Why Wal-Mart Will Never Pay Like Costco | Hacker News Reader

Why Wal-Mart Will Never Pay Like Costco

bloomberg.com

249 pointsgeorgecmu235 comments

Having read the interesting article submitted here, I have to say that it is refreshing to see an analysis of different approaches to retailing that focuses not only on the demographic groups served by the different retailers, but also on the SKU (stock-keeping unit) count for each retailer. Having more different products in stock is more expensive than having fewer different products in stock. Carrying "name" brands is usually more expensive than carrying "store" brands.

There are plenty of other differences between the shopping experience at Wal-Mart and Costco. A peculiarity of local geography is that we find that the two Costco stores at our end of the Twin Cities metropolitan area are just never on our way to anywhere else, so we let our Costco membership lapse after just one year. For quite the same reason, we hardly ever shop at Wal-Mart. But we shop at Sam's Club (the Wal-Mart version of a warehouse store like Costco) all the time, simply because it is on my way to work and largely on the way to many of our other trips during the week. Today we built a trip to Aldi into our schedule while our daughter was at soccer practice about halfway from our house to that store. We love to minimize driving--driving costs both money and time. Some stores cannot thrive unless they are within SHORT drives of many customers. Some of those stores have to extract a lot of productivity out of each worker to pay the workers even minimum wage.

I still wonder when Amazon is going to go all-in in setting up major same-day delivery centers in most metropolitan areas in the United States. That could have a revolutionary influence on my shopping habits. And if robots can do more of the stocking of shelves, and eventually self-driving cars do most of the delivering, that business model could end up with huge market share. I'm very happy when workers at menial retail jobs are paid more--I have had such jobs (at Sears and at Target, many years ago). But they best gain opportunity to advance themselves economically when they also can save on their own consumer spending in retail stores. Everyone likes low prices day in and day out.

>Some stores cannot thrive unless they are within SHORT drives of many customers. Some of those stores have to extract a lot of productivity out of each worker to pay the workers even minimum wage.

Many, now. Logistics is (and has been) a massively growing field when it comes to deployment of franchises of restaurants as well as groceries and general goods stores. There is hugely growing sentiment against unnecessary driving, partly due to rising fuel costs but I also hypothesize that media pressure of said fuel costs as well as innovation from Netflix etc. drive this signal as well. "Why leave the house when you don't have to" has farther reaching effects than simple DVD rentals.

Great post, BTW - and a very interesting subject indeed.

    " But they best gain opportunity to advance themselves 
    economically when they also can save on their own consumer 
    spending in retail stores. Everyone likes low prices day 
    in and day out."

Great observation. I know there is a business model somewhere that allows poor people to afford the same economies of scale by splitting bulk purchases somehow. I imagine that one of the neighborhood social networking sites like NextDoor could add feature that allows a neighbor to broadcast their future purchases to their neighbors and other neighbors that want the same product can choose to up the volume of those purchases. This will allow them to save money via volume and shipping. The company doing the sale (whether Amazon, Walmart, or whatever) would deliver all the stuff to that one neighbor and then the other neighbors would show up at the ordering neighbors house to collect their share of the purchase. This would be a very compelling feature for NextDoor or similar site to create a revenue stream that increases their attractiveness to lower income neighborhoods.

When adding to the cart, the user can choose to add products publicly or privately so that only non-personal products are broadcast to their neighbors.

"splitting bulk purchases somehow" is exactly what retailers are doing for you now. This is called "bulk breaking". http://www.encyclo.co.uk/define/Bulk%20breaking

> [...] same economies of scale by splitting bulk purchases somehow.

That's what Wal-Mart is doing, and they take a cut..

I'd love to have an Aldi in the Silicon Valley, at least if the concept is similar to the ones in Germany.

My first experience with Aldi was in Frankfurt when my then girlfriend (now wife) wanted me to go get her something that was on sale/a deal. It left an impression - it was a mix of US black friday and hypersensitivity to efficiency. Know what you want, focus on retrieving those items, and be efficient. Lots of grumbling if you held someone up or weren't ready to pay at the checkout counter. It was one sampling, but I still remember it 11 years later.

The Aldis in Illinois roughly 20 years ago were bottom-barrel discount grocery stores. Poorly maintained and all the produce was very suspicious. I don't know which half of the Aldi empire owned those stores.

Trader Joes is owned by the north aldi brother.

Aldi has improved in the Chicago area in the last decade. There's been a wave of new construction in more affluent suburbs and stores have expanded to include liquor sales in certain areas.

But yeah, it's still no frills. Staples like milk and baking goods are dirt cheap, but I wouldn't chance the produce. Lots of processed food. Bakery is all mass-produced.

Interestingly, the supermarkets I've been to in Germany lately are becoming more like US ones (Rewe, Edeka) but some are still super no-frills (Penny Markt, Norma)

Apparently Aldi has one of the toughest receiving for their produce nowadays. So that may have changed.

That's the Aldi I know and love from The Netherlands... so I assume it is like the ones in Germany.

That's a scary thought.. As recently as 2011 when given an Aldi and a Rewe next door to each other, it was really difficult to ever choose Aldi (in fact, the only reason to really venture in was their cheap and unlimited 3G SIM card resales). That said, Rewe managed to also make itself more useful in the process by actually having everything I needed so the extra price ended up working out, to some degree, if you count convenience.

It is. The Aldi's in Wisconsin, USA are pretty much the exact same as the one I was at in Berlin, except for different brands. Pretty much the same layout, except the Berlin one had beer.

Aldi in Georgia, USA has beer also.

> The Aldis in Illinois roughly 20 years ago were bottom-barrel discount grocery stores. Poorly maintained and all the produce was very suspicious. I don't know which half of the Aldi empire owned those stores.

All Aldis in the United States are Aldi South. The two Aldis are territorially-exclusive when it comes to the Aldi branding.

Incidentally, Aldi South has a different logo from Aldi North. So you can go to any country with an Aldi and tell which half it belongs to.

Really? In most of Europe Aldi is associated with poor quality. Great place to buy canned food, toilet paper or cleaning products but not the place you'd want to buy meat, milk or veggies.

I am not sure it's fair anymore. Part of it probably came from the fact that the fixtures used to be so run down. Long after all other stores had started using bar codes, Aldi employees had to memorize PLU codes.

It's not fair at all in Britain. The whole "Didldidi" Mitchell & Webb snobbishness conceals the fact that Aldi's food is generally of better quality and cheaper than Tesco's or Asda's.

