Do rivals need to follow Costco’s minimum wage lead right now?

Discussion
Photo: @beachbumledford via Twenty20
Mar 01, 2021

For many years, Costco has consistently been ranked among the best retail companies to work for. The retailer is known for valuing employees, and this week it will demonstrate that once again when it offers something that its rivals in the warehouse club segment do not — a $16 minimum wage.

The chain’s CEO Craig Jelinek, announced last week in testimony before the Senate Budget Committee, that Costco is lifting its starting wage from $15 to $16.

Raising the minimum is “not altruism” according to Mr. Jelinek. “Paying employees good wages and providing affordable benefits makes sense for our business and constitutes a significant competitive advantage for us,” he testified. “It helps us in the long run by minimizing turnover and maximizing employee productivity, commitment and loyalty. We encourage our employees to view Costco as providing a career rather than just a job.”

The Costco CEO’s Senate appearance coincided with a current debate on raising the national federal minimum wage of $7.25 an hour to $15, either in one fell swoop or over a period of years. The last time the minimum wage was increased was in 2009.

Proponents of the increase point to a change in the demographics of workers in low wage jobs, which has shifted from teenage workers to primarily adults, with women, including those with children, holding down positions in predominantly service industry roles.

Opponents argue that forcing the requirement on employers, particularly small to medium-sized businesses, will result in job losses and business closures. Others say it may make sense to lift the minimum wage in metropolitan regions but that it would damage rural economies.

A New York Federal Reserve Bank report issued in 2019 examined the effect of a hike of that state’s minimum wage had on employment compared to Pennsylvania, which kept its minimum at $7.25 an hour. The net result found earnings rose more in New York with “no adverse employment effects” compared to its neighboring state.

An analysis by the nonpartisan Congressional Budget Office has concluded that a bump to $15 would raise wages for 27 million workers and lift 900,000 Americans out of poverty. It would also cost 1.4 million jobs over four years.

DISCUSSION QUESTIONS: Do you agree with Costco CEO Craig Jelinek that “paying employees good wages and providing affordable benefits … constitutes a significant competitive advantage” for the retailer? How likely are Costco’s direct rivals and other retailing competitors to raise their starting wages to match the warehouse club giant?

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26 Comments on "Do rivals need to follow Costco’s minimum wage lead right now?"


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Mark Ryski
BrainTrust

A resounding YES. Jelinek’s opening quote says it all: “Raising the minimum is not altruism… Paying employees good wages and providing affordable benefits makes sense for our business and constitutes a significant competitive advantage for us.” Costco has been leading the pay-pack for years, but the other major competitors are slowly catching up. Ultimately, as wages rise at the major retailers, others will need to follow. And as much as I am sympathetic to smaller firms that don’t have the resources, the fact is, if you can’t pay people a fair living wage, then your business model is unsustainable.

Gene Detroyer
BrainTrust

I hugely agree! “If you can’t pay people a fair living wage, then your business model is unsustainable.” What those companies are saying is “we can only exist on the backs of our poorly paid employees.” “Burger Flippers” in the U.S. get paid appreciably less than in other OECD country. What does that say about this country?

Joe Skorupa
BrainTrust

Totally agree, Mark. Until recently, retail has historically counted on minimum wage workers to make its business model work. “Counted on” is nice way to put it. Costco and Target and a few others have shown this principle is out of date, just as the Federal minimum wage standard is out of date. It is time for the retail industry, at least the dominant segment of mega-billion-dollar corporations, to figure out a business model that pays a fair, living wage. Costco will force them to do so.

Ricardo Belmar
BrainTrust

Completely agree, Mark. Furthermore, what businesses fail to take into account in their financial analysis is the impact a better paid employee can have on customer service. This is hard to quantify, but there have ben many studies showing that this results in customers spending more with your business, not less. That means better paid employees, higher sales. If you’re getting higher sales, wouldn’t that cover the cost of those employees and fuel growth overall? If not, it’s back to your point about the business model being flawed.

Jeff Weidauer
BrainTrust

This is a smart move for Costco and will pay off as projected by the CEO. But the retail industry has been fighting labor costs since forever. Costco may be setting a new precedent, but few competitors are likely to follow.

Suresh Chaganti
BrainTrust

I applaud Costco for pushing the envelope. It is a competitive play that is a winner on multiple fronts – it is more attractive for prospective employees, good for public relations/perception, provides better customer service, and attracts employees from competitors. This is no different from companies trying to use pay/benefits as a differentiator in the labor market. Only this is also looked at from a minimum wage lens.

Others will react based on what they can afford and need to do to stay competitive.

Cathy Hotka
BrainTrust

Paying store associates the minimum wage might have made sense when all they had to do was bag groceries or fold clothing, but today’s associate is being asked to do much more. Engaged and well-trained associates remain in place longer and create more value. Costco knows that raising their minimum to $16 is a smart move, not a publicity stunt.

Mark Ryski
BrainTrust

Excellent point Cathy. The store associate role has expanded greatly (not just with the pandemic), and so it’s reasonable to expect that their pay should also be commensurate with the work.

Jeff Sward
BrainTrust

Competitors certainly need to follow the spirit of Costco’s move, if not the details. The fact is that few, if any, retailers can match Costco’s model on any front. For many retailers race to the bottom pricing will not marry well with race to the top wages.

Neil Saunders
BrainTrust

Personally I think they should, yes. Satisfied employees create better outcomes for customer service and productivity. Ultimately, however, each retailer needs to determine what works best for its business model.

