Superstores: An Analytic Comparison - Costco Vs. Walmart

Superstores: an analytic comparison

Costco vs. Wal-Mart

In this day and age of high volume, and deep-discount shopping, consumers search to find the most value for their dollar. Saddled with bills, the high cost of utilities, ever increasing gas prices and cable television, not to mention cell phones and many new technologies which weren't even an issue not too long ago, consumers almost have no other choice but to be as frugal as possible and measure what they are getting versus what they are paying.

Two big name stores that offer low prices and exceptional value are retail giant Wal-Mart and wholesale giant Costco. At its inception in 1962, Wal-Mart recognized the void that existed in the retail market for affordable products and services and offered everything needed for the home at deep discount prices. By the 1970's they experienced significant growth with 38 stores, 1500 employees and $44.2 million in sales which was a tremendous amount of money back in the 70's. Sam Walton, the founder of Wal-Mart also recognized the importance of positioning his company in the financial industry and began selling shares over the counter. This made Wal-Mart a publicly-held company during this time. One year later, its stock split by 100 percent at a market price of $47.00. It was approved and listed on the New York Stock Exchange and its stock split by 100 percent for a second time in as many years. This exponential growth continued for decades and the company was able to expand as well as acquire several smaller companies. It was the first company to attain $1 billion in sales in a short amount of time and would become the nation's number one retailer. By 1997, Wal-Mart became the largest private employer in the United States employing more than 680,000 people with an additional 115,000 employees internationally. They served over 90 million customers each week and their sales exceeded $100 billion that year. This impressive record allowed them to enter the Dow Jones Industrial Average, replacing another iconic company named Woolworth. As recently as five years ago, Wal-Mart had more than 1.6 million employees worldwide with record net sales of $345 billion. More than 176 million people shop at Wal-Mart each week. This record setting success has come at the expense of the average Wal-Mart employee. Claims of mistreatment and discrimination have plagued the company for many years. Thousands of employees in several different states including California and Massachusetts have accused Wal-Mart of failing to adequately pay overtime, vacation and a variety of other wages. Last year, the company agreed to settle a class action lawsuit in the amount of $86 million. That settlement is separate from Wal-Mart's 2008 agreement to pay as much as $640 million to settle 63 federal and state class-action lawsuits alleging it deprived workers of fair wages that were due to them (Reuters 2010). These are only a few examples of many lawsuits the company has faced and continues to face as their employees nationwide allege they are mistreated and under-paid. Putting Wal-Mart's financial position into perspective, the $86 million settlement is roughly equal to only two days of Wal-Mart's after-tax operating profit. The fact is that the company makes money hand over fist and in spite of astronomical lawsuit settlements, Wal-Mart's stock continued to rise. One could wonder how this company maintains such an incredible profit margin. From the very beginning, Sam Walton ran a bare-bones operation, cutting costs wherever possible. One way to do that was to offer employees only the bare minimum in terms of wages, and benefits. He was strongly against unionization and refused to let employees organize to improve unfair labor practices. Many employees alleged poverty-level wages, inadequate and unaffordable healthcare benefits, and discrimination against promoting women and have formed several grass-roots campaigns to fight against these issues. The recent case before the Supreme Court on whether or not a class action lawsuit to collectively represent all women who have been discriminated against can move forward is a shining example of how these grass-roots campaigns have paid off and have grown into full blown media blitzes. Of course, the very reason Wal-Mart ran a frugal operation from the beginning was to have the ability to pass on these savings to its customers and keep prices low, which has been the driving force of its large success. In recent years, there has been considerable pressure on Wal-Mart to treat their employees more fairly and to provide living wages and more affordable benefits. American labor unions have helped many employees form the Wal-Mart Workers Association. Since attempts to officially unionize any Wal-Mart's have failed, this unique association is going to bat with the nation's largest corporation over its practices of reducing the hours its employees work from full-time to part-time often jeopardizing their health benefits. This grass-roots organization though extremely tiny as compared to the retail giant is attempting to make a difference for these under-represented employees. The recent Supreme Court proceedings will likely sprout many more of these types of associations attempting to help employees organize. The issue of employee healthcare costs is two-fold as some analysts wonder if tax payers should be burdened with supporting those employees who must receive social services benefits just to get by as a direct result of Wal-Mart's lack of employer responsibility in providing them with adequate benefits. In spite of their negative reputation as an employer, Wal-Mart's employee turnover rate is still very close to the national retail industry average of 44 percent.

Lastly, Wal-Mart comes under scrutiny for doing too much business with China, instead of offering more American made products. Wal-Mart accounts for 8 percent of total US retail sales with the exception of automobiles and they import approximately 15 billion dollars of Chinese products to sell to American consumers each year. Many of Wal-Mart's other inventory comes indirectly from China through other companies such as Mattel. This reliance on Chinese-made imports makes Wal-Mart very vulnerable as the American dollar gets weaker and the Yuan (Chinese dollar) gets stronger. With the US trade deficit with China reaching 252 billion dollars, some say that Wal-Mart should assert itself as an American institution and work to close the gap. As consumers we are part of the problem because we maintain a high standard of living and China produces the low-cost goods that Americans want and largely look to Wal-Mart to provide for us.

Costco by large contrast is the