It doesn't tend to be as good as Sainsbury's, and of course it doesn't compete with M&S or Waitrose, but Aldi is the only store which seems to bring both decent jobs and affordable essentials to poorer communities. I have a massive soft spot for Aldi.

I've actually talked about them on HN before, embarrassingly.

Probably mainland Europe (esp. France) has better options, I'm sure.

One of the Sunday papers in the UK did a test comparing aldi and three other supermarkets for steak. Aldi was at the bottom buy a long way.

That's certainly a relevant test, and I'd like to see the method and results.

I can believe it, if only because the quality of the best fresh produce at Aldi tends to be very high, but that of the worst tends to be relatively low.

You definitely have to be a little more careful if you're looking for the best produce.

That said, I would be surprised if Tesco, Asda, or Iceland were included in this test.

If Tesco and Asda weren't included (two of the UK's largest supermarkets) then the test was essentially irrelevant to most of the populace.

This is a popular myth, especially among people not familiar with Aldi concept! Aldi sells the BEST quality for the lowest price (unlike Lidl). They sell cca. 720 products (usually 3-4 in each category) and get mass discounts nobody else can get at producers. If you buy vegetables in Aldi it is graded first class! They have a huge bio/certified organic food department as well.

People who care about quality and economics buy at Aldi!

Was the horse meat scandal a myth?

reading other comments I think Aldi in the UK is run as a completely different operation from the rest of Europe. I also have only positive experiences for Aldi. Fresh, good food at excellent prices.

... or maybe we in the UK are just used to much worse ...

Shoppping at Lidl And Aldi is an exercise in picking and choosing. Some stuff is utter rubbish but some stuff is remarkable value for money. The best regular olive oil I've bought has come from Lidl, as has the best instant coffee. Aldi is frequently recommended to me as a place to get good quality venison or pheasant - something that just doesn't turn up in regular British supermarkets.

"the best instant coffee"

I'm sorry, but no such thing exists. :)

German Aldis offer good customer experience and the assorment of goods has come close to premium supermarkets in affluent areas, giving the old nickname "Feinkost Albrecht" a new meaning.

At the same time, they have recently been getting their share of criticism for how they pay and treat their workers. Seems like they're still well avove Lidl, but not a prime example any more.

An Aldi opened nearby about two years ago. Every package of fish was imported from China. Every package of frozen meat was imported from China. I love low prices but I'm not going to eat suspect product to get them.

The ones in MI seem to be similar to the ones in Germany.

I don't think I missed it but I am confused why the author steered clear of some really interesting data. Based on the table Walmart has 2X the profit margin of Costco. Walmart's doing around 4.5x topline revenue but over 9x the total profit amount.

For the author's central point to hold true those numbers need to be more closely aligned. That is, they need to be roughly the same in % terms. They aren't, which means one or both of the players are doing something substantially different in their approach. Given that labor costs are the single largest expense for these types of business it's not unreasonable to reach the conclusion of those she's rebutting with this article. Namely that Walmart is overly maximizing profits based on the back of paying extremely low wages. To put it another way, if for some reason Walmart was told to bring it's margins in line with Costco the easiest way to do that would be to bring your wages up and keep your prices the same.

Let's do back of the envelope math based on the chart in the article. If Walmart had the margins of Costco rather than the current ones that would see it's profit dip from $15.6 billion to $7.53 billon. That in turn would "free up" $8 billion in what is now pure profit. With 2 million global employees you could pay them all $4K more. That's a 20% salary increase for the basic salary they highlighted of $20K per year.

I'm not bashing Walmart. I'm just pointing out that Costco seems to have made the decision to have meaningfully smaller margins than Walmart. Given where the bulk of their costs lie they must have had the conversation more than once about paying folks less to move those margins up to please Wall Street more. Yet they have decided not to do that. Perhaps it's simply because they believe the business benefit around being easier for them to be accepted in new communities (and thus grow) based on the real and perceived perception that they treat their workers well.

PS: Anecdotally Walmart opened near us two months ago. I have now been there 4 or 5 times. I am struck by just how many people there are working there on the floor. There seem to be too many whenever I'm there. They look bored and so congregate in groups and shoot the breeze. I couldn't get that out of my mind as the author kept stressing they really need a lot more employees.

Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products.

Everything about Costco's business model is backwards.

> Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

That $1.7 billion is net income, which is after subtracting out the income tax. You have to compare to pre-tax income, which in the case of Costco is essentially just operating income.

75% of Costco's income came from membership fees in the last fiscal year, and similar or higher percentages in other recent years.

From Costco's FY 2012 annual report, page 25 (in millions of dollars):

         Membership   Operating income
  2008      1,506          1,969
  2009      1,533          1,777
  2010      1,691          2,077
  2011      1,867          2,439
  2012      2,075          2,759

PDF file: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

The membership fee, of course, serves another purpose. It reduces patronage by lower-income shoppers, and therefore helps to reduce shoplifting. The receipt-check is another deterrent. Since Costco has such a tight margin on its merchandise, it cannot tolerate industrywide shrinkage rates.

The receipt check is generally there to catch crooked cashiers not crooked customers. Without it a cashier could fake scan items and their accomplices walk out undetected. The check means at least two employees have to collaborate to steal.

>>Did you notice the data point in the article that Costco makes $2 billion in membership revenue and yet makes $1.7 billion in profit, which means they effectively lose money on their sales?

I'm pretty sure the revenue isn't net. It would mean they have absurd retail margins on their members and negative ones on every other product sold; which doesn't make a lot of sense.

>>In fact, a little known feature of Costco's business model is their ability to sell all their stock well before their suppliers require payment for goods (Net 30)? This means they have an effectively _negative_ cash conversion cycle, or in other words, their suppliers are paying to stock their products.

That could just be their way of handling stocking fees. They handle a lot of merchandise they can't afford to stick into inventory.

No, they make money on their products, but the costs of workers/rent/etc. is what costs them more than the profit on the goods

This argument only makes sense if you consider 100% of membership revenue to be profit with absolutely no associated costs. However, clearly Costco's customers would not be willing to pay $60 annual dues if there were no benefits.

AFAIK most supermarkets run this model; when I was in school in Ireland in the 90s, this model was explained to me with reference to the main Irish chains. They end up with a big chunk of free cash that they invest.

Is the $2 billion in membership figured into the net? It seemed like it was separate in the article's table.

