Capitalism Ain't User-Friendly.

Taken from http://oregonstate.edu/instruct/anth484/minwage.html:Multiplying the minimum wage by a work year of 50, 40-hour weeks gives the annual earnings that can be expected from a minimum wage job. The red line is the poverty level annual income for a family of four. Minimum wages have never been sufficient to raise a family out of poverty, if only one member of the family works [Blogger's note: the red and blue values have been adjusted for inflation to allow for a comparison of annual wages and the poverty level over a span of the years since the poverty level was introduced as a government income measure in 1959.]

Today's subject came to me as I was skimming through the Times a few days ago and saw the following article in the top 25 emailed articles list that the online version of the paper runs:
How Costco Became the Anti-Wal-Mart; in fact it was running in the number 1 position as the most emailed article and continued to do so until sometime on Sunday - it's still in the top 10 as of this blog posting. This reminded me of a piece I listened to about a year ago on NPR, and I went looking for it and, lo and behold found it: NPR : Costco's Business Philosophy Questioned on Wall Street.

How an oxymoron like "Working Poor" can exist in the one superpower on the planet is a bit hard for me to understand, but I guess I'm just that kinda guy. What's the working poor, you may ask? People who are out there working, trying to stay off welfare and any sort of public subsistence, but find themselves in jobs that pay the U.S. minimum wage, which for those not
familiar with it is $5.15/hr (for a 40 hour week that's $206/week, $10,712/year, before taxes), can't make it on that wage (wow, really?). Of course this requires them to get an additional job, and if they have kids they now incur the cost of childcare, and ...well, you get the idea. To put a finer point on it, in 2003 if you made an income equal to or greater than $18,400 you were above the poverty level for a family of four --- of course you can't make that on a minimum wage income, and it also bears knowing that the common belief is that you would need a minimum income of about $35,000/year to adequately support a family of four.

There are many working poor in this country, especially without any healthcare. The healthcare issue is important - if the working poor get sick and they can't afford healthcare the fact is that it can't be refused to them, something has to be done for help them get well. Guess who gets to pay for that? Yep, you and I, the taxpayer. When Wal-Mart/Sam's [for those not in the know, Sam's owns Wal-Mart] makes it too expensive for their employees to buy into healthcare in reality the company's pushing the cost for that employee's ill-health, and their kid's ill-health, on us; it does make it easier for you to buy things more cheaply, though.

What amazes me is that it's not that by and large the working poor are willing to work hard, they just can't find a job that will pay them a decent wage and benefits for their efforts. Why is that? Well in this country we're more interested in pleasing Wall St. and corporate investors than we are in making sure people have a decent wage and coverage for things like health and dental care. But, alas, not all corporations seem to live by this rule of business. Here's how the introduction to the NPR report reads:

"The membership discount store Costco is doing incredibly well in terms of sales. Customers seem pleased with low prices and employees like the fact that they're paid more than the industry average. But some Wall Street observers say shareholders should be receiving more benefits from the company."

One Costco worker interviewed said that he'd been working at the drug chain CVS for ten years and left with an hourly wage of $7/hr after that time. After 7 years at Costco he was making $17. A starting cashier makes $10.50/hr, and after three years with promotions and bonuses could be making close to $45,000/yr. Moreover employees receive reasonable and affordable dental and medical coverage, with affordable family benefits; needless to say these are livable wages. If you read "Nickel and Dimed: On (Not) Getting By in America" by Barbara Ehrenreich, you learn how she had a terrible time trying to get by on what she was being paid at Wal-Mart and medical benefits for herself, much less for a family if she had one to worry about, were simply not affordable.

The NPR reporter talks to a couple of financial analysts about Costco and why Wall Street has a problem with it. One tells us that if you work or shop at Costco there's absolutely nothing not to love about the company. But if you were a shareholder there's a lot not to love in that the company doesn't wring the most it can out of salaries, benefits and health care costs, unlike
Wal-Mart/Sam's. The analyst goes onto say that the company's stock would be more attractive if the company wasn't so eager to please its employees and customers. A specific bone of contention was that the health care provisions for employees were far too generous, and the costs that were going to this could otherwise be diverted to investors. I sat there listening to this woman talk about healthcare benefits that were too expensive and thought to myself that her healthcare package likely well exceeds that of a Costco employee, but I'm sure in her mind she's entitled to this because she has an MBA.

A similar point is made in the Times article:

But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Mr. Sinegal [Blogger's note: the company CEO] is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

Is it good for business? Well the article tells us this:

IF shareholders mind Mr. Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19. Mr. Dreher said Costco's share price was so high because so many people love the company. "It's a cult stock," he said.

So the stock is doing better than Wal-Mart/Sam's, the stockholders seem to love it, and this guy at Deutsche bank, who I'm sure is a bright person who's very capable and all that, poo poos all this by labeling Costco as a "cult stock". Wow. It's not that Costco uses a business model that
validates and rewards its human capital and that, therefore, is one that's worthy of emulation, uh uh, nope - according to this clever analyst you have to be a lover of scientology or a moonie before you can make a logical case for buying the stock and otherwise Costco's success has nothing to teach business in general.

The credo for Costco is "Take care of your customers and your employees and your success will take care of your investors." I like that thinking, and I didn't until now appreciate how radical that is. Wall St. doesn't care about customers, and it sure and heck doesn't give a rat's butt about employees; it wants the highest return on its investment that it can find, which means miserly wages and miniscule healthcare coverage, a la Sam's/Wal-Mart, and taking the customer as far in price as you can possibly get away with. What does Costco have to show for its credo? Going to this snippet from an article written by John Helyar and Ann Harrington that originally appeared in Fortune Magazine on November 24, 2003:

"Consider some figures. Sam's Club has 71% more U.S. stores than Costco (532 to 312), yet for the year ended Aug. 31, Costco had 5% more sales ($34.4 billion vs. an estimated $32.9 billion). The average Costco store generates nearly double the revenue of a Sam's Club ($112 million vs. $63 million). Costco is the U.S.'s biggest seller of fine wines ($600 million a year) and baster of poultry (55,000 rotisserie chickens a day). Last year it sold 45 million hot dogs at $1.50 each and 60,000 carats of diamonds at up to $100,000. Chef Julia Child buys meat at Costco. Yuppies seek the latest gadgets there. Even people who don't have to pinch pennies shop at Costco. "I like bargain securities," says Berkshire Hathaway vice chairman Charlie Munger, a Costco shopper, investor, and director. "Why shouldn't I like bargain golf balls?"

Costco is beating out Sam's/Wal-Mart, but at the same time making the analysts on Wall St. unhappy because the investor isn't getting as much out of the store as they possibly could. Well, that's a problem I suppose, inasmuch as the investor is a capitalist and is investing to make money, and, therefore, should be expecting to get the most back on their investment. The fact that there's millions of happy customers and some tens of thousands of happy employees seems all a bit besides the point. Yep, that's how the system works, and it hits me that somehow there's something fundamentally not right with this. I suppose making money is important, but at what point does this outweigh whatever social responsibility there may be for providing people jobs with decent wages and the sort of healthcare that someone living in a country like the U.S. should come to expect? I don't know, I'm not sure, but I do know this bothers me. I also know something else:

Costco now has all my business when it comes to this kind of shopping - I now need to go and buy some of its stock and become a cult member.