6 ms·

I don't think I missed it but I am confused why the author steered clear of some really interesting data. Based on the table Walmart has 2X the profit margin of

I don't think I missed it but I am confused why the author steered clear of some really interesting data. Based on the table Walmart has 2X the profit margin of Costco. Walmart's doing around 4.5x topline revenue but over 9x the total profit amount. For the author's central point to hold true those numbers need to be more closely aligned. That is, they need to be roughly the same in % terms. They aren't, which means one or both of the players are doing something substantially different in their approach. Given that labor costs are the single largest expense for these types of business it's not unreasonable to reach the conclusion of those she's rebutting with this article. Namely that Walmart is overly maximizing profits based on the back of paying extremely low wages. To put it another way, if for some reason Walmart was told to bring it's margins in line with Costco the easiest way to do that would be to bring your wages up and keep your prices the same. Let's do back of the envelope math based on the chart in the article. If Walmart had the margins of Costco rather than the current ones that would see it's profit dip from $15.6 billion to $7.53 billon. That in turn would "free up" $8 billion in what is now pure profit. With 2 million global employees you could pay them all $4K more. That's a 20% salary increase for the basic salary they highlighted of $20K per year. I'm not bashing Walmart. I'm just pointing out that Costco seems to have made the decision to have meaningfully smaller margins than Walmart. Given where the bulk of their costs lie they must have had the conversation more than once about paying folks less to move those margins up to please Wall Street more. Yet they have decided not to do that. Perhaps it's simply because they believe the business benefit around being easier for them to be accepted in new communities (and thus grow) based on the real and perceived perception that they treat their workers well. PS: Anecdotally Walmart opened near us two months ago. I have now been there 4 or 5 times. I am struck by just how many people there are working there on the floor. There seem to be too many whenever I'm there. They look bored and so congregate in groups and shoot the breeze. I couldn't get that out of my mind as the author kept stressing they really need a lot more employees.