Gene Detroyer
BrainTrust

The headlines have read that the Congressional Budget Office estimated that increasing the minimum wage to $15 by 2025 would reduce employment by 1.4 million. Not in the headlines but in the report, the CBO also predicted that increasing the minimum wage to $15 would raise the pay of 27 million workers nationwide and increase worker pay overall by $333 billion annually, which would have a significant multiplier contribution to the U.S. economy.

Will Costco’s rivals match? Absolutely, if they are smart. Companies don’t only compete for customers, they compete for labor. Jelinek is correct, the best workers provide the best ROI. Too many businesses measure the cost of labor as what is reported on the P&L line that says “Labor.” Too few businesses look at that line and ask what that investment produces.

Bob Amster
BrainTrust

Paying a higher wage gets you a better, happier candidate. The results are reflected not only in higher payroll expenses but in the increased sales and profit from which a capable, happier employee population will result. Those retailers that “get it” will follow. Those that don’t will suffer the consequences.

Steve Montgomery
BrainTrust

Someone looking for a job quickly becomes aware of the wages being paid in the marketplace. Costco just raised the bar for its direct rivals and others where it operates. All other things being equal, no one would elect to work somewhere that paid less for similar work.

Lisa Goller
BrainTrust

Yes, Costco’s CEO has a point, as happy workers are loyal, productive workers. He knows few rivals can afford to raise wages anytime soon. They’re already incurring exorbitant costs, including tech and logistics, as e-commerce matures. Retailers face tough decisions about which stakeholders to prioritize when their own operational needs are so urgent and costly.

Richard Hernandez
BrainTrust
Richard Hernandez
Director, Main Street Markets
7 months 17 days ago

That would be YES. People should be paid their worth and Costco has been ahead of the curve for a long while.
I hope more businesses will follow without being told they have to do it.

Gary Sankary
BrainTrust

Costco has a been a leader in pay and benefits for retail employees for a long time. The result is they are a more desired place for front line retail employees to work and they have lower turnover than some of their competitors. That contributes to real financial benefits for Costco.

Joan Treistman
BrainTrust

Employees are not only workers but ambassadors for the company and reinforce its brand equity. Smart retailers will follow for sure. There is enough data to suggest good wages and affordable benefits result in higher productivity and happier employees. That seems like a desirable outcome for retailers who want to be competitive in the marketplace and in hiring.

Patricia Vekich Waldron
Staff

Yes they do! Retailers need to make up for the years of underinvesting in their people who are the direct connect with customers.

Kevin Graff
BrainTrust

Costco stock performance has risen nearly 400 percent in the last 10 years. Not many retailers can boast that performance. And that’s on the back of a company that puts their staff before their shareholders. Costco has led the way for years and continues to push forward on creating a great career while continuing to grow their business success. Other retailers need to open their eyes — and their wallets.

Rich Kizer
BrainTrust

I believe that the upward escalation of Costco’s pay plan will have a huge positive emplooyee effect and great reactions from customers due to staff attitudes. Competition will be forced to follow in slow fashion.

Mel Kleiman
BrainTrust

I have a different spin on wages than most companies. Companies do not pay employees to work for them. Employees pay companies for the right to work for them and the more they pay their employer by being productive the more that employers can pay them. In the case of COSTCO, their employees are highly effective, so they are paying the company with higher productivity so the company can pay them more. Win-win for everybody.

Trevor Sumner
BrainTrust

While I am a proponent of raising the minimum wage for moral and economic fairness grounds as well as the after effects on spending in geographies that have done it, I don’t think retailers need to start a price war for talent and should do what’s best for them based on the same factors mentioned here reducing costs of recruiting and reducing attrition vs. increased costs of labor. I don’t think the market demands it, and we will see shifts back to traditional labor balances as Covid subsides. During this period, making long term commitments seems premature.

Ricardo Belmar
BrainTrust
Costco is not just recognizing a well-established fact (with study after study pointing this out) that a well-paid employee will work better and outperform one that is not. In the restaurant space, brands that have done this found their revenue went up. Why? Because better paid servers result in better customer service and happier customers. Happier customers who are willing to buy more, more often. In retail, you not only have the same effect, but let’s also remember that in 2021 retailers are asking much more of their store associates than ever before. Just consider the level of technology expertise that is being thrust upon store associates and the amount of training required now. It’s not only fair, but if we were talking about professional salaries in other industries, the discussion wouldn’t be “is it too much,” it would be “is it enough?” Costco sets a high bar for other retailers to follow, but I am not sure many will follow them. They will look at their costs in isolation, and decide based on that… Read more »
Peter Charness
BrainTrust

I hope so, because the model today is the employer pays a living wage and gets the best employees who have time and focus to contribute, or the employer pays a minimal wage … AND the government provides a subsidy through a myriad of programs, and the employee is less able to contribute.

Carlos Arambula
BrainTrust

Absolutely.

Costco already has a halo when it comes to retail employment, so becoming the pathfinder on this issue only increases its appeal to the labor force. It’s a competitive advantage, enhancing wages and benefits will pay long-term dividends with employees and good-will from consumers.

I believe few companies will follow-suit unless it becomes a public relation nightmare and consumers begin to reward and favor patronizing only the “employee-friendly” businesses.

Karen Wong
BrainTrust

As a business owner myself, across the board increases in wage have a big long-term impact on costing. However once you’ve taken into account the true impact and inefficiency of high turnover and lower performance, it’s definitely a case of “you get what you pay for.” If you want to attract high-performing, loyal staff, you have to pay a fair market wage.

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