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Wal-Mart, McDonald's, Costco, and Chipotle: The Myopia of Low Wages

Source: Chipotle Mexican Grill

The debate over wages is getting increasingly intense lately, and companies such as Wal-Mart (NYSE: WMT  ) and McDonald's (NYSE: MCD  ) are attracting plenty of attention and criticism because of the insufficient salaries they pay to employees.

While the ethical dimension of the discussion is clearly very important, there are also some essential business lessons to be learned. Competitors such as Costco (NASDAQ: COST  ) and Chipotle Mexican Grill (NYSE: CMG  ) are proving that paying higher salaries can sometimes be a superior strategy in terms of maximizing financial performance.

Wal-Mart and McDonald's: Living on welfare
In its latest earnings report, Wal-Mart admits that "changes in the amount of payments made under the Supplemental Nutrition Assistance Plan and other public assistance plans" is one of the risks factors that could potentially hurt the company's business.

This is no big surprise considering that Wal-Mart has always been known for its low prices, particularly targeting low-income workers and the unemployed. But the irony of the matter is that Wal-Mart employees are among the company's main customers and many of them receive public assistance because of the insufficient wages paid by the retailer.

According to several reports, Wal-Mart employees may be the largest group of Medicaid and food-stamp recipients in the U.S. The same goes for workers at fast-food chains: one study reported that 52% of families of workers in the industry are enrolled in at least one public-assistance program, and industry giant McDonald's has received a lot of criticism for advising employees to enroll in assistance programs as a way to make ends meet financially.

The low wages paid by corporations like Wal-Mart and McDonald's can raise a lot of questions from multiple perspectives. Are taxpayers subsidizing the profits and dividends paid by these companies because of the economic costs of welfare? Should companies be allowed to pay these kinds of salaries or does the minimum wage need to be raised?

Costco and Chipotle: The other way
Maybe paying the lowest possible wages is not the best strategy from a business perspective. Employees are not just a source of expenses on the income statement; they are also a crucial resource for companies when it comes to generating growth and competing in the increasingly dynamic global environment.

Like Wal-Mart, Costco is in the business of discount retail, so the company needs to keep its costs at bay if it's going to provide competitively low prices for its customers. Costco saves as much money as possible in areas like marketing and store decoration, among others, but the company understands the importance of attracting and retaining a talented workforce.

A 2005 article in The New York Times called Costco "The Anti-Wal-Mart," explaining how the company has chosen a completely different path when it comes to salaries and other human-resources policies. Costco pays considerably better salaries than Wal-Mart, and the company provides superior benefits and opportunities for professional growth.

In the article, Costco co-founder Jim Sinegal explained that higher productivity, better customer service, and lower employee turnover rates provide an advantage for Costco versus the competition: "This is not altruistic. This is good business."  

Costco has materially outperformed Wal-Mart and its Sam's Club division over the last years. There is a wide variety of factors to consider when evaluating this difference in performance that cannot be attributed to human-resource policies alone. But the fact that Costco is generating superior results while paying decent salaries and providing better conditions for workers may indicate that minimizing remuneration as much as possible is not necessarily the best way to create value for shareholders.  

Chipotle Mexican Grill is not the typical fast-food chain: The company's "food with integrity" philosophy means special care to ethical and sustainability standards. This doesn't apply only to food and ingredients, but also to the company's relationship with its employees.

Chipotle pays better salaries than competing fast-food chains, and the company is also far more generous when it comes to benefits such as health-care insurance, 401(k) participation, and bonuses. Importantly, this high-growth company offers superior opportunities for learning and promotion, so worker incentives are clearly more encouraging at Chipotle.

A typical meal at Chipotle costs a few bucks more than at McDonald's, but this is no impediment for the company when it comes to gaining market share versus the competition. While sales at Chipotle Mexican Grill jumped by a spicy 20.7% during the fourth quarter of 2013, McDonald's is struggling with declining same-store sales in the U.S.  

There is much more to Chipotle's success than its human-resources policies, but the company provides another example on the importance of having a smart and holistic approach to salaries and employee benefits. Investing in human resources can sometimes be a very profitable decision in terms of long term shareholder returns.

Bottom line
There is a lot to be said about the low wages paid by many big U.S. corporations such as Wal-Mart and McDonalds, and the ethical implications and economic consequences of these policies are a subject of much debate. Equally as important, from a business perspective, is how other companies like Costco and Chipotle Mexican Grill seem to be demonstrating that paying higher salaries and providing better conditions for employees can be a more intelligent strategy to generate superior returns for shareholders.

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Read/Post Comments (8) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On April 06, 2014, at 4:13 PM, myamerica wrote:

    Minimum wage is important only because some businesses would pay a penny an hour if they could get away with it, because it's not slavery if people are paid even a penny an hour, right? All that's required is that the worker has to agree to the wages. The minimum wage is protection of the laborer from the capitalist, provided by the government. It also protects the capitalist from the labor, to keep from being accused of creating an unconscionable contract by the laborer. Think of how your parents protected you from your older siblings. Therefore, Costco and Chipotle are taking a more sophisticated route, the next step--better paid employees spend more money on quality of life pursuits that build communities and contribute to society. McDonalds and Wal-Mart perpetuate a dependent economy where people need food stamps and housing subsidies--which means they benefit twice, because those employees spend their money and food stamps at McDonalds and Wal-Mart...

