orleans and embrace Costco? Should we gather our pitchforks and torches? Well, not quite.
Walmart, like any other business, doesn’t behave in ways that it views at contrary to its interests. It isn’t some cranky old man shouting: “I could make more profit by paying workers more, but I won’t because I’m a cantankerous turd and I’d rather go bankrupt than show a sliver of human kindness! Humbug, I say!” Although actors in a free market don’t always behave rationally, a huge retailer like Walmart surely has good reasons.
The reality is that Costco and Walmart really aren’t direct competitors and their business models, as well as the classes of customers they target, are radically different. Businesses often pay differently for similar positions. This is why cashiers at Saks Fifth Avenue are paid more than the guy at 7-11 who speaks garbled English and always gives you the wrong change.
Megan McArdle, a journalist who writes for Bloomberg and the Daily Beast, has released a series of pieces elaborating on the differences between Costco and Walmart, and how those differences explain the divergence in their employees’ respective salaries. First of all, McArdle notes, Costco is a specialty retailer while Walmart is a department store. In practice, this means that Costco offers far fewer products than Walmart. Your average Costco offers about 4,000 stock-keeping units (SKUs), while your average Walmart offers a few magnitudes more – well over 100,000 SKUs.
This is the single most important reason why Walmart uses cheap labor. It’s because they’re the place where you can buy shoes, caulk, and milk and a computer in the same trip. It means need more labor doing more menial tasks, sorting, arranging, replacing, inventorying and reordering. At Costco, by contrast, employees simply haul the product in on pallets and make you, in McArdle’s words, your “own stockboy.” Where there are fewer employees selling more product (often in obscene volumes), a company can afford to be more flexible on salaries.
Indeed, when compared to direct competitors like Target, we see that Walmart’s salaries are actually not off-base. Target, like Walmart, doesn’t charge a membership fee and has a staggering number of SKUs. Like Walmart, Target has more employees per store and doesn’t pay them generously.
A second factor noted by McArdle is that Costco caters to a very wealthy clientele. Walmart does not. There are entire websites dedicated to the poor deportment and dress of Walmart shoppers. Local bounce artist “Mr. Ghetto” notoriously released a music video in 2011 entitled “Wally World” in which scantily clad dancers twerked rhythmically to lines like “she’s got her Louisiana Purchase Card.” At Walmart, there’s nary a monocle in sight.
The numbers also bear this out. According to McArdle, the household income of the average Costco shopper is $85,000. The average household income of Walmart shoppers is estimated to be roughly half of that. Sam’s Club, Walmart’s membership-only bulk retailer, also targets less wealthy shoppers and offers significantly more SKUs than Costco.
Ultimately, this is why it makes financial sense for Costco to pay its workers more: A wealthier clientele is more sensitive to poor customer service, and a well-paid, well-trained workforce with little turnover will offer customer service that is consistently better (because with labor, you tend to get what you pay for). The positive publicity is also helpful, creating a perceived sense of civic virtue to shopping at Costco sought after by high-end retailers. There’s nothing quite like making affluent people feel virtuous simply because they buy your stuff.
Costco is definitely an asset to New Orleans. However, it is not the clarion call of some new business model for all retailers. Costco’s model works for Costco, but most retailers, from the corner store all the way to Walmart, do not have their business model. This is not due to callousness or short-sightedness; it is an acceptance of economic reality.
So march onward fellow shoppers. Shop at Costco, shop at Walmart, or shop at one of our many local small businesses. Choose what works for your needs and preferences, but for Pete’s sake, don’t make it a political statement. The reality of the situation is far too complex for that.
Owen Courrèges, a New Orleans attorney and resident of the Garden District, offers his opinions for UptownMessenger.com on Mondays. He has previously written for the Reason Public Policy Foundation.