It includes all the revenues, including sales, membership fees, and interest income. Minus all the expenses, including cost of goods, sales and marketing, corporate overhead, debt service, and taxes.

Net income is literally the "bottom line" number on the accounting statement. It's the number that coes out after accounting for everything in the business.

Cool, thanks. I wasn't sure if the author was trying to separate the concerns to make some kind of a point about the different types of revenue. The membership revenues were also listed after the net, iirc, which I thought was strange. That makes sense, though.

This seems to be the same model as most gaming consoles.

The opposite model as Xbox and Playstation.

The console is the up-front purchase, which equates to Costco's membership fee. But Xbox and Playstation lose money up-front.

Instead, Costco operates on the Wii or the iPhone model, where you take most of your profit up-front and then operate the rest at a much smaller profit. (Though still positive.)

Walmart spends a great deal more on cost of goods sold than selling expenses, which is where the retail wages are counted. http://investing.businessweek.com/research/stocks/financials...

According to the data in the article, Walmart would have the same profit margin as Costco if they spent $3,500 more per employee annually. Ignoring part-time workers, salary-exempt, benefits etc., this is an hourly wage increase of about $1.75, still well under what Costco pays.

80% of Costco's profits comes from membership fees (source: http://www.businessweek.com/articles/2013-06-06/costco-ceo-c... ), so Costco is less dependent on changes in buying patterns, and sells pretty much at cost. Unless consumers start canceling their memberships en masse, Costco won't be in deep trouble.

Wal-Mart's profits, I'd imagine, are entirely from markups, and a slight change in consumer behavior (higher prices on gas, higher unemployment numbers, smaller paychecks) makes them a volatile player.

I used to work in a supermarket and in a department store.

Those people you see shooting the shit and slacking off are necessary. The reason why they're there is because if the store suddenly gets packed, they will be split up and given tasks. They're insurance. You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc.

And that's just during the day in front-end customer facing situations. They're constantly called back to inventory to do warehouse-type jobs, even if they're cashiers.

> You can't not have them there, or you'll get customer complaints when they can't find someone to help them, there's too few lanes, etc.

Aldi (in Germany) operates on a system were they don't have that insurance, and trained the customer to accept it. But that low level of customer service would only ever fly in Germany.

This. I used to work in a supermarket. Courtesy clerks (baggers) and even cashiers could be given bizarre tasks during slowdowns, but the crowds would always pick up during their shifts and they'd need to be called back to their posts. Seemed like this was usually at the top and bottom of the hour and various rush points of the workday. If the overflow labor wasn't there, lines would back up into the aisles and customers wouldn't just complain, they'd go bonkers.

Yeah, I don't mean to bash on them. And goodness knows I'm sure Walmart knows what it's doing with it's staffing levels. That's why I just added it as a random anecdotal PS.

Given that labor costs are the single largest expense for these types of business it's not unreasonable to reach the conclusion of those she's rebutting with this article.

Whaaaa? The largest expense, by far, is most certainly cost of goods sold.

I wouldn't really consider them an expense in the same way as labour costs. Maybe in terms of the costs of distribution and storage for things that aren't moving. Things that are moving though with a profit margin aren't really a cost center.

In bookkeeping, no, but in looking for opportunities for efficiencies, it's pretty relevant.

Say, you've got a single employee on a $60k salary moving goods worth $10mm, but at a razor thin margin, so your profit on the goods is $100k, and your net profit is $40k. If you want to increase your net profit, it would probably be easier and yield a bigger return to see if you can do something about your $9.9mm product expense than your $60k salary expense.

Oh, but you still have to pay interest on that tied up capital. (I.e. the faster you move your inventory, the cheaper it gets.)

It's a good point, Walmart is doing better in both volume and margins. That might imply Walmart has poorly allocated some of its returns.

There's a floor, though, where that argument isn't as compelling. It's not like we're talking of dropping from 20% to 10% margins, here, Costco's 1.7% margins might not be sustainable, or might only be sustainable for a business with less fixed capital.

I mean, maybe you're right, maybe 1.7% isn't that floor yet, I'd just need more information.

But the last piece focused more on the fact that Walmart is in business relationships with more poor people than just its employees. So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes.

So even if Walmart has poorly allocated its returns, I'd rather see those margins distributed to customers or foreign suppliers first, because my hunch is that the humanitarian impact would be greater on these groups, who I see as larger, poorer, and having fewer substitutes.

Exactly. The basic argument is that Walmart should engage in charity by paying above-market wages to its employees. But there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind.

Also interesting is that Walmart gets bashed for relatively low wages, but doesn't get credit for employing lots and lots of people. Imagine the reaction if they announced that they were doubling salaries and laying off half their workforce.

> there are much more effective ways to be charitable; mosquito nets in Africa and anti-aging research comes immediately to mind.

You are crazy if you think those are more effective use for WalMart's money, especially the anti-aging research.

Anti-aging research I have to agree.

But according to Givewell (http://www.givewell.org/) who do research into cost effective use of charity money, mosquito nets are very effective. Their #1 recommendation is the Against Malaria Foundation who "provides long-lasting insecticide-treated nets (for protection against malaria) in bulk to other organizations, which then distribute them in developing countries."

"AMF is a recommended organization because of its:

- focus on a program with a strong track record and excellent cost-effectiveness (more). - standout transparency and accountability - it publishes photographs and reports from each of its distributions and requires that organizations that distribute its nets monitor the usage and condition of nets in the years following the distribution and track and provide monthly malaria case rate data (more). - room for more funding - AMF has told us that it can use additional funding to expand its core program and has committed to reporting on how additional funds are used and what results are achieved."

Even if you don't accept Givewell's research, I think there is enough evidence here to doubt the statement that you wouldn't be "crazy" to think their were more effective use of money than mosquito nets.

Just silly examples. If you want some more conventional, donate to Doctors Without Borders.

If paying your employees is 'charity' what the hell do you call stock dividends?

Capitalism.

Stock dividends are a return on the investment made by investors. Many of us in the startup space would be unemployed if it weren't for that pesky thing called capitalism. VCs and investors aren't charities. They risk money for a return. Granted most VCs and angels are after capital appreciation, but for larger companies, especially those with a shelf life beyond the duration of the latest tech trend, dividends are a significant reason to invest in a particular stock.

