It's a good example to those that claim companies should pay employees liberally. Unless you're in a niche that people are willing to pay a margin for or serve upscale customers who also don't mind paying margins (Costco, Whole Foods, Nordstroms, Apple, etc), then you're going to lose business to competitors offering lower prices.
In this situation, the only way to improve the well being of those whose labor isn't as valuable is to restrict their supply, either by educating them to give them other valuable skills or providing paid leaves so they can go on vacations and forcing employers to hire more people. All of this extra wealth for those at the bottom would, of course, have to come from the margins those at the top are earning.
I am extremely wary of n=1 reasoning. It ends us being confirmation bias. We look at Sears, note that they pay more than Walmart, and say that paying employees more either has no effect, or is harmful.
But are we also looking at the thousands of businesses that pay their employees terrible wages, but go out of business?
Businesses are complex systems that defy the search for simple explanations. That won't stop humans from trying, though. We all love the idea that there is some simple Eureka! idea that explains everything.
In this specific case you're talking about wages as if all other things are equal. All other things being equal, if we pay employees more, we lose business to lower-cost competitors that pay employees less.
This is like saying that if all other things are equal, a restaurant that pays more for its ingredients will lose business to competitors that pay less.
Of course, as managers, our entire reason for existence is to make sure that all other things are not equal. If we pay more for ingredients, we have to build our business around turning those more expensive ingredients into a better customer experience and perception of value.
And the same goes for paying more in wages. It's our business as managers to turn that into value. If we can't, are the wages the problem? Or is our mismanagement the problem?
Looking at the comments about shopping at Sears, I am not seeing a lot of "Everything about Sears was great except things cost a few cents more." I'm seeing anecdote after anecdote about how poorly it was managed.
Under the circumstances, if I wanted to cut wages at Sears, I would have started with their managers. If they're going to manage the thing into the ground, why pay them more than you'd pay an intern in an MBA program?
This reminds me about a recent Freakonomics podcast about Trader Joe's. It starts off by asking, what would you think about a grocery store with no name brands, much fewer options, no sales on items, not loyalty program, no automated checkout, no large social media presence, no large advertising budget, etc? A lot of it sounds bad, but Trader Joe's is really successful.
If a restaurant is located in an area that has no customers interested in better ingredients or food, then it will lose business to competitors. And Sears' customer experience has been terrible for a couple decades, but from all accounts I've heard it was great in its heyday. What changed, and this is my conjecture of course, is the introduction lower cost options such as Walmart, Home Depot, Amazon, etc, that revealed that Sears' clientele were not willing to pay a premium for their products in exchange for whatever extra Sears was offering (in this case I'm assuming better staff at the stores via Sears offering better pay and benefits).
> Sears' customer service has been terrible for a couple decades, but [...] was great in its heyday.
Wouldn't "worse customer service" be the change that allowed other retailers to eat Sears' lunch, then? You say Sears' clientele were not willing to pay a premium for whatever extra Sears was offering, but by your own words they haven't actually offered anything premium for a long time.
More expensive and better is a viable value prop; more expensive and worse is not.
Yes, but I think it takes a while to switch a company's atmosphere, and they also have or had a ton of defined benefit pension liabilities on the books that other retailers didn't.
Sears catered to the giant American middle class, and while I'm sure that mismanagement was a huge part of its demise, I also think the declining spending power of the American middle class also contributed.
> This is like saying that if all other things are equal, a restaurant that pays more for its ingredients will lose business to competitors that pay less.
Well, isn’t that one also true? There are limits and exceptions, obviously, but yeah, I’m pretty sure there is a strong correlation between the cost (cheapness) of ingredients and total sales.
Actually, there is not a simple correlation between just one of your costs and total sales. In retail, for example, location cannot be ignored. Likewise, there is an awful lot of work that has to go into being the low-cost leader.
Amazon and WalMart are good examples of this. They don't just cut one cost and wait for the money to flow in. They build their entire business around leveraging low-cost, in ways that are extraordinarily difficult to copy.
