Costco vs. Walmart

Did you know that the multi-billion dollar big box retail industry has become a full blown political football?

I guess I am late to this debate.

Like many life long Chicagoans, I recall the fierce debates in our city about the entrance of the first Walmart back in 2006. Chicago is a "union town" where being a member of a powerful, politically connected workers union (public or private) is taken for granted in most middle class neighborhood homes. Walmart has been an outspoken critic of labor unions for decades and grew it's global retail empire without ever having to deal with them. So, when Walmart sought to crack into the Chicago marketplace, unions threatened the political future of several alderman to oppose the move. Only Mayor Richard Daley's overwhelming clout and veto pen saved the Walmart deal for Chicago's poorest neighborhoods.

However, since the opening of the first Walmart Supercenter in 2006 and the subsequent openings of several smaller stores; the issue has largely died away from Chicago's political landscape.

Apparently, the liberal and union opposition is still alive and well elsewhere.

What brings this debate to my attention is the sudden surge of comments I read on social networking sites and liberal blogs over the past few days following last week's news in Washington D.C. where the city council passed a "living wage" ordinance requiring Walmart to pay higher wages. Walmart subsequently announced they will not build or open 3 stores they previously planned for and are reviewing whether to open the 3 already under construction. Walmart claims that the new law will severely harm the profitability of these stores, all of which were set to open in economically depressed areas of the city where few grocery or clothing retail stores currently operate.

A virtual torrent of liberal venom spewed all over the internet after the story went national. Commentators and bloggers decried Walmart and its business practices, though most posts seemed copied and pasted from the 2006 Chicago Walmart debates.

One thing was different this time. Rather than simply bashing Walmart, commentators were talking about Costco as a liberal Holy Land in the retail world. This was a new development in the discussion.

Costco has earned a reputation for compensating its workers better than almost any comparable retailer in the world. Their average hourly wage is about $17-per-hour and the vast majority of workers have access to some form of corporate health insurance plan with a low employee premium. Costco also offers most employees a retirement plan option.

This is a far cry from Walmart, whose average hourly wages across all their stores, including Sams Club, is around $11-an-hour and benefits for anyone below store managers is unheard of.

On the surface, it is easy to see why liberals would be so fond of Costco. The store works with labor unions, pays well, offers benefits, keeps product prices relatively low and has profited all along. Walmart must just be too greedy to share its profits with its workers. It seems so simple.

However, liberal activists who bow in prayer to Costco and throw stones at Walmart are missing something. A business that has achieved the level of profitability of Costco while still offering robust employee compensation has some kind of magic potion in its corporate plan. Costco has a secret to its success.

In the United States, Costco's secret sauce is not so much about what it does, as what is doesn't do.

Costco's secret is that it explicitly avoids serving low income urban and rural areas where shoppers are less likely to make large weekly and monthly purchases that are at the heart of Costco's profitability quotient. By avoiding economically depressed areas altogether, Costco concentrates its resources on higher income communities that are not as susceptible to economic downturns and where shoppers spend excessively on consumer goods and groceries.  Also, by avoiding low income areas, they reduce the number of jobs accessible to low income people who may have less work experience or educational achievements.

The bottom line translated into liberalese: Costco goes out of its way to cater to the top 20 percent of income earners and hires their children while avoiding the 80 percenters and their kids like the plague.

Costco beefs up profits by serving areas with massive quantities of disposable household income; then pays out a considerable amount to workers who are from those same upper income communities on the assumption that they are well-educated, experienced workers. They avoid the risk of opening in communities with lower disposable household income where revenues would not be as high and economic turbulence is constant. By avoiding those communities, they also avoid the risk of hiring less experienced, less educated workers who would be both expensive based on their skill set and hard to fire if they don't pan out since they are unionized.

To prove my point, I wanted to do a head-to-head comparison between Costco and Walmart; however this is nearly impossible since Walmart has so many versions of itself. Sams Club, a Walmart subsidiary, is the Walmart entity that is in the exact same wholesale industry as Costco. Simply comparing Sams Club and Costco does tell part of the tale. However, Walmart Supercenters and large retail outlets make up much of Walmart's U.S. business, so we have to count them in some way, too.

I did an analysis of the Chicagoland area, specifically looking at Costco, Sams Club and Walmart locations within a 30 mile radius of downtown Chicago. This included all of Cook County, most of what we consider to be our suburbs and northwest Indiana. I examined 2010 census data from the zip codes that these stores were located in. Zip code census data is the best tool we have to measure demographics and economic data at a neighborhood level. This is also data businesses examine before selecting a real estate site to open on.

Here is what the data revealed:

 - There are 12 Costco locations within 30 miles of downtown Chicago. The average income across all 12 zip codes is $63,500 per person, per year. An average of 71% of the people who live in the zip codes are white while just 8% are black and 18.5% are Hispanic or Latino.

 - There are 13 Sams Club locations in the same radius. The average income across those 13 zip codes was a third of Costco zip codes, just $26,200 per person, per year. In addition, three times as many black people and 38% more Hispanics live in Sams Club zip codes.