The retirement funds of a large percentage of people absolutely depend on dividend-earning stocks. Let's not forget that those shareholders aren't Wall Street "fat cats." They are pension funds, teacher retirement funds and granny's retirement savings. So if you raise wages, you lower dividends (or raise prices, which lower demand) and THAT hurts the people that can least afford it -- those retirees that don't have the option to go find a higher paying job.

Let's look at it this way -- no one is forced to work at Walmart. If Walmart employees think they are worth more, then they can quit and sell their services to someone willing to pay more. If someone isn't willing to pay more, then obviously they aren't worth more. There's an argument that the government should simply require companies to pay more. That's fine and dandy, except now what happens to the cost of goods? It necessarily has to rise. So that means that everyone has to effectively subsidize workers' wages. Yet how is it fair that we have to pay more for goods (or higher taxes) to subsidize others?

In 2006-2007 I lived for several months in my car, ate Ramen almost every day for 6 months when I didn't have a job. I lost my apartment and eventually my car because I made some dumb mistakes both financially and personally. Yet during that time, I didn't ask for the government or any of you to give me some of your paycheck. I chose not to get married or have children until I could afford it. I didn't demand that you pay $2 more for a Big Mac so I could make more money. Eventually, moved to Korea, then China to English, then taught myself software development and now I'm doing ok.

These "sad" stories about people who work for 10 years at McDonalds for 7 bucks an hour don't move me one bit. If after 10 years you can't improve your lot in life, you're either stupid, lack ambition or you're a star in a Charles Dickens novel. There are plenty of stories about the single mom who worked minimum wage while earning a degree in night school and then going on to greater things. It can be done, it's up to the person. If we incentivize working shitty jobs, what's going to drive innovation and aspiration?

I refuse to subsidize wages in the name of "fairness." What's unfair is that I pay 30% of my income in taxes, plus sales taxes, property taxes, gas taxes, cell phone "universal service fee" taxes, and my telephone bill STILL has an excise tax on it that was supposed to fund the Spanish-American war! And what do I get for those taxes? I still have to pay $82 to get more pages added to a passport at the US Consulate. I still have to pay $25 at the DMV for a drivers license. I still have to pay yearly auto registration and inspections. I still have to pay tolls for bridges (and tunnels) that were built with taxpayer money (I'm looking at you Lincoln Tunnel with your $13 one-way toll!)

I have to pay almost 50% in taxes and fees for airline tickets and still have to deal with crappy infrastructure, a manically inept TSA, shitty transportation systems and public schools that I wouldn't send a dog to. Yet somehow certain groups of people get free cell phones, free medical care (I pay $1300 a month for a family of 4,) subsidized housing (there's public housing in Chelsea, NYC!) food stamp cards on which you can buy lobster and organic peaches and educational grants and subsidized loans for people to go to school.

I'm not arguing for or against any of those government programs, but if you're asking me to pay a buck more for a box of Kraft Macaroni & Cheese, you're out of your g'damned mind.

you think Walmart's customers are poorer than walmart's employees?? seriously? Walmart states that it's target demographic, which it also finds contains the majority of their customers, makes $30,000-$60,000 per year. Walmart's employees make $16,000 a year. So, the typical Walmart customer makes 2-4x as much as their employees. This stuff isn't hard to research, and should be blindingly obvious if you ever shopped at walmart in a rural area. The people who shop at Walmart are very clearly middle class in those regions, not the poor.

> Walmart is in business relationships with more poor people than just its employees

"more" here refers to "a greater number than", not "poorer than"

For comparison purposes, Apple and Google make 6-7 times higher net margins than Walmart.

And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins.

http://techcrunch.com/2012/01/25/netflixs-streaming-dvd-marg...

(That's old, they've dropped precipitously since then to something like 48%...)

> And Netflix's DVD side of the business (the one Reed Hastings wants to kill somehow) is turning in 50% margins.

DVD rental is a high-margin but stagnating market, while streaming is a low-margin but growing market.

The stock market believes that it's better to expand profitlessly than to remain small but profitable. See Amazon's P/E ratio.

Besides, Reed Hastings is a tech guy. He cut his teeth on the Purify memory leak detector. He claims that he always wanted to do streaming -- it's just that the broadband infrastructure wasn't well-developed In 1997, whereas DVDs were just then starting to take off. (And they happened to weigh under an ounce, which made them cheaply mailable.)

Stagnating at 50% returns is a strange kind of problem. Even Reed has admitted streaming will never get there. And it's stagnating because Netflix has no interest in growing that side of the business. They don't advertise it, they bury the sign up option on their page, they've tried to split it off, they've arbitrarily raised its prices... I mean, easy, drop to 30% margins and buy an ad, you'll get growth again.

Some people think that being a tech guy is exactly what's blinding Reed to the fact that the licensing problem is a far bigger problem than the shipping costs..

"I am struck by just how many people there are working there on the floor. There seem to be too many whenever I'm there."

Maybe that's more more of a load problem? They are probably there for the peak rush periods, and I would imagine forecasting those accurately is almost impossible, so you operate with a buffer. Lower wages enable them to be more flexible in handling these peak loads.

In terms of your point about the financial impact, a quick look at the SG&A of Walmart (20%) shows a big difference vs. Costco's (~9%). I don't have the breakout of employee wages, but it does seem like it's definitely a more labor intensive model. Then again, they probably could afford to pay higher wages, but the problem is that customers haven't given them a financial incentive to do so. I feel like the point the author was trying to make was a good one...many people that write about these issues should acknowledge the different business models instead of just quickly pointing at Costco and saying the model works with higher wages.

Walmart tried to move into a dilapidated mall in my neighborhood and everyone fought it and they couldnt. They moved a mile down the street to a slightly less wealthy neighborhood, in a dilapidated strip mall. Five years later, the strip mall with walmart is bustling with business and the other mall is still mostly empty. Wasted opportunity to get business into the township.

Even though I generally wouldn't shop there, I have no issue with walmart, for exactly the reasons this author suggests I wouldn't

What you say cannot possibly be true. I have been told time and time again that the arrival of a Walmart always spells doom for adjacent businesses, and the people who told me that seemed very sure about themselves.

(I think your sarcasm is appropriate given the histrionics that surround Walmart)

I've seen really impressive growth around a truly rural Supercenter opening but it's mostly been limited to chains that satellite the Walmart. Starbucks, Lowes, Jack in the Box, CiCis, Chilis and a handful of other shops that are nationally or regionally owned businesses that would have probably waited out opening in the area had the Supercenter been fought off. There is almost a symbiotic relationship between these concerns and a Walmart or Target super store that opens that is evident if you've ever been to the suburban southwest.