It's not as simple as, "Pay less wages, cut prices by a few cents, but keep doing everything else the same," any more than running a fast food restaurant is about buying cheaper ingredients and "passing the savings along to diners."
> It's a good example to those that claim companies should pay employees liberally.
Is it? Paying employees well isn't what killed Sears. Sears has been a ghost town for years, and anyone who's been in one in the past 20 years can probably tell you why. The customer experience simply sucks. Help is hard to find, checkout is slow, their warranties are garbage and a pain to exercise, and their once-great store brands have been either penny-pinched into mediocrity or sold off.
For me, this is it in a nutshell. I worked next door (as in a 30 foot walk) from a Sears and popped in to quickly grab a couple things in a 30 minute gap between meetings. In 10 minutes, I had what I wanted, and got in line to checkout. I was the 6th person in line...and eventually put my stuff down and walked out because I still hadn't managed to check out 20 minutes later. There was only one employee handling checkout, and that employee was moving at a slower-than-glacial pace. Even though several other employees were milling around the various departments, no one came over to help.
There are a lot of reasons Sears failed, but for me, making the most painful part of the process the part WHERE I GIVE THEM MONEY, was the last straw.
I should have wrote that it's just one factor, but at the end of the day, people opted for lower priced goods rather than the service that Sears offered, which I assume was partly due to the decent compensation they provided.
Another example of a low wage industry where paying employees more doesn't work in the grand scheme are hotels. People like to stay in newer, renovated, upscale hotels. Well if one hotel pays more than it has to, then it's owners save less capital with which they can purchase other land and build a new hotel on, or to renovate an existing one. So the hotel owners that pay the employees as little as possible and work them as much as possible end up with more money to invest in new builds or renovations, and customers end up going to those hotels, while the hotel that paid its employees well will lose business.
Unfortunately, good customer service only goes so far, especially when your clientele can barely afford it and they readily chose to forego it to save money.
Counter-example for basically everything you said: Trader Joe's.
Sears used to be like Trader Joe's: customer service was great, the best products were the house brands, and if you weren't satisfied, you walked back in and got a new one or a refund.
Then Sears' new management went off in pursuit of higher profits and killed everything.
I agree that Sears' management has been terrible, but also think that Sears' customers stopped being able to pay the premium for their American made Craftsman tools and knowledgeable employees.
Trader Joes are usually located in areas that have higher income and more young people. They do offer good customer service, but I also don't think Trader Joes could cater to as many people as Sears', and Sears stores and inventory seem much more costly to operate.
> but at the end of the day, people opted for lower priced goods rather than the service that Sears offered, which I assume was partly due to the decent compensation they provided.
Huh? The parent commenter was just describing how poor the service was at Sears stores.
Costco's average customer is definitely higher income than the average American, although I've seen different attempts to quantify this. The first result from a Google search gives me this: https://www.fool.com/investing/2016/06/17/who-is-costcos-fav...
A couple of factors act as a "filter" that makes Costco less worthwhile for lower income shoppers:
- Buying in bulk requires a bunch of cash up front, which not everyone has.
- Buying in bulk normally works best for families, and individuals with families have higher average incomes than those that don't.
- Costco stocks almost exclusively mid- to high-quality food and products. Shoppers may be able to have a lower grocery bill by buying lower-quality store-brand products elsewhere.
There are obviously individual exceptions, but these factors drive up the average income of a Costco shopper.
In Chicago a Costco membership is worth it just for the gas. It's usually at least 50 cents per gallon less expensive than nearby stations. I have no idea how they do that.
Also, for new parents: you can easily save the cost of the membership on diapers and wipes for the year or so your child wears them.
They always have a car parked in front or by the customer service center to advertise their auto purchase program. It has almost always been a Lexus, but for the past few months the one near me is a Maserati. I think this may be their signal on who their ideal customer is. Yet my parents used it to buy a Subaru and it was a good deal.
Costco loves the concept of price anchoring. That's why the diamond rings and tvs are right near the front, and their liquor isle has $1,000 bottles.
