Costco Efficiency Wage Case Study

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

As the minimum wage has remained flat, productivity has increased, and so too have corporate profits. If the minimum wage of the 1960s had increased with productivity, it would stand at around $15/hour. If it increased with inflation, it would be more than $10/hour (Khan, 1).

Ira Knight, who is an author of article “Let’s Make the Minimum Wage a Living Wage”, expresses an opinion that increasing the minimum wage would help all struggling workers and at the same time improve U.S economy. On the other side, Janice Steele in her article “Keep the Minimum Wage Where It Is” argues that raising the minimum wage would have bad effects on workers, consumers and small businesses. Ira Knight’s article seems to be the stronger of the two positions because her arguments are based on several recent studies, and last but not least, she had a personal experience with the minimum wage job.

“Overall, these are strategic investments in our people to reignite the sense of ownership they have in our stores,” CEO of Walmart Doug McMillon said on Feb. 19. “As a result, we firmly believe that our customers will benefit from a better store experience, which can drive higher sales and returns for our shareholders over time.” (Che, 2015). As the world’s largest retailer, the change could affect the economy, motivating more customer spending and making other stores raise their baseline salary. At Ben & Jerry’s an entry level position will start at $16.29 an hour and it will probably go up as long as you stay with that company long enough. The average employee at Costco is making $21 an hour I was amazed when I read that. Also, about 88 percent of Costco workers have company sponsored health insurance.

In many studies recorded by Raise the Wage, it states that, when the San Francisco Airport had a raise in pay, employee turnover drastically dropped from 95% to 19%. As well as 35% increase in working performance, employee morale improved 47%, 44% drop in for disciplinary issues, and customer service improved 45%. However this is not only the San Francisco Airport is not the only place where improvements were found in employees, by raising their pay; home care workers located in Bay Area also had turnover drop by 57%, and in Los Angeles there was an average 17% lower rates of turnover in firms where pays were higher. Fast-food employees were also employed longer and were commonly found to have full-time jobs when minimum wage was raised. Many companies including Costco, have taken notice of the improvements in workers when payed higher, a Business for a Fair Minimum Wage stated, “[h]igher wages benefit business by increasing consumer purchasing power, reducing costly employee turnover, raising productivity, and improving product quality, customer satisfaction and company

The Costco theory is by paying their employees a higher wage, it will minimize employee turnover and maximize employee productivity, and this theory has been put to the test and stands tried and true.

Renee McDonald (“Plaintiff”) allegedly sustained personal injuries on October 8, 2015 while shopping at a store owned and operated by Costco (“Defendant”) in Brooklyn Park, Maryland. According to the plaintiff, while walking through the store, she tripped on mop water which caused her to fall to the ground and suffer “severe bodily injuries.” The Plaintiff claims that her fall was caused by the mop water. The mopped area had been secured with a yellow caution sign that warned customers of the wet floor. At the time of the Plaintiff’s fall, however, the sign had fallen down and was lying on the floor. Plaintiff alleges that the store did not have proper signage to warn of the hazardous condition.

Costco is one of the most profitable retail stores in the United States at the moment. This is in spite of the prevailing tough global economic times and stiff competition from stores such as Wal-Mart and Target. Costco, a members’ wholesale retail store, was founded in 1983 in Washington by Jeffrey Brotman, who serves as the current Chairman of the board of directors and James Sinegal, the current company president. Costco has not been spared by the current global economic conditions. They have affected it in a number of ways that have made the company’s management respond in a manner that is meant to ensure that the business not only survives but grows even stronger. First, Costco has taken strong measures to keep

“Paying your employees well is not only the right thing to do, but it makes for good business”-Jim Sinegal, CEO of Costco. Many of America’s employees are not being paid well, however, for the annual income of a full-time employee who works year-round is less than $16,000 (about $15, 080) according to the current federal minimum wage (Rebuilding). To put into retrospect how out-dated the federal minimum wage is, consider that the minimum wage of 1956 amounted to exactly $7.93 in 2009 (Henderson). How progressive is it that our nation’s workers being paid less today than workers from the 50’s? The federal minimum wage should be raised in order to assist families out of poverty, to ensure the effort and loyalty of workers, and

Costco’s does not pay it’s employee too much. It does make sense for Costco to compensate its employee so much bettter than Wal-Mart/Sam Club. Good compensation for employee is another business strat gy that Costco has employed in order to be set apart from their rivals and also to be able to win a sustainable competitive advantage.

Costco’s business model is to generate high-volume sales and rapid inventory turnover by offering low prices on a limited set selection of brands and a few selected privately labeled products. This model does not turn a profit on its own with the company operating slightly below its break-even cost. However, to make up for this Costco charges a membership fee and this is a simple way of padding their profit but also enabling them to provide a customer experience that emphasizes value.

Successful organizations demand satisfied employees. Figure 1 below shows a theoretical one-way linkage chain called the "Engagement-Profit Chain." This chain directly shows how active employee engagement leads to good service which ensures that customers will to continue coming back, providing a solid foundation on which the company can grow. As employee effort is indeed discretionary, it has been observed that higher levels of engagement, or the way management commits itself emotionally to employees, pushes a higher level of discretionary effort (Kruse, 2014). It is not by chance that

A Business week article makes an interesting statement that Costco belongs to the very short list of companies with a culture so favorable to employees that it gives the company a competitive advantage, and it’s most likely to keep on rising over many decades. Costco sees workers as an asset to invest in, rather than a cost that must be reduced. In the U.S. Costco pays workers an average of nearly $21 per hour, almost three times the minimum wage and about twice as much of what most competitors pay. They receive great benefits and are part of a safe and healthy working environment as well. At Costco they are committed to providing its employees with opportunities for personal and career growth. Costco has implemented a strategy for a competitive advantage by having a mix of low-cost providers and differentiation. Company differentiates itself by providing consumers with products in bulk at a low per unit cost. Costco offering two types of memberships- the regular and executive membership. With an executive membership, Costco gives a 2% reward on annual Costco purchases. A holder of the executive membership receives incentives for shopping there, which leads to more sales and higher customer visits. This is just one of the many reasons customers keep going back to Costco. It has made itself a highly successful company by offering quality products and excellent customer service.

Companies that have higher levels of engaged employees have higher earnings per share (EPS) than companies that have lower engagement levels (Kelleher, 2011). Engaged employees are more productive, have higher levels of customer loyalty and help their employers become more profitable. An engaged employee is less likely to leave their current position. This saves their company money because there is no need to spend money to hire and train new personal. These saving can be passed along to the employees for increased wages, bonuses, and benefits. All of these items help in motivating employees, to attempt to engage the disengaged.

Organizational culture has been described as shared values and beliefs that underline a company’s identity. A strong culture that encourages employees from the top to the bottom in adaptation and change can increase organizational performance by energizing and motivating employees, shape behaviors, unify personnel in the goals / objectives and align employee’s actions with the priorities of the company (Daft, R., 2013). Creating a constructive culture should be a manager’s top priority because the right culture will propel a company into a top performer in its industry.