Wal-Mart Is Copying Costco: Smart Move

By Markets Fool.com

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Wal-Mart (NYSE: WMT) and Costco (NASDAQ: COST) are two of the world's leading discount retailers with remarkably different strategies regarding human resources. Wal-Mart has always been harshly criticized for paying insufficient wages, while Costco rewards employees with above-average pay and superior benefits.

But Wal-Mart is borrowing a page from Costco's playbook, offering higher salaries and better working conditions. And that new approach is generating benefits for the company in terms of sales growth. Judging by recent financial reports from Wal-Mart, it looks as if what's good for employees can also be good for customers and investors.

Wal-Mart is going the Costco way, but only partially

Wal-Mart launched a series of bold initiatives in February 2015. Among other things, the company raised its minimum wage to $10, and wages for department managers increased from $12 to $15 an hour. According to an article in The New York Times, Wal-Mart has raised its average pay for full-time nonmanagerial employees to an average of $13.69 an hour, a 16% increase since early 2014.

It's not just about wages, as the company is also offering improved opportunities for education and professional development. Wal-Mart has developed an onboarding and training program offering potential career paths for employees who are looking to move beyond entry-level positions. Associates in these programs receive hands-on training in areas such as merchandising, retail fundamentals, teamwork, and people skills. Those who successfully complete these programs get to climb the corporate ladder toward jobs with higher responsibility and better pay.

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Wal-Mart is also offering better conditions for associates in areas such as work schedule and benefits. The company is allowing employees to choose between more predictable or more flexible time schedules, according to their own needs, providing more control and ownership over their work and personal time. In addition, Wal-Mart is improving benefits related to healthcare, sick leave, and education.

Chances are that Wal-Mart will never completely close the gap versus Costco when it comes to wages in particular and human resources policies in general. It's worth noting that Costco raised its minimum wage by $1.50 an hour, from $11.50 and $12 an hour to $13 and $13.50 an hour, this past March. That was the first minimum-wage increase from Costco since 2007, and the decision probably reflects the fact that other companies in the industry started raising wages, so Costco needs to do the same to stay ahead of the competition.

Costco has a unique corporate culture in the retail industry, and its business model is quite particular. Since Costco operates completely under the warehouse retail model, the company makes more revenue per employee than other industry players, so Costco can naturally afford higher wages than Wal-Mart.

Nevertheless, the fact remains that Wal-Mart has changed its strategy. As opposed to trying to increase profit margins by paying the lowest possible wages it can get away with, the company is offering better working conditions to improve customer service and keep operations running smoothly. This new approach to human resources is generating promisingresults.

The move is paying off

During fiscal 2014, Wal-Mart suffered from declining comparable-store sales and negative traffic figures in the U.S. in every quarter. But things started to improve in fiscal 2015, and the recovery is quite noticeable nowadays. Comparable-store sales at Wal-Mart U.S. grew 1.6% during the second quarter of fiscal 2017, driven by a 1.2% increase in traffic. The company has produced positive comparable sales in the U.S. over the past eight quarters, while traffic has remained in positive territory over the past seven quarters in a row.

According to CEO Doug McMillon, one of the main reasons sales and traffic are moving in the right direction is that the customer experience is improving, which is clearly related to having a friendlier and more motivated workforce. In McMillon's words: "We believe a contributing factor to the results is our consistent improvement in customer experience. Customer surveys indicate that we're making good progress in providing a better shopping experience with cleaner stores, faster checkout, and friendlier service."

Wal-Mart is facing increasing costs, not only because of higher investments in employees, but also because the company is aggressively expanding its online retail capabilities. These initiatives are putting downward pressure on profit margins, but management is doing the right thing by prioritizing revenue growth and competitive positioning above short-term profit margins.

Employees aren't just an expense item on the income statement; they're one of the most important resources a business can have. As it turns out, investing in wages and other benefits can many times generate attractive returns for shareholders.

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Andrs Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. 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.