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Short Takes

Q: Costco gives its workers more generous health insurance coverage than Wal-Mart. How can Costco do this when its competitors do not?

Costco has drawn widespread praise for its generous employee compensation--including higher wages and health insurance--compared to its competitors in the giant retail sector, including Wal-Mart. How can Costco be so worker friendly and remain competitive?

Costco and Wal-Mart distinguish themselves in the marketplace; economists dub it "product differentiation." If the two retailers were identical except Costco topped its compensation package by throwing in health insurance, Costco would be doomed. Costco would have to pass along the cost of health insurance in the form of higher prices. Why would anyone shop at one store if they can get the same article for less at another?

But Costco is wooing upscale customers and Wal-Mart is not. Costco does this in a variety of ways, including selling crab legs, fine wines, designer clothing, even a Picasso painting, in addition to a variety of other products. It also requires an annual membership, something many Wal-Mart shoppers won't do or can't afford. Just as it is targeting upscale shoppers, Costco also wants to attract different employees than those working for other discount retailers. These are all elements of product differentiation.

Costco wants to attract higher educated, more productive workers, and workers with whom its customers can more readily identify. The company does this by offering higher salaries and health insurance. At the very least, this has resulted in a very loyal workforce for Costco, which boasts the lowest worker turnover in retailing--five times lower than Wal-Mart. A retailer like Wal-Mart may be trying to differentiate itself by hiring workers who are willing to work at the lowest wage jobs, as a way to offer the lowest prices on the items it sells (which differ in many ways from Costco's products).

Costco is more generous to attract different workers. Health insurance may be more important to the kind of worker they seek. And that may be how Costco does it.

Bottom Line: Costco can do it as long as the company offers consumers something different.

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