The comparison is more striking when examining Wal Mart zip codes:

There are 11 Wal Mart Supercenters or free standing, full service retail stores within 30 miles of downtown Chicago. The average income per person, per year in these zip codes is just $19,000. About 55% of residents of these zip codes are white, 26% black and 25% Hispanic. Also striking is that nearly 40% of people in Wal Mart zip codes rent rather than own their living space, suggesting an overall lower standard of living.

Walmart's zip code income stats are about to go lower. There are two Chicago super-centers planned to open this year. One will be in Hermosa, just west of Logan Square and another in the Pullman community. Once these open, the per person income averages I described above will plunge lower.

Also, worth noting is that I excluded Walmart Markets from the equation. These smaller mini marts occupy some of the poorest zip codes in Chicago including West Englewood. Two more are planned to open in Little Village and Back of the Yards this year. If included, these neighborhood markets would have also driven Walmart shoppers average income numbers much lower.

To fully articulate the liberal view, I have to mention that they claim Walmart exploits poor communities by offering low wage jobs and killing locally owned businesses thus bringing blight to these communities. In the zip codes I studied, there are very few local businesses to kill and while the new jobs may be low wage for entry level staffers, they are the first new wage-paying jobs created on a large scale in those communities in a generation. Anyone who claims that Walmart caused Chatham's blight by offering low wages did not visit that part of Chicago prior to Walmart's establishment because I assure you, the blight came before the Walmart and there were virtually no wages to be found prior to its opening.

Whatever you think about Walmart and its practices, at least they don't have a corporate plan built around excluding low income communities and minorities from their establishments. If Costco dared to open more than one store in a lower income Chicagoland community, their entire local business model would implode within a year.

Costco has only four Chicagoland outlets located in zip codes where the average annual income is below $39,000 per year, per person. Those four stores are in communities surrounded by significantly wealthier consumers who can easily commute. Even more striking is that only 2 of the 12 Costco locations are in zip codes where black people make up at least 6% of the total population.

Maybe the story is different downstate? Nope.

Costco only has 18 locations in Illinois. Only one is outside the Chicagoland metropolitan, six-county area. The rest of rural Illinois and Indiana is completely ignored.

Avoiding low income and minority neighborhoods has also negatively impacted Costco's employee diversity. Only 9.8% of Costco's U.S. workforce is black according to their 2012 EEO-1 report to the federal government. Walmart's black workforce is double that number and expected to grow significantly with the opening of new stores in predominantly black neighborhoods across the country.

In fairness, Costco employs twice any many Hispanics as Walmart nationwide. (It is a little unclear how the two retailers count Hispanic employees so I am just using their own raw numbers to make that statement.)

Let me be clear: I don't believe retail businesses are either moral or immoral. Most executives run their businesses in an amoral way with an eye on how the public will perceive their actions. Thus, labeling Walmart as immoral and Costco as moral is absurd. Both are out to make the biggest profits that they can.

Costco has won the public relations media battle by offering generous compensation to their unionized employees while Walmart has caught flack for not allowing unionization and keeping employee compensations low. However, there is a bigger difference between the two companies. Costco targets upper income, white shoppers in wealthy urban and suburban neighborhoods while Walmart uses it's Sams Club brand to target more diverse middle income shoppers in a variety of urban, suburban and rural zip codes. Walmart then uses it's name brand to appeal to lower income and poverty level shoppers, most of whom are urban minorities or rural Caucasians.

For most of Costco's existence, the company was upfront about what kind of shopper they were after. Jim Sinegal, co-founder and president of the company, was famously quoted by the Pittsburgh Post-Gazette for saying, "Generally we don't have customers who use food stamps." It was a public wink-wink, nod-nod way of saying "our shoppers are upscale and sophisticated, not poor." It was only in 2009, in the depth of the Great Recession, that Costco finally relented and allowed shoppers to use food stamps at their stores...but only if they paid the $50 annual membership fee first.

The members-only structure of the company is also a firewall against low income people coming into the stores. Most low income people can not afford $50 a year for a mere membership to shop at a Costco. In addition, Costco does not do any significant marketing. Thus, word of mouth is the best way to draw new members. Upper income people tend not to have a lot of low income friends, so the only people they will recommend a membership to...is a fellow upper income earner. Country clubs and exclusive golf clubs tend to operate in a similar manner.

Costco is not unlike other high end stores. Let's face it, Nordstroms doesn't have many retail outlets in Humbolt Park. Little Village is not teeming with Macy's, Banana Republics and Abercrombie & Fitch stores. Many high end retailers have no interest in low income shoppers. However, liberals don't praise them out of some misguided sense of self righteousness.

I understand why liberal activists who don't research beyond talking-points have such distaste for Walmart. It is far less clear to me why they champion Costco, a store whose secret to success is excluding not only low income and minority communities from their portfolio but also the workers and shoppers who live there.

Unless liberals have become far less interested in racial equality and social justice, I think they are just not examining the facts. Hopefully this blog post helps clear it up for them.

Oh, and for those dead-enders who will still cling to the theory of Costco morality, I have a request:

Start a campaign to get Costco to open it's first store inside Chicago city limits south of 47th street.

Just one store.

See how far you get.

Good luck.

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