The concept is that when you decide against buying the $1,000 thing, the $50 thing seems a good comprise. If all you had were $10 things, the $50 thing would seem to be 'too much'.
Costco makes ~75% of their profit from memberships, gas is like their iconic $5 rotisserie chicken - sell it at cost or a small loss as a incentive to buy and maintain membership. Gas prices are posted outside so it's a particularity public ad for costco membership and as such they have a strong incentive to push the price as low as feasible.
With sufficiently stable social circles (also not available to everyone, but at least not an identical requirement) you could replace storage with distribution.
This was years ago so I don’t have a reference. But one of my business professors in college assigned a case study that contained the memorable (to me) stat that the average Costco shopper had a higher net worth than the average Nordstrom shopper. Something to do with small business owners vs people going into debt to look more affluent than they really are...
Shopping at Costco is often a wise financial decision, and hence people who shop at Costco tend to be the type of people who make wise financial decisions, and the net result of making wise financial decisions is a higher net worth.
Costco does sell in bulk but it's not a Family Dollar. It's for the middle class to save some on their name brand groceries because they can afford to pay more at the register to go a little longer between trips to the store. It's not really aimed at people that can barely afford to shop at the discount Aldi every few days because they can't pool enough money together for a biweekly Costco trip.
They are. You need to have a good amount of extra money to afford the membership and the cost of buying 6 months of toilet paper in advance. Those are cheap items that you will need, if you are not poor you probably don't even think about it. However when you are poor it doesn't matter if it is cheaper or not to buy in bulk because you don't have the cash to afford it. (you also are unlikely to have the storage space for all of that)
Do not forget about ALDI - it is cheaper than Costco, does not require buying in bulk, but the quality is stable and generally well worth the money. ALDI is the place to go for the working class.
Upper class? It's true that those living in poverty often don't have the means to buy in bulk or pay a Costco membership, but I don't think the designation of "upscale" describes the store either. Many working class and middle class people shop there.
Upper class is a bad descriptor, and many working class people do shop there, but I think Costco does have a bit of an upscale connotation. A different one than whole foods or a natural food co-op, but I think it still has one. It's not the "normal" grocer.
This basically renders your point meaningless, since now literally all businesses in the US are servicing the upper class.
There's relative poverty in the US still. Currency still has relative purchasing power. Saying a person living below the US poverty line should be put in the same class (upper class) as Jeff Bezos seems disingenuous as best.
Don't know about "upper" class, but definitely middle class. A lot of things at Costco (at least where I live) are only available in organic formats, for example, which jack up the price for no real benefit (imo). The working poor don't usually have the flexibility to do these kinds of things.
I've known plenty of people on various levels of welfare support who would shop at costco/sam's club. They got their support once a month, making a big shopping trip perfectly in reach. The busiest Costco locations I've been to have been the lower income areas of town (Phoenix area).
Membership at Costco is like 60 dollars a year. Not saying it's doable for everyone but its hardly something 'you need to have a good amount of extra money' to afford.
> Membership at Costco is like 60 dollars a year. Not saying it's doable for everyone but its hardly something 'you need to have a good amount of extra money' to afford
If you are poor to the point of relying on public assistance to meet basic needs, an extra $60 up front even if it will pay off over a year means foregoing other essential expenses now.
But the bigger cost in many parts of the country is the space needed for inventory to maximize the benefit of bulk purchasing. Sure it works well for my family, but we live in a decent sized suburban home with an second refrigerator, and a storage closet converted for additional pantry space.
Why do you think I was talking about people who are poor to the point that they are relying on public assistance? Did you gloss over the part where I said 'not saying it is doable for everyone'? You even quoted it. This thread was debating whether or not Costco is an 'upscale' place that only the well to do can afford, not whether or not Costco is an option for people on public assistance.
If you look at the locations of Costcos in any metropolitan area, they will not be near the poorer areas. Walmart is more frequently located near poorer areas, and what I was getting at, was that Walmart can't just up its pay to match Costco because many people that shop at Walmart don't have any extra money, whereas Costco can afford to raise prices to help pay for better wages.
