Costco and Wal-Mart, two of the most successful retailers in the United States stand at two opposite poles in terms of their business strategy and human resources management; while Costco provides above average wages and benefits to its workers, Wal-Mart is notorious for giving minimum wages to its workers with only half of them receiving health insurances. With these differing strategies, the question of who gains better profitability between the two companies becomes controversial in the literature.
Holmes and Zellner (2004) of Business Week explored the impact of higher wages at Costco and its implication on the profitability as well as its effect on employee’s productivity and loyalty. Comparing it with Wal-Mart, the authors explored the impact of higher compensation on employee and its impact of operating costs and how Costco have developed loyal employees based on the turnover rate of its workers as compared to Wal-Mart.
In order to provide a more accurate comparison, Holmes and Zellner (2004) compared official company statistics and figures of Costco and Wal-Mart’s Sam (the direct competitor of Costco). In doing so, the authors avoided general comparisons and opted for specific assessment of the two companies.
For instance, Holmes and Zellner (2004) noted that Costco employees generates more sales than that of Wal-Mart so that Costco only needs 33.33% employees that Wal-Mart employs in order to get the same sale. Consequently, in terms of employee loyalty, Costco has a low turnover rate of 24% compared to Sam’s which posted 50% employee turnover.
Largely, Holmes and Zellner (2004) conducted a qualitative and quantitative research by focusing on primary statistical data that they have obtained from company reports of Costco and Sam. The study has also employed financial analysis in order to specifically measure the productivity of employees as well as their efficiency. Subsequently, interviews were also conducted on the management of both companies in order to provide an in-depth analysis of why the management of both companies has employed their business strategies.
Moreover, Wall Street investors were also interviewed on their preference company to invest in. The result showed in the quantitative research is different from that of the qualitative research: whereas, the quantitative data shows that Costco has performed better than Sam’s of Wal-Mart, most investors still prefer to invest in Wal-Mart.
The study of Holmes and Zellner presented a short yet concise picture of the retailing industry giants and to a large part provides evidence on the debate of whether management should provide better wages to its workers or not. As Herbst (2005) have argued, Costco provides a good alternative on how retailers should manage their workers and the productivity of their employee. Considerably, Herbst (2005) supports the findings of Holmes and Zellner by proposing that productivity and efficiency can be achieved with better wages. Moreover, as Fishman has argued (2006), doing business with Wal-Mart is not the be-all, end-all of suppliers.
Business researches such as Holmes and Zellner that focuses on both the quantitative and qualitative methods provides a deeper understanding of the business decisions and business management of companies. Oftentimes, while statistics may show that one is more profitable than the other, most managers and investors seeks to do otherwise. The study presented a short yet comprehensive evaluation of the clash between higher wages and profitability and how Costco and Wal-Mart have figured in choosing separate strategies. Finally, the research provides a strong case why empirical studies need to be conducted in lieu with theoretical claims.
Fishman, C. (2006). The Wal-Mart Effect: How the World’s Most Powerful Company Really Works–and How It’s Transforming the American Economy. The Penguin Press: 294 pages.
Herbst, M. (2005) The Costco challenge: An alternative to Wal-Martization. The Labor Research Association. Retrieved 30 June 2007 at http://www.laborresearch.org/print.php?id=391.
Holmes, S. and Zellner, W. (2004) The Costco Way: Higher wages means higher profits. Business Week. April 12, 2004. Retrieved 30 June 2007 at http://www.businessweek.com/magazine/content/04_15/b3878084_mz021.htm.
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