Should Walmart Imitate Costco?

The following is the Executive Summary from a soon-to-be-published NCPA policy report.

There has been much debate over the past few years about raising the national minimum wage to $10 or even $15 an hour. In areas where the minimum wage is at or slightly above the federal level of $7.25, unions have complained that big box retailers and fast food restaurants do not pay “living” wages.  Living wage advocates often accuse Walmart of being the worst offender, and point to Costco as a model to follow because it allegedly pays higher wages.  But is it realistic to expect all retailers to pay the same wage?

Retail Wages Vary by Store Type and Product Specialty.  Average wages for various retail stores vary widely depending on the type of retail.  According to the Bureau of Labor Statistics, if all the retail subsectors are combined, the average hourly earnings of retail nonsupervisory employees was $14.90 as of October 2015.  Divided by retail store type, some have lower average hourly wages than others — ranging from $11.19 for gas station clerks to $22.12 for electronics and appliance store clerks.

Profit Margins in Retail Compared to Other Industries.  If a large firm earned “record profits” last year, surely they have the money to boost the pay and benefits of their workers. However, profits as measured by dollars do reveal much about a firm’s expenditures.  The question should be:  What is the profit margin — the percentage of income earned on a dollar of expenditure?   The retail industry has some of the lowest profit margins of all industries.  After-tax operating margins (after-tax operating income divided by total revenues) in retail segments range from 2.23 percent to 4.38 percent.

Walmart Compared to Costco. In addition to differing types of retail stores with different profit margins and labor productivity, retailers have various business models — which include the products they sell, their customer base and their sources of potential revenue.  Consider the two primary stores labor activists like to compare in terms of wages, Walmart versus Costco.  The inherent difference between Costco and Walmart is their business model.

Walmart operates 5,300 stores (including the smaller Neighborhood Markets and Sam’s Clubs) and tries to cater to the widest range of customers and provide quality and cost options that appeal to a range of lower to higher income shoppers.

Costco operates about 447 stores under a subscription business model, charging customers for membership. It offers relatively fewer choices to customers compared to Walmart.  Costco is geared toward a smaller, more selective clientele than Walmart.  Costco stores tend to be located in more affluent neighborhoods and a higher percentage of Costco’s customers are business buyers.

A Statistical Analysis of Walmart and Costco Locations. Given that Costco targets a higher income demographic than Walmart, one could surmise that both store chains would locate in areas that suit their desired income demographic. To test this hypothesis, we compiled a dataset of counties in Texas and Florida (states selected for their population size, relatively weak zoning laws, and presence of both Walmart and Costco) using five explanatory variables of interest:  population, median household income in each county, number of Costco stores in each county and number of Walmart stores and Sam’s Clubs in each county.  The results indicate that Costco locations are largely dependent on income, while Walmart locations are not.  Given two equally sized (500,000 residents) counties, if one is in the top 40 percent of median income it has a 76 percent probability of having a Costco; if it is in the bottom 60 percent, it has only a 20 percent probability.

Do Retailers Pass on Labor Costs to Their Customers?  Several studies have found that “price sensitive” shoppers (those who are more likely to change their buying habits based on price changes) were more likely to have larger families, lower incomes and patronize more stores.  Those who were less price sensitive were more likely to be older, of higher income and loyal to a particular store.  If high-income consumers are less sensitive to price changes, as the research suggests, stores that cater to higher income shoppers could pass on the costs of higher wages to their consumers (to some degree) through increases in product prices.  But a store that caters to price sensitive shoppers would more likely be unable to raise prices.

Researchers from Georgia State University measured the effect of the 2007 to 2009 incremental minimum wage increases (from $5.15 to $7.25 an hour) on 81 fast food restaurants in Georgia, including medium and large-sized cities and rural areas.  They found that among adjustments in response to the wage hikes, there was a nearly 11 percent increase in the price of the combo meal.

Conclusion.  Living wage advocates claim that putting more money in the pockets of low-wage workers boosts the economy by enabling them to buy more goods and services.  But this argument ignores the potential increased price of products as a result of labor costs being passed on to consumers.  If lower income earners are already as price-sensitive as the research suggests, making basic goods more expensive will not financially benefit them, particularly if they have large families with several dependents who do not work.  There are better ways to help lower-income households than to mandate high minimum wages.

Comments (4)

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  1. John Galt says:

    As you have to pay a membership fee at Costco for the privilege to shop there, I have never shopped there. I visit a Walmart at least 4 times a week.

  2. James Schneider says:

    I wish all policy pundits would adhere to these fundamental economic principles when discussing government Safety Net policy and the taxes to pay for that Safety Net.
    1. Business cannot pay taxes. Only people pay taxes. Business costs, including taxes must be passed along to customers via higher prices, employees via lower wages, owners via less profits or absorbed via improved operations. Globalization means investors/owners are no longer an option because their capital will follow the path of least resistance and move overseas in order to achieve the best ROI with the least risk. Therefore, either total labor costs must come down or prices must increase.
    2. Since business cannot pay taxes, it should never be required to pay any taxes. Forcing a business to pay any tax allows law makers to hide the true cost of government in the prices of the goods and services a business sells.
    3. All federal safety net programs should be paid for via a Safety Net Tax based on consumption with a rebate paid to those below the poverty level and pro-rated to those up to 1.5 times poverty. The rebate will make the SNT far more progressive than the Payroll Tax and the increased prices consumers pay for all business paid taxes and regulations. Business should never be expected or ever allowed to pay for any portion of the Safety Net.
    4. The Minimum Wage is part of the safety net. As such, under a SNT, the discussion would be very different and would make so much more sense. In other words, should all people pay for some proposed increase in the national minimum wage with every purchase? They already do, they just don’t realize it and they don’t know how much.

  3. William Carney says:

    Not everyone should have a family, if they can’t get a job that will support it. Low-wage jobs are generally entry-level jobs, with the expectation that over time, the employees will learn enough and work hard enough to earn promotions. If that doesn’t work with their employer, perhaps they should find another employer willing to hire them at a higher wage.

  4. PJohnson says:

    It’s simple. If you want to support $15 an hour. Buy at Costco. Then please shut the hell up.

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