I can't speak to the real economic impact of such a situation (maybe it's great!), but I do suspect that there are real cascading effects to small businesses in this scenario. Pizza places, chinese food places, your random donut shop, the lumber yard... they all take a hit. I don't know, maybe all these places were terrible in quality and service in the face of the efficiency of national chains, but it still seems intuitive that there is a wealth flight around this situation and one has to wonder if it's for better or worse.

But to be honest, I don't know.

"Using an instrumental variables approach to correct for both measurement error in entry dates and endogeneity of the timing of entry, I ﬁnd that Wal-Mart entry increases retail employment by 100 jobs in the year of entry. Half of this gain disappears over the next ﬁve years as other retail establishments exit and contract, leaving a long-run statistically signiﬁcant net gain of 50 jobs"

http://faculty.smu.edu/millimet/classes/eco6352/papers/baske...

Curious if there's any speaking to the wage differential between the gained jobs and the replaced jobs.

One more interesting indicator would be the relative economic change within the area in question. Meaning, how much as the tax base and property values increased within the area of the store. I think the real question is, "Is a Walmart a net gain for a community." Lots of data points, but I'm sure there's some dude reading this with Hadoop skills and a case of boredom and some leftover Jolt Cola that could hammer it out this weekend.

I am quite curious about this as well.

That list of brands sound like just the sort of totally generic suburban shopping center on a highway that I hope to never set foot in again for the rest of my life. Anodyne on the surface, but a soul-crushing complete lack of culture of any kind. It's the "local flavor" of rural and suburban America. Everywhere. It fills me with anomie just to think about it.

Familiarity is "soul-crushing"? I really don't understand this sentiment, though I see such statements quite a lot. Care to explain why?

I agree. I tend to avoid Walmart due to its low quality on a lot of the store brand goods, but don't actually have any issues with how they run their business. They aren't exactly hiding that they are a low-cost retailer.

If people have problems with the wages Walmart pays they should stop attacking Walmart and go deal with the people who actually set the minimum wages: your congress critter.

Wal-Mart grocery sells many if not all the same name brands my local grocery stores do; Publix and Kroger for Atlanta metro. They just sell them so much cheaper I only buy at the others when I am lazy or there is a BOGO

Going to any of my local Wal-Marts with grocery and it is the most crowded place of the store. While their clothing sections and miscellaneous house hold goods sections can be dodge the electronics section, automotive, and garden, sell many name brands I see elsewhere.

For what it's worth, people do try that. Wal-Mart tends to show up and throw its weight around when this happens.

For those interested in learning more about Costco, this is the most informative, fascinating, and mind-blowing report I have ever read:

Understanding Costco by Coriolis Research (namely, Tim Morris). http://www.coriolisresearch.com/pdfs/coriolis_understanding_...

Some mind blowing facts:

1. They pay their employees $10-$17/hr as opposed to Walmart (as discussed in the article)

2. CEO earned 350k in 2012, only twice that of a store manager at Costco

3. Margins are razor thin. In fact, an employee got yelled at for selling something at a higher margin (even though all the products were successfully sold within a week)

4. ~40% of Californians have a membership

5. 30% of inventory is at the store within 8 hours

*Note: My employer is a consultant for Costco, and I might be too, so I'm definitely bias, but I love the company.

CEO earnings are generally much more extensive than just the salary (I'm not judging, just saying). This link seems to indicate that the compensation was maybe $4.8 million (basic compensation fiscal year 2012) to over $10 million (options, WARNING I'm not sure how to read these so just addding all of them together)

http://www.reuters.com/finance/stocks/officerProfile?symbol=...

> 3. Margins are razor thin.

I seem to recall reading their markup is <17%, no more than one part in six.

Costco's gross margin: 12.5%

Safeway's gross margin: 29.6%

Costco's ROIC: 17.8%

Safeway's ROIC: 4.9%

The article is Slashdotted, I cannot load it. Let me explain something.

Walmart follows 'classical management' of negative reinforcement and cutting expenses down to the bone including salaries, benefits, and other stuff. They are willing to pay executives millions while letting most employees work for slave wages with little to no benefits to cut down on costs as much as possible.

Costco follows 'participatory management' in which management gets involved with the employees and empowers them to make their own decisions. Executives are not paid millions and their salaries are based on how well the company does to encourage growth. Employees are paid more so they will be more productive and with good benefits to take care of health problems and family problems so they don't interfere with work. If the company is losing money, they do job cost analysis to see what products and services cost more to support than the revenue they bring in, and then quality is improved on those services and products and if it cannot then those products and services get cut instead of the people and new products and services replace them.

Steve Jobs did this with Apple, cut out products and services that didn't bring in enough revenue to justify keeping them, cut his own salary as the iCEO, improved the quality of products and services or come up with new ones to replace them. Walmart and other 'classic management' companies just don't understand how to do that so they take it out on the employees instead.

Wal-Mart has listed key executive compensation of around $63m USD this past year [http://insiders.morningstar.com/trading/executive-compensati...] and reported yearly revenue of $473,000m USD [http://finance.yahoo.com/q/ks?s=WMT].

I'd argue that spending 0.01% of revenue on key executive compensation (which is the 'paying executives millions' you talk about) is irrelevant to Wal-Mart overall and how much they can or can't pay their workers. Even if you stripped the executive compensation and gave it to the workers (2.2m of them), you'd only be handing out $30 to each person. That's a few hours of work total, and amortized over a year? Not a factor at all in the grand scheme of things.

...

The article is well worth a read. It's interesting and insightful and discusses more interesting things like business models, target demographics, value-mindedness, etc. I recommend it if you can get it to load. (It was fine for me.)

That's $63m to just the top 6 executives. Total executive compensation would be far far greater. And for comparison, Costco paid its top 6 only $19m, which I think is the GP's point: http://insiders.morningstar.com/trading/executive-compensati... .

I don't know, seems pretty reasonable, Costco revenue is 105B. Walmart has >4x revenue, and 19m*4=76m, more than Walmart. Based on your comparison, Walmart is paying their executives fairly.

About as reasonable as getting 9 women to make a baby in 1 month. This would only be true if those 6 executives were doing 4x the work of the executies at Costco. Conservatively, they might be doing 1.5x or even 2x the work. But I doubt they are putting in 160 hours a week.

Brad Pitt doesn't make a movie 10x faster either, and he certainly doesn't do 10x the work. But he's paid 10x what many other actors are paid.

