The Costs Of Not Providing A Living Wage: Wal-Mart & McDonald's vs. Costco

Michael Teague |

Last week, McDonald’s (MCD) did something really nice for its employees when it teamed up with Visa to produce a bi-lingual pamphlet titled “Practical Money Skills: A Budget Journal”.

The company billed the document as “a great first step toward taking control of your money,” enlightening its employees with the kind of wisdom about personal finance that one would otherwise have to spend great sums of money to obtain, such as “Knowing where your money goes and how to budget it is the key to your financial freedom.”

Perhaps McDonald’s was well-intentioned in this endeavor, but either way the company’s efforts have not been appreciated by its employees, or the larger public for that matter. The reason for this might be that the model on which the so-called budget journal is based, to say nothing of the tone in which it was written, reveal what assumptions  the $97 billion corporation might hold about those who make its profits possible at a most basic level.

For instance, on the fourth page of the document, a sample budget is provided in which the “monthly net income” section includes slots for “1st Job” and “2nd Job”, with a sample grand total of just over $2,000. The “monthly expenses” section that follows is equally curious, as it estimates the cost of “mortgage/rent” at $600 per month, “health insurance” at a staggering $20 per month, and “car payment” at $150 per month.

Aside from the assumption that workers necessarily have second jobs, and the vast underestimation of the cost of such things as healthcare, the pamphlet fails to include estimates for the cost of other relatively vital needs such as food, child care, gasoline, diapers, household products, and so on. Even Fox Business showed signs of consternation, if not at the spirit of the document, at least by the somewhat obtuse manner in which it was expressed.

And though the matter did not garner the same sort of media attention as the royal baby, it is no less consequential. Those who are concerned about workers making a living wage should probably thank McDonald’s for its honesty, unwitting or otherwise, as it has helped draw attention to the larger wage issue at play. While it might seem somewhat insulting that a multi-billion dollar, transnational company condescendingly tells its employees how to budget the few pence they get for what can only euphemistically be called a “monthly income” (and that only with the addition of a second job), at least it has addressed the issue and showed its hand, as it were, which is more than can be said for other companies who are well-known for paying their workers diminutive wages, such as Wal-Mart (WMT) .

Indeed, back in 2004, the Labor Center at UC Berkeley released a study titled “Hidden Cost of Wal-Mart Jobs: Use of Safety Net Programs by Wal-Mart Workers in California” that found that California taxpayers were footing an $86 million bill for some 44,000 of the company’s workers to access public assistance programs such as food stamps and healthcare. Perhaps this is one of the reasons that many local residents in cities small and large across the country have often opposed the construction of Wal-Mart outlets, as was recently seen with the company’s efforts to build a location in Chinatown, adjacent to the heart of Downtown Los Angeles.

Fast-forward ten years and the situation has only gotten worse. Wal-Mart is a company with one of the largest revenue figures in the world and nets on average over $15 billion in profits on a yearly basis, but its employees are costing the nation’s public assistance programs over $2.66 billion per year because its workers do not make enough money to foot the bill some other way.

But there are some indications that this situation is just as bad for the company, from a fundamental standpoint, as it is for Wal-Mart workers. On the basis of performance, the company’s stock might look as though it is not doing all that bad. Like other big-box and discount retail chains, Wal-Mart weathered an underwhelming holiday season at the end of 2012, and saw lower sales in January and February due to complications with the disbursement of tax returns, as well as the expiration of Bush-era payroll tax cuts. Shares are currently trading on a gain of 16.5 percent in 2013 at $78.55.

But the company’s attempts to cut costs, particularly on labor, has left store shelves poorly stocked, and customers dissatisfied, and is the culmination of a process that has been visible over a period of years, and it is not clear how else the company can fix the problem aside from putting more money into its workforce.

Meanwhile, there is a bright and shining counter-example to the sort of labor policy on display at Wal-Mart, which can be found at another popular discount retailer, Costco (COST) . Costco is a very popular company who sells products at a discount, usually in bulk, and makes a great deal of its profits from membership fees, which an ever-increasing number of consumers seem more than willing to pay.

One of the most salient differences between Costco and Wal-Mart is company policy vis-à-vis employees. Costco pays its employees a living wage, on average double what Wal-Mart (or McDonald’s) employees make, and gives them access to opportunities for advancement within the company. As a result, turnover among the company’s workforce is much lower, and sales as measured on a per employee basis are double that of Wal-Mart’s Costco-like subsidiary, Sam’s Club.

And while sales and revenues are down at places like Wal-Mart and McDonald’s, Costco has gained more paying members and enjoyed better sales growth through the course of 2013. The company’s stock is currently trading for $119 per share, up 21.5 percent year-to-date. Furthermore, Costco has built itself a pretty sterling reputation by setting a non-union model for compensating its employees for their work.

[Image: New York City residents protesting against the building of a Wal-Mart, Courtesy of Flickr Creative Commons]

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ACMM Accom Inc 0.00 0.00 0.00 0
COST Costco Wholesale Corporation 151.19 -1.34 -0.88 1,862,192
MCD McDonald\'s Corporation 116.53 -0.64 -0.55 3,022,356
WMT Wal-Mart Stores Inc. 71.62 -0.73 -1.01 5,948,719

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