  • Report this Comment On April 07, 2014, at 2:48 AM, tardisgurl4eva wrote:

    Here's something people should know. Fully half the people going to our local food pantry for free food & clothing, aren't on Welfare.

    They're not elderly people living solely on their social security pension. They're not disabled and getting by on SSD and/or worker's compensation. They're not on unemployment insurance.

    Half the people using our local community food pantry work for a living. However, they make so little money on their jobs, they need help feeding themselves and--very often, their children.

    Think: if employers raised min. wage, these people might not have to ask for free handouts. They wouldn't need to go through the tedious and stressful (and lengthy) process of getting food stamps.

    If employees made a decent living wage, they would be able to buy food and clothing themselves. They wouldn't need to use tax money for food benefits. They wouldn't need to use up local charity resources--which are already stretched to their limits thanks to the 2014 cut in food stamps.

  • Report this Comment On April 07, 2014, at 9:37 AM, kirubu wrote:

    We need a minimum wage, and it should be raised occasionally. But a lot of people are forgetting that young people in their late teens need to get that first job. They have no work experience, and may not have many skills unless they took some specific type of class in high school. The higher the wage the harder it will be for them to get a job. The criticism of Wal Mart is easy to understand, but McDonald's is the often a starting point for these kids. So is pizza delivery - my son did that for a while. There is NOT 40 hours worth of work delivering pizza, and it just requires a reliable car - no brains at all.

  • Report this Comment On April 07, 2014, at 10:00 AM, globeflyer wrote:

    I always shop Costco (over Sam's) and try to avoid Wal-Mart at all costs (no pun intended). Chipotle has a good goals and when traveling, I do look for them. The major problem is Americans, through financial necessity or philosophical differences, will knee-jerk to the "lowest prices". The reason Wal-Mart is able to avoid paying higher wages is they have grown so fast, i.e. successful, they feel no need when people stand in line for jobs. A higher level of consciousness when shopping would benefit all Americans, but then, we are all about "dumbing down" the work force to compete globally for labor, aren't we?

  • Report this Comment On April 07, 2014, at 1:27 PM, Tj34 wrote:

    What would be interesting is if for every employee that Walmart has that is one welfare or food stamps that Walmart would be charged what the government gives to that employees extra. So like some working at Walmart makes 1000 a month but draws 500 from the government on top of that just to make it well the Walmart would be billed the 500.00 that the government is forced to pay because the wages are not living wages.

    Don't think it would happen but it would solve some problems.

  • Report this Comment On April 07, 2014, at 6:38 PM, SomethingCryptic wrote:

    Walmart pays a wage that is competitive with other grocery chains, which is in fact a dollar $8.59/hour more than minimum wage $7.25/hour. I do not understand our obsession with minimum wage, or the fact that people think that businesses can remain competitive in this market by paying the lowest wage possible.

    If your truly concerned for the plight of the worker then, then we should do everything we can to improve the job market as a whole, lower unemployment means that businesses have to pay a higher wage if only to compete with other businesses to get good employees. Raising the unemployment rate in a weak job market will only continue to hurt a weak job market.

  • Report this Comment On April 07, 2014, at 11:48 PM, tusculum22 wrote:

    In life it is often said you get what you pay for right? One downside of companies paying lower wages and imposing difficult conditions on its workers that I have seen is the creation of a work force that while they will take a lot of grief, they will not produce what a happier and better cared for work force ever will. I have known people in retail who have told me they will waste time, they will do as little as possible, and more as a form of revenge against their employers. Now while there companies may have a group of people who are unhappy and unproductive, imagine how many people employed by a company like Wal-Mart every day are not performing to the best of their abilities simply out of spite? If they have little to lose, then at worst a job at Target, Kmart, or similar retail stores may beckon. While those workers with more to lose in the form of better wages and working conditions have more inceptive to help the company the work for continue to grow and achieve.

    Sorry for the epistle but I think this is sometimes a forgotten point.

  • Report this Comment On April 08, 2014, at 1:47 AM, tstorey1 wrote:

    Points to keep in mind.

    Both Walmart and McDonald's are basically 1950's business models. It would be difficult to expect these companies to effect the changes necessary to treat their employees fairly.

    Both Costco and Chipotle are in higher markets. They have the traction to charge more for their products. Organic isn't a big deal for their customers...etc.

    If i were to hazard a guess, Walmart and McDonald's, as they are currently constructed, are on the way out. Probably a good thing in the long run as they both truly perpetuate the employee as a replaceable cog religion. Henry Ford had his foremen beat uncooperative assembly line workers to death from time to time to keep things running smoothly. This begets unions as our system requires being part of a bargaining unit to get anything beyond starvation.

    The author would be best not to compare industrially grown imported oranges picked by slaves and spray painted with DTD to carefully selected hand picked organic apples that only listen to nice music. Of course you need a $100,000 a year job to buy the apples.

    I am fascinated by many American's concern with animal treatment and "where their food comes from," Good Lord, what about your fellow human beings working down at Wally world? I don't think a polar bear would be caught dead working in that place.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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