You can also get the $120 membership that gives you a percentage back. If you shop there regularly the membership becomes effectively free. But this doesn't help someone living paycheck to paycheck. Where the hell are they going to find an extra $120?
Unlike other groceries, Costco isn't that reliant on low-margin, zero-margin, or loss-leader groceries (e.g. produce). They keep their costs down by having a limited selection and large, sparsely located warehouses in relatively inexpensive areas rather than traditional retail locations. Selling larger sizes and quantities of product helps to more quickly cancel out their fixed costs. They also sell much higher margin products alongside their groceries, such as electronics and appliances.
Their margins are high like the others because many households renew memberships each year but do not make much use of them. I also think their membership does skew more affluent than many other retailers.
Wouldn’t an unused membership be worse (for Costco) than a used membership? Perhaps barring some rare edge cases like customers who would only buy loss leaders, or stores that are congested with shoppers.
Interesting point, I wouldn't have guess that. Although, it sounds like they would still rather their members buy products, based on this sentence:
> If you examine the company's sales, it brought in $56.59 billion in net sales with a merchandise cost of $50.21 billion and sales expenses of $5.92 billion.
I don't think that sales expenses would vary much depending on how many members were buying products.
The membership fee keeps away many poor and lower-income shoppers. They just aren't going to pay to shop somewhere. They go to wal-mart, aldis, dollar stores, etc.
Paying employees more is supposed to work because it results in employees who do their job better. It seems Sears just increased the pay without increasing the expectations. I avoid Sears because when I go, despite there being no customers, the place is a mess and I can't find anyone to help me.
You have to pay the market rate for the people you want. The point is that going above that rate probably won’t get anything more out of them other than maybe retention.
> I'm sure above certain threshold, which is probably low, raising wages doesn't make employees do their job any better.
This is a known study
> In other words, unless you pay your workers literally peanuts, they will do the same job more or less.
Welp, nope, this deviates from the study; The "drive" study suggests that wages need to satisfy their needs, give them cushion, be at or above their peers.
For the most part, "happiness" in the U.S.A. starts at 50% more than the average salary ($50k).
I think part of the point is that you pay more money to attract different people who will perform better, or to encourage people to stay at the job longer (and thus get better at it).
If you pay a premium for labor, you need to deliver operational excellence.
I worked for a company in high school whose philosophy was to pay 150% of the local average for retail/foodservice work. They did this because they worked you 2-3x harder, and their operational framework was able to turn that into money.
Many places are designed to be on some scale of mediocrity because it's hard to the excellent. I ran into a Walmart cashier who couldn't identify broccoli the other day. That's evidence that a warm body that doesn't walk off with the till is what they hire for.
Another option is to force an increase in minimum wage which is what most people in those positions make. Not every company can afford to keep the same amount of staff on hand at that price so some people would be let go but it makes the remainder of people much more valuable.
> Unless you're in a niche that people are willing to pay a margin for or serve upscale customers who also don't mind paying margins (Costco, Whole Foods, Nordstroms, Apple, etc)
Is it fair to lump Costco in with these other companies as an example of places where consumers don't mind paying higher margins?
From a quick google search on gross profit margins:
- Costco: 13%
- Nordstrom: 38%
- Apple: 38%
- Costco: 33%
Costco's is also likely skewed due to their house brand where they likely make a much higher margin than the name brands
I lumped Costco in there just because its known for paying above average wages. I don't see these 4 stores outside of affluent, or at least upper middle class areas. I would say even Trader Joes can be lumped into there.
But the point is that if Walmart or Sams club wanted to raise their wages to match Costco, it would hurt their business because their customers can't afford it.
In this situation, the only way to improve the well being of those whose labor isn't as valuable is to restrict their supply, either by educating them to give them other valuable skills or providing paid leaves so they can go on vacations and forcing employers to hire more people. All of this extra wealth for those at the bottom would, of course, have to come from the margins those at the top are earning.