Why Wal-Mart Can't Compete With Costco for Black Friday

Mega-retailer Wal-Mart generally seems like the biggest turkey in retail, even when it's not Thanksgiving time. However, the megabehemoth, which generally gets the most grief about worker treatment, is once again under fire for its employment policies.

Wal-Mart's alleged agreements to Florida requests after workers' recent strike there have galvanized Southern Californians to strike as well, hoping to have their own discussions with the retail giant to improve employee policies.

Some of the complaints are similar to those from last year, when Wal-Mart faced major strikes just ahead of the traditionally biggest shopping boon of the year -- Black Friday. In addition to the usual complaints about rock-bottom pay, terrible hours, and shoddy benefits, Wal-Mart is perpetuating another major risk to overall business health. Investors should think long and hard about what this means for the long term.

When companies skimp on costs related to their employees, service -- one of the most elementary and essential factors in retail -- starts to disintegrate. It's not even just a morale problem, which in itself is a negative. Obviously, miserable workers make for a sad and oppressive experience.

Critics point out a problem that numbers-driven investors may miss. Understaffing leads to long lines, resulting in frustrated customers who leave their carts and the stores. In addition, when too few workers are around to stock shelves, shoppers may come in and be thwarted in buying items they stopped in for.

Big targets
Retail in general isn't exactly renowned for amazing employee treatment. There is a growing outcry among both workers and consumers about the big problems in big retail.

Just a few months ago, McDonald's and many of its fast-food rivals made headlines by inciting worker strikes. Many might argue that their demands to make $15 per hour are too much for companies that have for so long run their businesses paying workers much less. Still, as it stands, the $7.25-per-hour minimum wage many of those workers pull in isn't enough to survive on well at all.

Sadly, many companies pay their workers just as badly or even worse than Wal-Mart, even though it takes most of the flak.

Maybe that's because it's the Godzilla of retail. Wal-Mart's market cap is $252 billion. Despite its recent financial disappointments and the economic difficulties hitting its core customers, in the last 12 months Wal-Mart has raked in $473 billion in sales.

In addition, Wal-Mart employs a whopping 2.2 million people all over the world. Unfortunately, they're not paid very well and often have to apply for public assistance to make up for their shoddy paychecks. Investors who feel like boosted profits are better for their own stock returns should consider that by paying its employees low wages, Wal-Mart is shoving costs onto the public. So investors are helping to pay for those externalized costs even if they are pulling in some dividends. Their neighbors are, too.

It's not impossible to pay employees well and have a profitable business. Take Costco , which pays its employees an average of $20.89 per hour. On the other hand, Wal-Mart pays an average $12.67 per hour to approximately 475,000 full-time workers in the U.S. However, it's quite another story for its nearly 1 million part-time workers here, who make about $9 per hour, or approximately $26,000 per year.

Costco has stable and even super-loyal clientele as well as workers with no real reason to complain. From the investor standpoint, Costco's longtime operational decision to sacrifice some near-term profitability to actually provide comfortable and upwardly mobile jobs for workers has worked out very well, hasn't it? It hasn't exactly been a stock dud.

At Costco, employees stick around far more than workers do at other retailers. In addition, and in line with the American dream, there actually are real opportunities to rise through the ranks at Costco.

A more creative form of creative destruction
If people beat up on the most prominent names like Wal-Mart and McDonald's, maybe these are just among the most high-profile and powerful companies to target. If such companies actually begin to devise ways to set up their business foundations to treat their employees better, companies with similarly shoddy practices may follow suit.

One possible downside: Wal-Mart could also wreck many businesses' futures if it did so. Doing so would improve its brand, and if other companies can't make the transition, they might suffer terribly. From a purely business and investing perspective, the idea of Wal-Mart driving other companies to ruin is a sad one. That's part of creative destruction, which is scary, and Wal-Mart at its ruthless worst certainly has driven many smaller rivals into dire financial straits.

However, if creative destruction comes in the form of millions of workers making better wages, it would likely make our economic future better, not worse. It could unlock many people's futures so they become more educated, can take advantage of more opportunities to advance, and could even start new businesses. Perhaps their children will as well, since their futures will be easier and brighter.

Perhaps if Wal-Mart joins a positive race to the top, it will certainly drive either destruction or innovation to its ever-vigilant rivals. Instead of ruthless capitalism, it could join the still small but growing numbers of companies that show how capitalism should work -- private industry competing to be the best companies they can be, furthering many futures and thereby boosting the economy, not taking from it.

Given the increasing attention to issues like these, and the realizations that some companies manage to be popular and profitable by utilizing these strategic advantages, Wal-Mart's continued difficulties in dealing with this situation add up to a giant mystery. Right now, that mystery comes at a terrible time -- right before the time of year when shopping is really emphasized and striking hits really hard.

Editor's note: This article has been updated to reflect that the average Wal-Mart employee pay of $12.67 is for full-time workers, and that the average pay for part-time workers is lower. 

The article Why Wal-Mart Can't Compete With Costco for Black Friday originally appeared on Fool.com.

Alyce Lomax owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale and McDonald's. The Motley Fool owns shares of Costco Wholesale and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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