Is it reasonable? There's a lot of money to be made by the studio that can prove it's not by making consistent blockbusters without stars. But nobody has figured out how to do that yet, so Pitt keeps getting paid. Outcomes are what matter, not hard work.

EDIT: I realized there is a studio that makes consistent blockbusters without stars: Pixar. In a way, they're like the movie studio equivalent of Costco, since they figured out a way to make hit movies with far, far fewer (but much higher paid) laborers. But like Costco vs. Walmart, Pixar can't make all the movies that the other studios can make, so they'll likely always have to settle for a small chunk of total box office receipts.

Executive compensation in America is totally fucked up.

But it's not at all the case that the executives are "stealing pay" from the guy working on the floor or whatever other crazy rhetoric people are saying now.

If the CEO is stealing money from anyone, it's the shareholders, and for a whole bunch of reasons (good and bad) they have been unable to get a cap on that.

I think we're forgetting that the Walmart customer is not the Costco/Trader Joe's customer.

I would argue that Walmart pays minimum wages because they can and their customer base doesn't really value the benefits of paying higher wages and 'participatory management' - primarily lower turnover and thus more engaged/invested employees who deliver better service and higher productivity. Walmart most likely sees their employees as replaceable and the average Walmart customer is driven by low prices and not great customer service. To that end, the lower the Walmart cost structure, the more margin they have to work with to stay competitive (without having to lower CEO salaries, etc. of course).

Costco and Trader Joe's are known for great customer service and easy return policies. Based on my observations, people who shop at Costco like to save money, but it's from a best value angle and not from an absolute cheapest I can get angle. The Costco consumer has to be willing to shell out an annual membership fee up front and you're buying in bulk which means you have to be able to pay for goods you use in the future. Trader Joe's wants to be the neighborhood store and that means they need happy employees, not employees who are thinking about how they're going to pay for the knee surgery they badly need.

I'm probably making broad generalizations of the different customer bases here but it's what I've personally observed.

>> I think we're forgetting that the Walmart customer is not the Costco/Trader Joe's customer.

I would say the same for the employees. Your average Walmart worker would probably be washed-out in a shift or two at Trader Joe's. Everyone at TJ's is busting their ass, Walmart employees seem to just be standing around doing nothing but talking to one another.

I wonder if it's because the jobs at TJ are so coveted that employees know if they don't bust their ass, someone will happily take their position? I feel the same way about In-N-Out which pays above market, people there always seem to try a bit harder to be pleasant and helpful.

You get what you pay for. With competitive pricing, you can fire someone and immediately get a high-quality replacement.

Walmart, on the other hand, seems to scrape the bottom of the barrel with their employees. As long as the employees show up to work on time and don't steal merchandise, they're good.

> I wonder if it's because the jobs at TJ are so coveted that employees know if they don't bust their ass, someone will happily take their position?

Yes, it's known as paying "efficiency wages." Which is mentioned in the article.

The article suggests that TJ's limited SKU count and upscale clientele allows it to pay efficiency wages. Whereas Wal-mart has a massive SKU count and a lower-end customer base.

Walmart owns Sams Club which is equivalent/competitor to Costco.

Which makes this article seem ingenuous. Why not just compare Sams Club to Costco?

Perhaps because Walmart is the parent company?

This is so wrong that I just have to laugh. Yes, Costco DOES pay its executives millions.

http://insiders.morningstar.com/trading/executive-compensati...

Can you name one Fortune 500 company that doesn't pay executives millions? Facebook, Google, and Apple pay its executives millions, and yet its contracted janitors get low hourly rates. Where's your rage?

I think you are missing the forest for the trees. The point is that costco's approach reduces the "spread" between management and employees, not that it eliminates it.

From moringstar, Costco CEO's compensation was ~$18.5M, Walmart's was ~$62.5M.

In 2006 (the easiest numbers I could find) the average Walmart employee earned ~$10/hr vs $17/hr at Costco. Walmart employees also had less health coverage (<50% vs ~80%) and were responsible for %33 of the cost vs %8.

source: The High Cost of Low Wages - Harvard Business Review.

http://hbr.org/2006/12/the-high-cost-of-low-wages/ar/1

The article you cite is not a peer-reviewed journal paper.

Apple's head lawyer alone made $68 million last year, not to mention other executives. No outrage?

I don't think peer review is necessary to confirm the relative levels of compensation as stated by the article. If you think those numbers are not accurate you are welcome to cite other sources for the wage levels.

As for bringing up Apple, are you trying to make me defend Apple? I'm no fan for a whole host of reasons, red herrings though they may be.

How many Apple employees are on foodstamps and/or medicaid?

Including the Chinese workers who assemble Apple's products?

Last time I looked up the numbers, those workers were earning at least an integer multiple of the average wage for China, and were right about where you'd expect for someone in Shanghai (a highly privileged part of China).

If you really think they're equivalent to Wal-Mart's minimum-wage employees, you are either extremely ignorant or just delusional.

> Last time I looked up the numbers, those workers were earning at least an integer multiple of the average wage for China

Underneath the pompous attempt at technical-sounding language, what are you trying to say?

If you really meant "...at least an integer multiple of the average wage...", this is a really pompous way of saying "some amount, which could be infinitely negative", since integers include negative numbers of unlimited magnitude.

If you really meant "...at least a positive integer multiple of the average wage...", that's a really pompous way of saying "...at least the average wage..."

If you really meant "...at least an integer > 1 multiple of the average wage...", that's a really pompous way of saying "...at least twice the average wage..."

"Integer" is neither pompous nor technical-sounding. Your entire comment is just a really arrogant way of saying "I'm a pedantic jackass".

> "Integer" is neither pompous nor technical-sounding.

I didn't say that "integer", standing on its own, is either pompous or technical sounding.

My criticism was that, as written, the sentence is actually completely meaningless ("X is at least an integer multiple of Y", where X and Y are from context real-valued measures, means, after all, doesn't actually provide any bound, lower or upper, on X), and that for any conceivable meaning that could have been intended, and that, given the word choice and the way the general structure was overly convoluted for any of the conceivable meanings intended, appeared to be a pompous attempt to use technical-sounding terminology rather than simple direct statements that would clearly communicate the intended meaning.

I notice that you still don't say what it is you actually meant by the completely meaningless phrase you used.

I meant your final interpretation, but you already knew that, as would anyone else reading my comment.