dylangs1030 13y ago
I used to work in a supermarket and in a department store. Those people you see shooting the shit and slacking off are necessary. The reason why they're there is because if the store suddenly gets packed, they will be split up and given tasks. They're insurance. You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc. And that's just during the day in front-end customer facing situations. They're constantly called back to inventory to do warehouse-type jobs, even if they're cashiers.
- eru 13y ago
  > You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc. Aldi (in Germany) operates on a system were they don't have that insurance, and trained the customer to accept it. But that low level of customer service would only ever fly in Germany.
- jusben1369 13y ago
  Yeah, I don't mean to bash on them. And goodness knows I'm sure Walmart knows what it's doing with it's staffing levels. That's why I just added it as a random anecdotal PS.
- cantankerous 13y ago
  This. I used to work in a supermarket. Courtesy clerks (baggers) and even cashiers could be given bizarre tasks during slowdowns, but the crowds would always pick up during their shifts and they'd need to be called back to their posts. Seemed like this was usually at the top and bottom of the hour and various rush points of the workday. If the overflow labor wasn't there, lines would back up into the aisles and customers wouldn't just complain, they'd go bonkers.
bokonist 13y ago
Given that labor costs are the single largest expense for these types of business it's not unreasonable to reach the conclusion of those she's rebutting with this article. Whaaaa? The largest expense, by far, is most certainly cost of goods sold.
- robryan 13y ago
  I wouldn't really consider them an expense in the same way as labour costs. Maybe in terms of the costs of distribution and storage for things that aren't moving. Things that are moving though with a profit margin aren't really a cost center.
  - eru 13y ago
    Oh, but you still have to pay interest on that tied up capital. (I.e. the faster you move your inventory, the cheaper it gets.)
    - deleted 13y ago
      [deleted]
  - mseebach 13y ago
    In bookkeeping, no, but in looking for opportunities for efficiencies, it's pretty relevant. Say, you've got a single employee on a $60k salary moving goods worth $10mm, but at a razor thin margin, so your profit on the goods is $100k, and your net profit is $40k. If you want to increase your net profit, it would probably be easier and yield a bigger return to see if you can do something about your $9.9mm product expense than your $60k salary expense.
arnoldwh 13y ago
"I am struck by just how many people there are working there on the floor. There seem to be too many whenever I'm there." Maybe that's more more of a load problem? They are probably there for the peak rush periods, and I would imagine forecasting those accurately is almost impossible, so you operate with a buffer. Lower wages enable them to be more flexible in handling these peak loads. In terms of your point about the financial impact, a quick look at the SG&A of Walmart (20%) shows a big difference vs. Costco's (~9%). I don't have the breakout of employee wages, but it does seem like it's definitely a more labor intensive model. Then again, they probably could afford to pay higher wages, but the problem is that customers haven't given them a financial incentive to do so. I feel like the point the author was trying to make was a good one...many people that write about these issues should acknowledge the different business models instead of just quickly pointing at Costco and saying the model works with higher wages.
hearty779 13y ago
For comparison purposes, Apple and Google make 6-7 times higher net margins than Walmart.
- brownbat 13y ago
  And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins. http://techcrunch.com/2012/01/25/netflixs-streaming-dvd-margins/ http://techcrunch.com/2012/01/25/netflixs-streaming-dvd-marg... (That's old, they've dropped precipitously since then to something like 48%...)
  - tanzam75 13y ago
    > And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins. DVD rental is a high-margin but stagnating market, while streaming is a low-margin but growing market. The stock market believes that it's better to expand profitlessly than to remain small but profitable. See Amazon's P/E ratio. Besides, Reed Hastings is a tech guy. He cut his teeth on the Purify memory leak detector. He claims that he always wanted to do streaming -- it's just that the broadband infrastructure wasn't well-developed In 1997, whereas DVDs were just then starting to take off. (And they happened to weigh under an ounce, which made them cheaply mailable.)
    - brownbat 13y ago
      Stagnating at 50% returns is a strange kind of problem. Even Reed has admitted streaming will never get there. And it's stagnating because Netflix has no interest in growing that side of the business. They don't advertise it, they bury the sign up option on their page, they've tried to split it off, they've arbitrarily raised its prices... I mean, easy, drop to 30% margins and buy an ad, you'll get growth again. Some people think that being a tech guy is exactly what's blinding Reed to the fact that the licensing problem is a far bigger problem than the shipping costs..
1123581321 13y ago
Walmart spends a great deal more on cost of goods sold than selling expenses, which is where the retail wages are counted. http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=WMT http://investing.businessweek.com/research/stocks/financials... According to the data in the article, Walmart would have the same profit margin as Costco if they spent $3,500 more per employee annually. Ignoring part-time workers, salary-exempt, benefits etc., this is an hourly wage increase of about $1.75, still well under what Costco pays.
- prostoalex 13y ago
  80% of Costco's profits comes from membership fees (source: http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world#p2 http://www.businessweek.com/articles/2013-06-06/costco-ceo-c... ), so Costco is less dependent on changes in buying patterns, and sells pretty much at cost. Unless consumers start canceling their memberships en masse, Costco won't be in deep trouble. Wal-Mart's profits, I'd imagine, are entirely from markups, and a slight change in consumer behavior (higher prices on gas, higher unemployment numbers, smaller paychecks) makes them a volatile player.
markost 13y ago
Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales? In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products. Everything about Costco's business model is backwards.
- sk5t 13y ago
  This argument only makes sense if you consider 100% of membership revenue to be profit with absolutely no associated costs. However, clearly Costco's customers would not be willing to pay $60 annual dues if there were no benefits.
- tanzam75 13y ago
  > Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales? That $1.7 billion is net income, which is after subtracting out the income tax. You have to compare to pre-tax income, which in the case of Costco is essentially just operating income. 75% of Costco's income came from membership fees in the last fiscal year, and similar or higher percentages in other recent years. From Costco's FY 2012 annual report, page 25 (in millions of dollars): Membership Operating income 2008 1,506 1,969 2009 1,533 1,777 2010 1,691 2,077 2011 1,867 2,439 2012 2,075 2,759 PDF file: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTY1MTY0fENoaWxkSUQ9LTF8VHlwZT0z&t=1 http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M... The membership fee, of course, serves another purpose. It reduces patronage by lower-income shoppers, and therefore helps to reduce shoplifting. The receipt-check is another deterrent. Since Costco has such a tight margin on its merchandise, it cannot tolerate industrywide shrinkage rates.
  - rogerbinns 13y ago
    The receipt check is generally there to catch crooked cashiers not crooked customers. Without it a cashier could fake scan items and their accomplices walk out undetected. The check means at least two employees have to collaborate to steal.
brownbat 13y ago
It's a good point, Walmart is doing better in both volume and margins. That might imply Walmart has poorly allocated some of its returns. There's a floor, though, where that argument isn't as compelling. It's not like we're talking of dropping from 20% to 10% margins, here, Costco's 1.7% margins might not be sustainable, or might only be sustainable for a business with less fixed capital. I mean, maybe you're right, maybe 1.7% isn't that floor yet, I'd just need more information. But the last piece focused more on the fact that Walmart is in business relationships with more poor people than just its employees. So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes.
- orangecat 13y ago
  So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes. Exactly. The basic argument is that Walmart should engage in charity by paying above-market wages to its employees. But there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind. Also interesting is that Walmart gets bashed for relatively low wages, but doesn't get credit for employing lots and lots of people. Imagine the reaction if they announced that they were doubling salaries and laying off half their workforce.
  - cowsandmilk 13y ago
    > there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind. You are crazy if you think those are more effective use for WalMart's money, especially the anti-aging research.
    - eru 13y ago
      Just silly examples. If you want some more conventional, donate to Doctors Without Borders.

