Politics & Policy

Costco: The Arugula of Chain Stores

Obama's choice for shopping is great if you don't know any non-rich non-liberals

President Obama has been talking up the members-only shopping chain Costco in his crusade to raise the federal minimum wage, but the favored big-box store for well-heeled shoppers is probably far from the right model for most American businesses.

A minimum-wage hike is high on Obama’s “Year of Action” priority list, and Costco — a successful business that racks up big profits while paying its workers above the industry average — is useful in countering critics who say some companies cannot stay in business while being forced to pay higher labor costs.

#ad#Speaking at a Costco in Maryland last week, President Obama said that the company’s CEO Craig Jelinek “knows that Costco is going to do better, all our businesses do better, when customers have money to spend. . . . It’s time to give America a raise.” A week earlier, during his State of the Union address, Obama touted Costco as a corporate exemplar, saying that “profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover.”

This is true: Costco not only pays wages above those of its obvious competitors — the average Costco employee earns $22.89 an hour, compared to $12.67 an hour at Walmart — but also offers health care to its workers, boasts a meager 5 percent turnover rate among employees, and has seen sales increase by 39 percent and stock prices double since 2009, according to Bloomberg Businessweek.

But what is good for Costco may not be good for everyone else.

Costco operates on a very specific business model. With a small, highly productive labor force the firm runs massive, warehouse-style facilities to sell a diverse array of higher-quality retail and food items in bulk. They offer relatively low prices, but only to consumers who pay annual membership fees simply for the privilege to shop there. Not every company can operate this way, nor should they.

For example, Costco keeps wages high even though it has slim profit margins on actual product sales. They can do this because 70 to 80 percent of the company’s profits come from membership fees, which range from $55 to $110 a year. Other companies, like Walmart or Kmart, for example, might not be able to charge a membership fee, raise employee wages, and still make a profit.

Costco is largely found in middle-class and affluent communities, where residents can afford to front $55 to $110 before purchasing a single item. But membership fees price people out of stores: If Walmart or Kmart introduced fees, many low-income and impoverished individuals who benefit from the low-priced goods such stores sell could not even afford to enter the building.

“Costco attracts a higher demographic in terms of expendable income,” says Lee Peterson, a retail expert and the executive vice president of creative services at WD Partners. “On an income-demographic bell curve, Costco is way over on the right side.”

Costco’s model is also based on the assumption that it is “profitable in the long term to minimize employee turnover and maximize employee productivity, commitment, and loyalty” by paying higher wages, Jelinek said in a statement supporting the minimum wage.

This method works for Costco, but not every industry or company depends on or even desires the low turnover rates Costco has. Farms that rely on seasonal work or restaurants that employ students after school and in the summer might as well pay lower wages to temporary employees who only work during peak times. An arbitrarily set minimum wage could be devastating for companies that rely on low-skill or young workers who either cannot or do not want to remain in the industry to become the “committed” and “loyal” employees that a place like Costco has.

Costco is an admirable company whose success offers many lessons to other retailers, but Obama’s insistence that its model can work everywhere is no more credible than his belief that one-size-fits-all business mandates can work in a complex and diverse economy.

— Alec Torres is a William F. Buckley Fellow at the National Review Institute.

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