Absolutely no one who genuinely wants to address a linguistic ambiguity opens with calling it "pompous". There is simply no way you were acting in good faith.

You just wanted an excuse to be a jerk.

> I meant your final interpretation, but you already knew that

No, I didn't. My actual belief was that the last two were about equally likely, with a slight favor to the first over the second, and that it was about as likely as either of those two that you meant something else that I hadn't thought of, given how unnecessary the whole qualification was for the second interpretation, and how distant the third was from any reasonable (even considering understandable mistakes in word choice of the type that could support the second interpretation) relationship to the words you actually used:

* The first interpretation I assumed to be unlikely because it was completely meaningless (but I didn't consider it impossible that you were knowingly making an empty statement.)

* The second I thought was plausible because using "integer" in place of "natural number" or "positive integer" is a fairly common error, this would obviously be the interpretation of the three presented with the most excess verbiage, but of the non-empty ones it was the easiest mistake of word choice to understand.

* The third involves a bizarre, nearly inexplicable, error of meaning -- I've literally never before seen anyone use "integer" to mean "at least two" and can't see any reason why anyone would expect anyone to understand "integer" to mean that -- but provided some explanation of why you'd have any phrase modifying "average wage" at all.

"Integer multiple" in relation to "wage" combined with the mention of being in line with Shanghai wages is clear in its intended meaning. And I still don't believe a word of your BS because you opened with an insult, eliminating any possibility you are acting in good faith.

By the way, the "inexplicable" becomes a lot more explicable when you allow for the possibility (in this case fact) that the writer was suffering extreme exhaustion at the end of an incredibly long day.

Why not just apologize for being a jerk and move on?

Holy shit. I can't believe I just read that. I shall forever this moment as the one where HN jumped the shark. God damn.

What about the chinese workers that assemble products sold at walmart?

I am not sure why anyone would want to be an executive, unless one gets paid millions. Executives work crazy hours, travel all the time and don't see their families. Who would want to do that, if not for the millions ? Sure, some would, but not many

If you're working as an executive for the millions you're doing it wrong. The millions you get paid as an executive are what enable you to work crazy hours; you can afford a maid and a cook and a nanny so that your ability to work isn't impeded. There are some perks like a nice car and a big house or whatever. But fundamentally that pay is because you bring a lot of value to the company and it needs your hours desperately. It will pay to make most/all distractions disappear.

What a solid article.

The number that caught my eye is Revenue/Total Employees. That brings home some realities of markets. Total revenue in the market is the amount consumers spend on groceries. Thats more or less constant. Wall Mart's low revenue/employee ($211k vs $620k) means they employ more people for every dollar of market share they have. This is an enormous difference. It implies that every time Costco win $1m in market share from Wal Mart, total employment drops by 3.1 people.

Aldi (and its slightly upmarket cousin, Liddel) serve a similar market segment to Wal Mart in Europe. Is suspect they do it with even higher revenue per employee. These store are all about labour efficiency.

This might be a "be careful what you wish for" scenario for retail workers and people concerned with wages at the lower rungs. Employers might be able to afford higher wages, but demand for those wages will go down. In that case, its hard to imagine wages really improving in the long term. Even if they did, total employment would be much lower and that would hit the lowest skill workers hardest. When you pay better wages, you can be choosier.

This may be taking it a little far but.. I think what we see running through this scenario is an example of how improved efficiency breeds wage inequality.

That's true for all kinds of efficiency, including automation, which is near and dear to the hearts of Hacker News readers.

The benefits of improved efficiency and automation, as you have pointed out, skip over employees. Some of them accrue to customers in the form of lower prices, but largely they accrue to management and shareholders in the form of increased profits. Costco appears to be the exception that proves the rule, here.

In theory, efficiency and automation should be a net benefit to society, as we can then enjoy the same level of goods produced with less labor involved, but the uneven distribution of benefits causes lots of avoidable suffering on the part of laid-off workers.

A guaranteed basic income for all (as opposed to means-tested benefits like welfare and the EITC) would fix a lot of that. It would remove the suffering from losing your job, and give investors an incentive to automate even more, as now you would have to pay people quite a bit to motivate them to accept low-skill menial jobs.

We can fund such a basic income in part by dismantling the welfare state bureaucracy. No means testing makes distribution much simpler. The rest through higher taxes on income beyond the basic.

A lot of what I knew about Walmart came from third party sources (activists, whatever), so I decided to go to a primary and read Sam Walton's book, and I must say it gave me a new appreciation and understanding for the vast machine that is Walmart. I highly recommend it:

http://www.amazon.com/Sam-Walton-Made-In-America/dp/05535628...

Sam Walton has been dead for decades now, and many of his ideas (giving stock to employees, even store workers) made more sense for the early growth stages he oversaw than the company that exists today.

Indeed. Not sure what that has to do with what I wrote. The history of Walmart is still the same, and that's what I found so interesting.

The history of Wal-Mart during Sam Walton's life is decades removed from the company's business practices today.

True, but I never said it was a book about today's Walmart, just that I found it interesting to learn about that company's history and that I recommend the book.

To which I'll add: the past helps better understand the present...

On the other hand, here in India- My neighbor has just come back from Dubai, after serving as a cashier at a major retail firm for almost 20 years.

According him, surprisingly enough they make money while customers don't bother to collect change, or when the cashiers don't have change they just leave it at them. They keep a track of how much change has collected like that hourly or at half-day and then they pocket that. The company doesn't lose money anyway, the customers give away the change like tip. But in the process these guys make a lot of money.

According to him, the money he makes through the change is actually way more than his actual salary, nearly like a multiple of his salary. And that is how he built much of his fortune back here in India.

"The average American cashier makes $20,230 a year, a salary that in a single-earner household would leave a family of four living under the poverty line."

20k is on the low side, but one should still consider their own income before having children, especially two.

One thing that nobody ever seems to point out in these discussions: Should we legally mandate that every job in the world must pay enough money to support a family of 4 as a single earner of the household? What about high school/college students, retirees, spouses of high earners, and other people who want a relatively low-skill job that doesn't pay that much? Should the kind of job they want be illegal because, someday, somebody who does have a family will take that job and then complain that it doesn't pay enough to raise their family?

It's far less economically distorting to top up a family's income with an EITC than by mandating higher wages. For one thing, it avoids giving employers incentive to cut back on labor costs.