dylangs1030 13y ago

I used to work in a supermarket and in a department store. Those people you see shooting the shit and slacking off are necessary. The reason why they're there is because if the store suddenly gets packed, they will be split up and given tasks. They're insurance. You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc. And that's just during the day in front-end customer facing situations. They're constantly called back to inventory to do warehouse-type jobs, even if they're cashiers.

eru 13y ago
> You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc. Aldi (in Germany) operates on a system were they don't have that insurance, and trained the customer to accept it. But that low level of customer service would only ever fly in Germany.
jusben1369 13y ago
Yeah, I don't mean to bash on them. And goodness knows I'm sure Walmart knows what it's doing with it's staffing levels. That's why I just added it as a random anecdotal PS.
cantankerous 13y ago
This. I used to work in a supermarket. Courtesy clerks (baggers) and even cashiers could be given bizarre tasks during slowdowns, but the crowds would always pick up during their shifts and they'd need to be called back to their posts. Seemed like this was usually at the top and bottom of the hour and various rush points of the workday. If the overflow labor wasn't there, lines would back up into the aisles and customers wouldn't just complain, they'd go bonkers.

bokonist 13y ago

Given that labor costs are the single largest expense for these types of business it's not unreasonable to reach the conclusion of those she's rebutting with this article. Whaaaa? The largest expense, by far, is most certainly cost of goods sold.

robryan 13y ago
I wouldn't really consider them an expense in the same way as labour costs. Maybe in terms of the costs of distribution and storage for things that aren't moving. Things that are moving though with a profit margin aren't really a cost center.
- eru 13y ago
  Oh, but you still have to pay interest on that tied up capital. (I.e. the faster you move your inventory, the cheaper it gets.)
  - deleted 13y ago
    [deleted]
- mseebach 13y ago
  In bookkeeping, no, but in looking for opportunities for efficiencies, it's pretty relevant. Say, you've got a single employee on a $60k salary moving goods worth $10mm, but at a razor thin margin, so your profit on the goods is $100k, and your net profit is $40k. If you want to increase your net profit, it would probably be easier and yield a bigger return to see if you can do something about your $9.9mm product expense than your $60k salary expense.

arnoldwh 13y ago

"I am struck by just how many people there are working there on the floor. There seem to be too many whenever I'm there." Maybe that's more more of a load problem? They are probably there for the peak rush periods, and I would imagine forecasting those accurately is almost impossible, so you operate with a buffer. Lower wages enable them to be more flexible in handling these peak loads. In terms of your point about the financial impact, a quick look at the SG&A of Walmart (20%) shows a big difference vs. Costco's (~9%). I don't have the breakout of employee wages, but it does seem like it's definitely a more labor intensive model. Then again, they probably could afford to pay higher wages, but the problem is that customers haven't given them a financial incentive to do so. I feel like the point the author was trying to make was a good one...many people that write about these issues should acknowledge the different business models instead of just quickly pointing at Costco and saying the model works with higher wages.

hearty779 13y ago

For comparison purposes, Apple and Google make 6-7 times higher net margins than Walmart.

