Wal-Mart vs. Costco, Part IV

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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A few weeks back, I wrote about how the number of products a store carries can drive its labor model, and a lot of other business decisions. Costco Wholesale Corp. has a few products and a lean labor force, each of whom is paid more than a Wal-Mart Stores Inc. worker; Wal-Mart has a lot of products and a lot of workers, many of whom make less than $10 an hour. When you suggest that "Costco shows it's possible" for Wal-Mart to pay its workers much more, what you're actually suggesting -- though you don't realize it -- is a radical shift in the way that the store does business. (And as presidential economic advisor Jason Furman has noted, one that might actually make workers worse off, by leaving a lot of them unemployed.)

Here's a vivid illustration, as Virginia Postrel has noted: Wal-Mart is having to staff up, because its attempts to run stores leaner has resulted in complaints about the lack of stuff on the shelves. Carrying a lot of products means that you have to employ a lot of people to unpack the stuff and put it in the right place, then make sure that it goes back to the right place after a woman in Sporting Goods discovers that her toddler grabbed a six-pack of body wash all the way back in Health and Beauty. If you try to cut back on the number of workers, you'll have big holes in your shelves -- and then holes in your balance sheet as customers decide to do their shopping somewhere where they don't have to wait half an hour for the manager to fetch Advil Liqui-Gels out of the stockroom.

Could Wal-Mart cut back on the products it carried? Well, it tried. It got rid of about 8,000 products, presumably the ones that weren't doing that much volume -- and then had to reverse course when customers complained. Carrying fewer products would make it easier to have fewer workers, but ultimately, Wal-Mart found that doing so cost it more in sales than it gained in cost savings.

Now, Wal-Mart could possibly overcome some of this by employing a higher-skilled workforce, one that constantly combed shelves for empty spaces and then proactively fetched the correct product from the stockroom. But in a store the size of Wal-Mart, there's only so much that skill and attitude can substitute for sheer number of bodies. No matter how bright and alert you are, you cannot traverse the distance between shelf and stockroom three times faster than your lazier, stupider counterparts. Not without knocking over some customers, anyway.

With 4,000 products that are just stacked on pallets, Costco does a lot less of this. Its labor is concentrated in areas where skill makes more difference to both speed, and customer experience: food preparation, customer service, cash register operation.

Obviously, skill matters to Wal-Mart, because it's moving a bunch of temporary employees to part-time status, and part-time employees to full time, suggesting that it plans to invest more in worker development. But it's also adding a lot of seasonal workers for Christmas, suggesting that in the end, it also needs a whole lot of bodies on the floor.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net