Costco rejecting industry austerity

Higher minimum wage, better benefits good business for retail giant

Los Angeles TimesMarch 9, 2013 

Wholesale Inventories

Costco, which intends to open its first store in Lexington later this year, has earned a reputation over the years of treating its employees relatively well. Calls for the company to cut expenses have quieted as its stock has continued to grow in value.

RICK BOWMER — ASSOCIATED PRESS

NEW YORK — For many businesses, opposing minimum wage increases is a no-brainer: Raising the minimum wage increases their expenses. The U.S. Chamber of Commerce steadfastly opposes the proposal, as do many businesses big and small.

But earlier this week, a handful of businesses applauded a bill introduced in Congress to raise the minimum wage, and even sent out a news release vocalizing their support for doing so.

They include retail giant Costco, which intends to open its first store in Lexington later this year, and smaller businesses such as British American Auto Care in Columbia, Md.

So what gives? Why are some businesses bucking the trend and calling for a change in policy that could increase their expenses, especially at a time when finances are stable at best? And why Costco, a public company that has investors watching every penny and questioning every management decision?

After all, wages in retail, when adjusted for inflation, have actually decreased by about 30 cents an hour since 2007. Wouldn't retailers want to keep it that way?

For Costco, the answer is no. The company has earned a reputation over the years for treating employees relatively well. Costco pays a starting wage of $11.50 an hour, gives most employees health care and other benefits, and has not switched to the model adopted by many big-box retailers of using temporary firms in warehouses to keep costs low.

"Instead of minimizing wages, we know it's a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty," said Craig Jelinek, Costco's chief executive.

Analysts have sometimes called on Costco to cut back on benefits or lower wages, but the company has not listened, James Ragan, a senior equity analyst at Crowell, Weedon & Co., said in an interview last year. Such calls on the company have quieted as its stock has continued to grow in value. The stock is now trading over $100 a share; a decade ago it was at $32 a share.

"I believe that their positive treatment of employees, especially compared to competitors, has definitely been positive," he said. "It has a strong company culture at the employee level."

The company doesn't outsource its call center; a few years ago, when it engaged a third-party company to clean its facilities, the company eventually decided to hire the workers full time and give them better wages and health benefits.

"I think we've always resisted several things that seem like they make economic sense," said Chief Financial Officer James Galanti. "For us, we feel it's better long term that we do it this way."

Costco employees typically stay with the company longer than employees at other big-box retailers, many of whom are employed by outside agencies, rather than the retailers. Since retail employees interact with customers frequently, Galanti said, it's important for them to be happy, so they'll treat customers well, he said.

"We run our business the way we think it should be run, and we've done pretty well doing it," said Galanti, in an interview last year. "When tasked with looking at all the costs, we tend to not look at 'how do we reduce expenses.' ... There are things like taking health care out that we're not willing to touch."

These policies have helped Costco avoid some of the labor unrest that retailers such as Wal-Mart have faced this year, as workers call for higher wages and unions.

But Costco's policies are unlikely to spread to other retailers. Wall Street has urged companies to cut fixed costs such as labor during the recession and recovery, making raises and health insurance for retail employees unlikely to come soon unless, of course, they work for Costco.

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