brownbat 13y ago
And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins. http://techcrunch.com/2012/01/25/netflixs-streaming-dvd-margins/ http://techcrunch.com/2012/01/25/netflixs-streaming-dvd-marg... (That's old, they've dropped precipitously since then to something like 48%...)
- tanzam75 13y ago
  > And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins. DVD rental is a high-margin but stagnating market, while streaming is a low-margin but growing market. The stock market believes that it's better to expand profitlessly than to remain small but profitable. See Amazon's P/E ratio. Besides, Reed Hastings is a tech guy. He cut his teeth on the Purify memory leak detector. He claims that he always wanted to do streaming -- it's just that the broadband infrastructure wasn't well-developed In 1997, whereas DVDs were just then starting to take off. (And they happened to weigh under an ounce, which made them cheaply mailable.)
  - brownbat 13y ago
    Stagnating at 50% returns is a strange kind of problem. Even Reed has admitted streaming will never get there. And it's stagnating because Netflix has no interest in growing that side of the business. They don't advertise it, they bury the sign up option on their page, they've tried to split it off, they've arbitrarily raised its prices... I mean, easy, drop to 30% margins and buy an ad, you'll get growth again. Some people think that being a tech guy is exactly what's blinding Reed to the fact that the licensing problem is a far bigger problem than the shipping costs..

1123581321 13y ago

Walmart spends a great deal more on cost of goods sold than selling expenses, which is where the retail wages are counted. http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=WMT http://investing.businessweek.com/research/stocks/financials... According to the data in the article, Walmart would have the same profit margin as Costco if they spent $3,500 more per employee annually. Ignoring part-time workers, salary-exempt, benefits etc., this is an hourly wage increase of about $1.75, still well under what Costco pays.

prostoalex 13y ago
80% of Costco's profits comes from membership fees (source: http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world#p2 http://www.businessweek.com/articles/2013-06-06/costco-ceo-c... ), so Costco is less dependent on changes in buying patterns, and sells pretty much at cost. Unless consumers start canceling their memberships en masse, Costco won't be in deep trouble. Wal-Mart's profits, I'd imagine, are entirely from markups, and a slight change in consumer behavior (higher prices on gas, higher unemployment numbers, smaller paychecks) makes them a volatile player.

markost 13y ago

Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales? In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products. Everything about Costco's business model is backwards.

sk5t 13y ago
This argument only makes sense if you consider 100% of membership revenue to be profit with absolutely no associated costs. However, clearly Costco's customers would not be willing to pay $60 annual dues if there were no benefits.
tanzam75 13y ago
> Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales? That $1.7 billion is net income, which is after subtracting out the income tax. You have to compare to pre-tax income, which in the case of Costco is essentially just operating income. 75% of Costco's income came from membership fees in the last fiscal year, and similar or higher percentages in other recent years. From Costco's FY 2012 annual report, page 25 (in millions of dollars): Membership Operating income 2008 1,506 1,969 2009 1,533 1,777 2010 1,691 2,077 2011 1,867 2,439 2012 2,075 2,759 PDF file: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTY1MTY0fENoaWxkSUQ9LTF8VHlwZT0z&t=1 http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M... The membership fee, of course, serves another purpose. It reduces patronage by lower-income shoppers, and therefore helps to reduce shoplifting. The receipt-check is another deterrent. Since Costco has such a tight margin on its merchandise, it cannot tolerate industrywide shrinkage rates.
- rogerbinns 13y ago
  The receipt check is generally there to catch crooked cashiers not crooked customers. Without it a cashier could fake scan items and their accomplices walk out undetected. The check means at least two employees have to collaborate to steal.

brownbat 13y ago

It's a good point, Walmart is doing better in both volume and margins. That might imply Walmart has poorly allocated some of its returns. There's a floor, though, where that argument isn't as compelling. It's not like we're talking of dropping from 20% to 10% margins, here, Costco's 1.7% margins might not be sustainable, or might only be sustainable for a business with less fixed capital. I mean, maybe you're right, maybe 1.7% isn't that floor yet, I'd just need more information. But the last piece focused more on the fact that Walmart is in business relationships with more poor people than just its employees. So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes.

orangecat 13y ago
So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes. Exactly. The basic argument is that Walmart should engage in charity by paying above-market wages to its employees. But there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind. Also interesting is that Walmart gets bashed for relatively low wages, but doesn't get credit for employing lots and lots of people. Imagine the reaction if they announced that they were doubling salaries and laying off half their workforce.
- cowsandmilk 13y ago
  > there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind. You are crazy if you think those are more effective use for WalMart's money, especially the anti-aging research.
  - eru 13y ago
    Just silly examples. If you want some more conventional, donate to Doctors Without Borders.