President Obama Loves Costco, Should You?

President Obama is impressed by many features of Costco. Should you be impressed for the same reasons? Should you be impressed enough to consider an investment in the company?

Feb 4, 2014 at 5:45PM

Between his State of the Union Speech and deciding on the potential deportation of Justin Bieber (based on a petition exceeding the required 100,000 names for presidential consideration), President Obama made a stop at a Costco Wholesale (NASDAQ:COST) store in Maryland. This shouldn't be shocking considering Costco executives have contributed to the Obama campaign in the past. 

However, despite political ties, Costco's business plan goes along with President Obama's beliefs in regards to employee pay. President Obama is impressed that Costco is capable of paying its employees more than the average big-box retailer, such as Wal-Mart Stores (NYSE:WMT) or Target (NYSE:TGT). He's also impressed by Costco's low turnover rate and superior morale. On the other hand, President Obama might be missing out on one key component to all of this. 

Higher pay possible
Costco might pay its employees more than Wal-Mart and Target pay their workers, but this relates to Costco's business plan. According to Bloomberg, thanks to approximately half as many employees being required per square foot than traditional big-box retailers, Costco is capable of higher labor productivity.

Costco pays the average worker $20.89 per hour. According to Wal-Mart, its average full-time worker earns $12.67 per hour. If you include part-time workers, then the average sales floor worker makes $8.89 per hour, and the average cashier earns $8.64 per hour (Glassdoor.com). At Target, the average pay for a sales floor worker is $8.36 per hour, and the average pay for a cashier is $8.14 per hour (Glassdoor.com). 

Wal-Mart and Target offer everyday low prices. Wal-Mart uses this approach to attract low- to middle-income consumers, whereas Target uses this strategy to attract middle- to high-income consumers looking for bargains. However, Costco still attracts a higher-income clientele than Wal-Mart and Target, partially because it requires an annual membership fee (often $55). Costco warehouses also tend to be located in relatively higher-income areas.  

Is Costco more impressive than Wal-Mart and Target in regards to pay, company culture, and overall treatment of employees? Yes. But Wal-Mart and Target don't have much wiggle room when it comes to raising employee pay. If Wal-Mart and/or Target went this route, it would lead to increased prices, which would defeat the purpose of the business model. 

Another perspective
While Wal-Mart and Target can't pay their employees like Costco does and survive, small pay increases would be possible. Wal-Mart and Target sport profit margins of 3.6% and approximately 3.3%, respectively. Therefore, slight cuts into these margins would still allow for profitable growth. Of course, this would hurt stock prices, which is just one reason it's not likely.  

The Foolish takeaway
While there are justifiable reasons why Wal-Mart and Target can't pay their employees the same as Costco pays its workers -- it would lead to increased pricing on merchandise and declining traffic and sales -- the bottom line is that Costco has a better business model for the current economic environment. That being the case, Costco is likely to offer a better investment opportunity.

So, yes, you should be impressed by Costco. It's capable of growing in a challenging consumer environment, all the while treating its employees exceptionally well, which leads to a strong company culture and increased productivity. It's a positive cycle. Please do your own research prior to making any investment decisions. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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