In all the years I’ve shopped at Whole Foods or Trader Joe’s, for that matter, I’ve never met an unhappy employee.
The guys refilling the produce bins, the ones behind the sandwich counter (at WF) and the cashiers helping you part with your money – they are all unfailingly polite, friendly and helpful. [A cashier at Whole Foods once “told” me to buy strawberries instead of blueberries because there was a 2-for-1 sale on strawberries that day.]
Shopping at Costco, similarly, is a pleasant experience – though the folks there exude an air of competence and efficiency, in place of the friendliness at the other two places.
It would be reasonable to therefore conclude that the steady growth and profitability of all three retailers is somehow related to the happiness/friendliness/efficiency demonstrated by their employees. It would also be logical to assume that perhaps these workers were paid more than their counterparts at other retailers.
And you would be right.
What would be wrong though, is to conclude that “Companies that invest in higher salaries for low-level employees find success in a competitive market“, as the tagline for a recent article in The Atlantic did.
That’s the kind of correlation-causation conflation (alliteration, my new friend) that should make all thinking beings shudder. But why do they do it? Because it is beguilingly easy to do so (and we all do it on a daily basis).
In the case of Costco, Whole Foods and Trader Joe’s – what makes them profitable to begin with is a combination of the following: locating stores in affluent neighborhoods, not stocking a gazillion products and offering high-end, high quality and/or difficult to buy elsewhere, goods.
Taken together, these conscious strategic decisions
(a) attract customers with the ability and the willingness to spend a lot of money (more money than what a typical Walmart shopper might spend, at least)
(b) enable them to control various operational costs (non-labor, non-wage costs)
(c) create conditions ripe for profitability
[As an aside, specific to Costco, its membership fees, which are of course almost all pure profit, act as a barrier to entry for those that might not be a good Costco customer…so it is likely using this to make sure that only a certain kind of customer steps in to its’ stores.]
These companies’ labor practices, including higher wages, benefits, scope for advancement and training, complement their core business strategies, in two ways:
Cost reduction (HBR article from 2006) because employees stay longer:
Costco’s practices (wages and benefits) are clearly more expensive, but they have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year, close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.
And increased sales (via James Surowiecki in The New Yorker):
The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.
The reasons for this aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a “phantom stock-out.” That’s when a product is in the store but can’t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales.
But despite that, any of them could decide, tomorrow, that they can live with unhappy employees or with employees that make minimum wage and fewer benefits if such a move didn’t damage the bottom-line (such damage can come from some customers choosing to go elsewhere where employees are “fairly” treated – or – from their brands being damaged and reducing their ability to price products at a premium).
And that’s where the progressive visions of their founders and CEOs come into the picture.
John Mackey at Whole Foods and Costco’s Jim Sinegal (and Costco’s current CEO, Craig Jelenik) believe in paying their employees living wages and more. More power to them…I would do the same thing. But only if I was running a retail business that was structured to be profitable, to begin with.