Which Retailer Is the Socially Responsible One?

PJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When choosing between Costco (NASDAQ: COST) and Wal-Mart (NYSE: WMT) as potential investments, the choice is obvious.  For me, the choice doesn’t come from the P/E ratio or PEG ratio, but the social responsibility of each corporation.  More specifically, I would like to focus on the way each of these companies treats their employees and how this will translate into value for the investor over time. 

Wal-Mart notoriously pays its employees low wages with lousy benefits, while Costco treats its employees well with higher wages and opportunities for promotions and raises.  In fact, a Wal-Mart employee starts out at around $10 an hour, while a Costco employee starts out at around $11.  The difference becomes evident in the advancement opportunities, where a Wal-Mart employee makes about $12.50 after four years, while a Costco employee is bumped up to $19.50 after the same period of time. 

While wages make up a big part of how an employee is treated, other factors must be taken into account.  I was able to experience the working conditions at a Wal-Mart for about six weeks during the summer following my freshman year of college.  I saw it all: employees faking injuries to get out of work, high employee turnover, and unhappy employees struggling to support themselves and their families.  As a “part-time” employee, I routinely put in 35 hours per week.  This is one of Wal-Mart’s money saving tactics: employing multiple part-time employees rather than a full-time employee, to avoid having to pay out benefits required for full time employees.  The low pay and poor treatment results in low productivity.

As a human being with a heart and a conscience, I would much rather sacrifice profits to give my employees what they deserve to live happily.  But fortunately for Costco, they were able to both treat their employees with respect and turn a healthy profit in the process. 

Below you can see the comparison between Costco and Wal-Mart:

 

<img src="/media/images/user_16449/wmt-cost-chart_large.png" />

As you can see Costco gets the most out of their employees, with higher revenue per employee and also higher profit per employee.  After witnessing Costco’s success, one would think that Wal-Mart would consider increasing its employees pay to achieve more efficiency and get more out of each employee.  With a profit margin nearly 2% higher than Costco’s, Wal-Mart has room to compensate employees a little bit more fairly, but instead chooses to pay rock bottom wages with little benefits.  Perhaps a move towards Costco’s attitude towards employee compensation would result in a more profitable long-term performance from Wal-Mart.

Over the past five years, Costco treating its employees well has translated into a higher return for its investors.  If an investor purchased Wal-Mart in February 2008, he would have achieved a return of about 40%, while one who purchased Costco would have achieved a return of about 60%. 

<img src="/media/images/user_13833/costco_large.png" />

The proof is in the numbers: Costco is a better pick in the long-run.  Not only has Costco returned more to its investors, but they have also managed to treat their employees with dignity and respect by treating them like human beings with lives and families, rather than merely pawns in a game of corporate profits chess. 

 


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