Costco's: Extravagant Labor Costs Help Stockholders

Topics: Costco, James Sinegal, Sol Price Pages: 4 (1084 words) Published: December 8, 2008
Marcus Chan
Jen Petersen
Business and Its Publics: Inquiry and Discourse
February 20, 2008
Argument Essay (Op/Ed): Final Draft

Costco’s Extravagant Labor Costs Help Stockholders

When you think wholesale warehouse, one word comes to mind—vast. Or maybe, enormous. Or perhaps, titanic. Or some other variation of “very-very-large.” Sam’s Club and BJ Wholesales, with their voluminous ceilings and piles of 64 ounce mayonnaise jars that you can only buy in packs of three, welcome you to ‘Wholesale Land’. The immutable law of this land is to maximize profit; that is, to increase sales or to decrease costs. Multi-billion dollar corporations categorize employee wages and insurance as costs and cut them in an effort to maximize profits. However, Jim Sinegal’s Costco provides a refreshing exception to this corporate cannibalism. Costco sees the respectable treatment of employees as an investment instead of an unnecessary cost.

At an average employee wage of $17 an hour, Costco’s business strategy has Wall Street analyst Bill Dreher of Deutsche Bank lamenting that at Costco’s, “it’s better to be an employee or a customer than a shareholder.”[1] Since labor costs generally account for about 80% of a wholesale company’s total expenses, Costco is forfeiting potential profit– the cost of wages is simply too high. [2] Let’s also not forget that Costco pays for 92% of employee health insurance premiums, a whopping high expense compared to the 66.66% paid by Sam’s Club, its closest competitor.[3]

By forgoing variety and stocking relatively few items, the wholesaler can buy its items in larger bulk – thus ensuring a discount from its supplier. The wholesaler then marks up items by very little, only 17 or 20 percent as opposed to the 25 percent mark up by supermarkets and the 50 percent mark up by department stores to pass the discounted price to its consumers.[4] However, because of the low mark up, the wholesaler must sell a larger volume to make the same...
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