Costco's (NASDAQ:COST) business operates on razor-thin profits. Operating margin was just 3% of sales last year, compared to 6% for Wal-Mart and Target and 13% for Home Depot.
That tiny earnings buffer makes Costco obsessive about squeezing savings out of every corner of its operation. Warehouses aren't decorated with elaborate product displays or perks like the restaurant-style eateries you can find at a Whole Foods store. Instead, management brags that floor plans are "designed for economy and efficiency in the use of selling space."
To save additional cash, Costco carries dramatically fewer items than other retailers. And the recent move to drop American Express as its exclusive credit card was motivated by cutting more costs.
Splurging on wages
But one area that the warehouse giant doesn't skimp on is labor. According to Glassdoor surveys, a typical Costco cashier makes $13 per hour, while a Sam's Club worker earns an average of $11 per hour.
Here's how Costco's management describes its overall salary goals in the company's 10-k report (emphasis mine):
"Our philosophy is not to seek to minimize the wages and benefits that [our employees] earn. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces."
Happier, longer tenured employees tend to make for a better shopping experience. Wal-Mart yielded to that fact recently when it boosted wages for its workforce, which management admitted it did in order to improve the customer experience. "We win when associates exceed customer expectations. That's why we're investing in higher wages and increased training and development for our U.S. associates."
Why Costco isn't worried
Meanwhile, Costco has set up its business to minimize the impact from those higher hourly labor costs. For one, it operates under a limited schedule. Warehouses are open for just 69 hours per week, or roughly 100 fewer hours than a typical Wal-Mart Supercenter.
And because products are displayed directly on pallets, employees don't have to constantly stock and restock as they do at a grocery store like Kroger. Finally, Costco's sales volume is massively higher than that of its rivals, giving it much more revenue to spread costs over. It is the second biggest retailer in the country despite the fact that it operates fewer than 500 locations. First-place Wal-Mart has 650 Sam's Club warehouses and another 3,400 Supercenters across the country.
All of those wins translate into much higher labor efficiencies for Costco. In fact, annual revenue per employee trounces every other retailer around:
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Costco's engaged employee base is one factor behind the record-high customer satisfaction that it's logging these days. Yes, the company has to shell out above-market wages as part of that workforce strategy. But Costco's results demonstrate that higher spending on wages doesn't break the bank. And that's true even for a retail business organized around cutting costs down to an absolute minimum.