Costco vs Sam's Club- a battle of retail values
Updated: 1 day ago
"It doesn't do Costco any good if nobody can afford to buy anything." James Sinegal, founder.
The idea of warehouse clubs revolutionized retail when it was introduced. Using the basic economic principal of economies of scale, warehouse stores could sell larger quantities at lower prices and still make money. Instead of buying a single roll of toilet paper for $1, purchasers can get a huge package of 32 for $20. For those with the need and space for larger quantities, larger quantities make sense.
The first warehouse club was started in 1976 under the name Price Club (later merged with Costco). It's success spawned two competitors in 1983- Sam's Club and Costco, who are the dominant players in the market today. This blog post will look at the two companies and some surprising differences between them.
Sam's Club is a division of Wal-Mart, and has 881 locations worldwide as I write this. Sam Walton became one of the wealthiest Americans ever from his success building both franchises. Wal-Mart stores became known as the home of low everyday prices, with much of its merchandise sourced from overseas. It's large buying power has made them the number one retailer in the world and a behemoth that controls its suppliers in ways other competitors can't. Their size has also allowed them to put out of business many smaller competitors, including small-town mom and pop stores that once dominated the rural landscape.
Sam's Club is very much an extension of Wal-Mart, but with a warehouse club business model. Both stores use the same corporate management, supply chains, shipping resources, and corporate philosophy.
Costco was founded by Jim Sinegal and Jeffrey Brotman as a new company. Brotman has since passed away, but Sinegal still influences the company and its current CEO, Ron Vachris. Costco merged with Price Club in 1993, and it has risen to be the third largest retailer in the US. (Amazon is #2).
I've shopped at both warehouse stores, and honestly I can't tell much of a difference, though I'm told Costco's prices are slightly higher and weekend lines are longer. Both have private label brands, groceries, electronics, giant rolls of toilet paper, and most everything you'd expect at a warehouse store. Both stores charge an annual membership fee- Costco $65 and Sam's $60, and you must have a membership card to get in the door. Both clubs have optical centers and hearing aid centers, discount gas, and vacation deals. But there is one huge difference that struck me when I learned about it.
Costco treats its employees much better than either Wal-Mart or Sam's Club. The corporate philosophies mirror the debate in society at large. Are employees disposable assets that are to be paid as little as possible, or are they long-term assets that should be cultivated, retained, and well-compensated? Costco turns over about 12% of its employees every year, while Sam's Club loses about 44% of its employees. Average tenure of a Sam's Club employee is 1-2 years, while Costco averages 9 years per employee.
In addition to higher salaries, Costco employees also enjoy lower health insurance premiums and a better benefits package. Sam's Club employees are encouraged to apply for Medicaid and Food Stamps. It's not surprising that Sam's Club reviews like the following can be found on job sites like Indeed:
"The managers are constantly giving conflicting instructions and then berating employees for being confused. They are completely demoralizing and dehumanizing. Employee concerns are ignored or worse, treated as disrespectful. I've never worked with such horrible bosses."
The vast difference in corporate cultures can be traced back to the two founders, Sam Walton and Jim Sinegal. While both men lived simpler lives and took a relatively small salary, Sam Walton and his children were driven to expand their company at the expense of employee satisfaction. While Walton paid lip service to great customer service, as the company grew that apparently fell by the wayside. Poorly paid employees don't stick around very long. Sinegal, however, created a corporate culture that truly valued employees instead of paying lip service to them. That culture has continued for 43 years and going.
Walton died in 1992, and that's when Wal-Mart may have pivoted from an emphasis on customer service to one on low prices instead. Walton's five children, who took over the company, are now all billionaires many times over. Costco has grown despite its generous employee benefits, and it puzzles me that both warehouse clubs have prospered under totally different philosophies.
Personally, I prefer shopping at Costco if only because of their treatment of employees. I want happy people selling me stuff. Also, Costco was one of the few companies that deliberately kept their diversity, equity and exclusion policies when others abandoned them in the face of the wokeness rebellion. Costco carries more organic foods than Sam's Club, and at least makes an attempt at being environmentally sustainable. Their $1.50 jumbo hot dog and soda is the best deal in town compared to the $10 version you find everywhere else.
I don't understand how the disposable employee model keeps working. Sam's Club is experimenting with Scan and Go technology that lets shoppers check out on their phone and never use an employee at all. It's been documented that many Wal-Mart employees use food stamps and Medicaid to get by, meaning that the US government is indirectly supporting them. Sam's Club and Wal-Mart treat shoppers as wallets, and employees as accounting line items. Amazon is even worse from what I'm hearing.
At some point, if no one can earn an affordable salary, no one will be able to spend money either, and the big retailers will all slowly die as AI and computers slowly bankrupt their customers. Henry Ford saw this over a century ago when he raised employee salaries.
Is the "treat employees like shit" model more profitable? It takes more money to recruit and train a new hire than to keep an old one. Happy employees are more motivated to serve customers, which fattens the bottom line. But human beings are complicated, and dealing with them through pregnancies, family emergencies, and the twists and turns of life is hard. It may seem easier to churn through the working population than sticking with them. But it remains to be seen how late-stage capitalism will eventually end up.
By the way, investing $1,000 in Wal-Mart stock from 2000 to 2026 would net someone about $12,600. Not bad. But investing the same $1,000 in Costco stock? $27,000! Treating employees like human beings really can pay off.
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