Lets Get Costco
2005-01-28, 9:18 a.m.

Our small county is in the process of opening a 3rd Walmart. The county commissioners are slick bastards. They posted a rezoning meeting way in the back of the paper, bury amongst trival crap about 1 1/2 years ago. This new Walmart that is going up, is 4 miles from the other one in town.
I hate Walmart.
Here is an article sent into the local paper on it.

Wal-Mart no bargain for business

By Paul Heise

First, full disclosure: I never shop at Wal-Mart or Sam's Club. I know their business model, and I don't like it.

People don't like Wal-Mart even as they are seduced by those low prices. They are right. Even as they fear the effect on the local business community and things like traffic and crime, people also sense a loss of control when they face the mega-retailer.

The conventional wisdom says that the everyday low wages, in the store or in China, are why Wal-Mart can offer those everyday low prices, which everyone agrees are so beneficial to the consumers. Those low prices are the reason communities put up with the low wages, the outsourcing and the effect on the local environment.

But are those low wages really necessary? It is useful to compare Sam's Club with its toughest competitor, Costco, whose president challenged Wal-Mart to avoid a race to the bottom in wages.

Sam's Club pays a full-time, senior employee $11.52 and hour ($8.56 at Wal-Mart) while Costco pays $15.97. With 70 percent of new hires lasting less than a year, few at Wal-Mart actually get that wage. Of Wal-Mart's employees, 47 percent have health insurance, and 64 percent have a retirement plan. But 82 percent of Costco's employees have health insurance, and 91 percent have a retirement plan. And Costco invites the unions in while Wal-Mart does not.

You would think that Sam's Club's expenses would be lower. They are not. Costco is far more productive and efficient. Costco's 312 stores have sales of $34 billion, while Sam's Club's 532 stores have $35 billion. Costco sells that amount with 68,000 employees, while Sam's Club has 102,000. As a result, Costco earns $13,647 in operating profit per employee compared to $11,039 at Sam's.

In effect, Costco says if you pay a living wage and treat your employees with respect, they will produce for you. Wal-Mart pays as little as it can. Costco is using what economists call the efficiency wage model, and it works. Employee turnover at Costco is, as you would expect, a very low 6 percent per year, while at Wal-Mart it is 40 percent.

The Wal-Mart pay scale leaves many families with children below the poverty line. That makes them eligible for all the benefits that we have set up to keep people from destitution and malnutrition. Such families are eligible for food stamps, heating supplements and school-lunch programs. The public pays the bill.

Full-time Wal-Mart employees are eligible for health coverage. However, they must pay 35 percent of the cost, double the national average, and more than half of them simply cannot afford it.

A third of Wal-mart employees are part-time and not eligible for health care. Hopefully, they would be covered by Medicaid. When the uncovered show up at the emergency room, the most expensive site of medical care, the public pays the bill.

The way many Wal-Mart employees escape poverty and extreme hardship is through the Earned Income Tax Credit (EITC) which is, in effect, a negative income tax paid to the working poor. A average worker with dependents earning $8.50 an hour worker would pay no income tax and would receive as much as $4,000 as a grant. The IRS, with your tax money, is making up the shortage in their Wal-Mart wage. The public pays the bill.

This is the what is called corporate welfare. The public is subsidizing Wal-Mart profits.

Free-market economists will tell you the market works, and this low wage is what those workers are worth. Free markets are efficient, but only when firms follow the rules.

Wal-Mart was sued 6,000 times in a one-year period year for violations of some practice, law or rule. In 33 class-action suites in 31 states, Wal-Mart employees alleged they were forced to work off the books. Discrimination against women is another of the more frequent allegations.

In 2003, federal agents raided 61 Wal-Mart stores and found 250 illegal immigrant workers employed by cleaning contractors. CNN reports that Wal-Mart executives knew of the violations and that the largest number were in Pennsylvania and Texas. These workers sued Wal-Mart for not paying overtime, workers' compensation taxes and withholding taxes.

Finally, Wal-Mart operates more than 3,000 stores in the U.S. and has closed more than 400. The pattern, applicable to Lebanon, is to open one store, and if the competition persists to open a second within 5 miles. Local firms lose, as 84 percent of Wal-Mart sales come from existing businesses.

Then, when the local businesses close, Wal-Mart is able to close one of its stores.

The community is left with a blighted store site and a devastated business community unable to respond should Wal-Mart decide to raise prices. If past practices hold, one and maybe two of these three stores will be empty in five years, and you can kiss downtown development goodbye.

Lebanon really does not need another Wal-Mart. The Wal-Mart price is just too high.


A resident of Mt. Gretna, Heise holds a Ph.D. in economics and is professor emeritus of economics at Lebanon Valley College. His column appears every other Thursday.

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