Sunday, March 05, 2006

More on the Wal-Mart

Big story in the Milwaukee Journal-Sentinel this morning about the profitability of the Costco model. Costco, which is apparently coming to Grafton, pays its employees somewhere in the neighborhood of $17/hr compared to an average of $10.51/hr for an average fulltime employee at Wal Mart.

Costco, although it is nonunion, has become something of a club to be used by the anti-Wal Mart forces. If Costco can do this, why can't you.

There is much about what Costco does that I like. Caring about those affected by your business - including your employees - is a good thing. While I think that relatively little of that can or should be mandated by government, I don't think a good Christian businessman or woman can possibly emphasize profit to the exclusion of the well-being of employees and customers. (And, before you jump, I am sure the same holds true for many other belief systems.} Costco's CEO has also repudiated the idea of enormous salaries for the very top executives and I think that makes sense as well; although his own salary is probably too far below market to serve as a model for many other companies.

But the idea that everyone can be like Costco ignores the realities of business. There is a thing they teach in business school called market segments. Some companies compete effectively by offering high quality at a high price while paying the high wages required to deliver that quality. The company that I serve as General Counsel follows precisely that strategy in its industry and the family that owns it is filthy rich.

But much to our chagrin, not everyone can or wants to pay for the great stuff we sell. (No one finds this more disappointing that I do.) So other companies are also successful selling lower quality stuff at a lower price paying lower wages. To compare us to them and then claim that they could do the same thing is just wrong. The market wouldn't bear it.

So it goes for Wal-Mart who, as the article points out, sells at lower prices with thinner margins to lower income consumers. Wal-Mart is a bit more profitable than Costco but that explains very little of the difference in wages. Wal-Mart earned 0.6% more per dollar of sales than Costco. On global sales of 312.6 billion, this comes to roughly 1.8 billion of extra income. Let's assume Wal-Mart paid that out to its employees instead. Wal-Mart employs 1.6 million people. The foregone income would net each of them approximately $ 1172 more per year, coming out to approximately 70 cents more per hour. You might argue that it could be higher since not all these folks are people working in stores and not all are full time. But even if you limited the redistribution to full time employees below a certain wage level, you get the picture.

Wal Mart is in a different market sector selling to different people. You can hate Wal-Mart for not paying its employees enough or for beating up its suppliers, but it seems inescapable that the result is really low prices for people who can't afford to pay more. Give up one end of the equation and you have to give up the other.

As an aside, I am not a blogger on Wal-Mart's e-mail list. They have completely ignored me as I, in my shopping habits, have completely ignored them.


Mendez said...

Jobs and discount goods for working people are indeed good things. But the Wal-Mart model is defective in at least one way. Because its benefits package is weak, many Wal-Mart employees end up on Badger Care and taxpayers like the Shark pick up the tab. So even though the Shark doesn't shop at Wal-Mart, he still subsidizes Wal-Mart's bottom line.

If we are going to do health insurance in this country through employers, then large businesses like Wal-Mart must cover their workforce. That's the cost of doing business. Shifting the burden onto Joe Taxpayer isn't fair.

Rick Esenberg said...

Why does hiring someone imply that you must pay their doctor's bills? If an employer is forced to do so, you'll see fewer jobs and higher prices. The law of supply and demand - and mathematics - are hard things.