Employers will not cut back on labor costs if there is demand and they're still making profits. They'll cry, bitch, whine and scream at congress because their profits took a hit, but they will not cut back if they're still making profits.

Lack of demand, on the other hand...

You're missing the word "enough" before profits. Employers are like any other investor. If returns on hiring more labor are less than buying new equipment or just forgoing expanding and investing back in the market, then they won't be hiring.

You forget substitute goods. You can substitute a cashier with a self-serve machine, you can buy and use machines to clean the store faster, you can reduce opening hours, you can plan the store so that fewer employees are needed, etc.

Yes capitalism is amoral so people will certainly be willing to pay to increase salary, but they are also willing to buy machines, outsource work, make customers do more and other things that reduce the need for employees.

If Wal-Mart raised their wages to CostCo levels, it wouldn't be the current Wal-Mart employees who benefit. Wal-Mart would replace their old workers with new workers, and start competing with CostCo for those higher wage workers.

But then you're subsidizing the labor costs of employers who pay low wages...

Ah so you expect the "stressed middle" like most of us to subsidize the walmarts of the world.

Where do you think the money for EITC/WTC comes from?

A tax on corporate profits?

This is just a special case of people not living within their means. If you can't afford a kid, don't have one.

The catch to this line of reasoning is that you might have a perfectly well-paying job when the kid is born, but several years later endure a drastic shift in your professional life that's out of your control.

So I don't know. "Must pay enough to support family of 4" is incredibly arbitrary, and EITCs for low-income families (as another poster mentioned) sounds icky to me, since now everyone else is just subsidizing low-wage employers. Not sure what a good solution might look like.

True. But it goes to a broader social issue. Should a family of 4 where one parent is employed full time by a large organization be earning below the poverty line. Was it like that 10/20/40 years ago. Where will it be in another 10 years? What's the impact on our social fabric.

At the micro level as a rationale economic player you in theory should make that determination. At the macro level it's our job to decide whether we want one income families to be below the poverty line and what are the broader implications of that.

Yes. If that person is a cashier at Walmart. The value added by that employee is simply not that high. They shouldn't get paid more just because we don't want to be poor. If you only make 20k you shouldn't be having 2 kids. If you continue to make poor life decisions, the outcome is living below the poverty line.

Note, that I'm not against helping the poor. Charity is great, and helping people move up is great. Simply telling Walmart they should pay more for the same work is stupid. If you want to make more, you should provide more value.

I think you're taking it for granted that people who have money deserve to be given money, and people who don't have money don't deserve handouts. Which is charity: giving a 1% rise in Walmart's profits to its shareholders, or giving that 1% rise in profits to its workers? What makes shareholders intrinsically more deserving of reward for the company's output than employees? Under what circumstances does Walmart giving money to people not qualify as charity? Why is it okay to legally compel Walmart to give shareholders money, but legally compelling Walmart to give its employees money is unfair to Walmart?

It's really bizarre to call paying people a fair wage charity.

That is a great response, and it really puts things into perspective.

If you're born a millionaire like Paris Hilton, and you capriciously decide to become a large shareholder of Walmart's stocks one day, you... well, you just sit back and watch the money roll in without doing anything. Even though you're providing zero value to society you make a very large amount of money. In this way, not only is clarky07's profoundly and bizarrely misinformed, it is also selfish and offensive.

> well, you just sit back and watch the money roll in without doing anything

I'll be the last to argue that we live in a meritocracy but in your example the capricious heir is in fact providing capital to the economy, taking on the risk that if that business fails the capital is gone.

Actually it's not zero value to society, and you don't just get to watch money roll in. It is providing capital to a business and it is full of risk. If the business fails then the money is gone. The markets play a valuable role in our economy. It is you that is misinformed.

That's true, but the fact remains that shareholders don't really get a larger share of profits than employees because they're more deserving. They get a larger share because they're in a position of power and the employees are powerless to secure a fair share.

Employees don't bear the same risks investors do. They earn their wages risk free, even if they don't generate enough value to justify their pay. They might lose their job, but you never come out of a job with less money than you came in with.

Investors wouldn't take risks if they couldn't reap rewards from them, which means workers wouldn't have the jobs either. The end result would be even less fair.

In any case, the modal investor isn't Paris Hilton or Warren Buffet, it's an ordinary working stiff trying to save for retirement in his 401k, or a pension fund for workers at other companies.

That's a strange way to look at the situation, when you consider the larger picture of a man's struggle in life.

Someone who's working at Walmart does not make a lot of money, they most likely cannot afford to give their children the best education, they cannot afford a reliable car, they're more at risk of failing to make the rent payment due to some unforeseen accident.

Someone who's in the financial position to be able to comfortably invest their money, or is otherwise a millionaire, even if they lose a good few hundred thousand dollars, it will not affect them much. At least, not as much to pose the question of if they'll be sleeping on their own comfy bed or in a homeless shelter.

When you say that people "deserve" minimum wage because that's all of the value they're providing to society, this is what you're talking about. You're talking about putting them in a very shakey position, you're talking about making them borderline-homeless.

If people can't earn enough to support themselves and their families, they should get help from the public. I don't want to see anyone borderline homeless. But it breaks the entire system to say employees should receive profits rather than shareholders when the company only exists, and only works, because shareholders are bearing the risks that the workers either can't afford to or choose not to.

And we're not just talking about millionaires bearing the risk, either. About half of Americans own stock one way or another.

> If you continue to make poor life decisions, the outcome is living below the poverty line.

What makes you think everyone who's poor got there from making poor decisions?

Just because someone says that A implies B, does not mean that any B you encounter was a consequence of an A.

That is, making poor life decisions will lead you to poverty, but that doesn't mean being in poverty meant you made poor life decisions, and that wasn't claimed AFAICS.

Didn't say that at all. I said if you make bad decisions you will get a bad outcome. I did not say everyone who has a bad outcome made bad decisions to get there. Subtle but important difference.

>The value added by that employee is simply not that high.

The corporation would cease to function without them.

Paycheck is not a measure of value added. Most of the time it doesn't even correlate to value add.

No it wouldn't. There are literally billions of other people capable of doing that job.

While there are exceptions, on average a corporation would pay no more for a person than they think that person is worth, at that point it is better to close the business than continue to lose money.

But paychecks are also capped by the price of substitute goods, such as self-cleaning robots, self-checkout and other mechanical help, as well as alternatives like reduced hours or staff.

I guess the question is partly

"does the market value the work being done by that one wage earner enough to support a family?" and partly

"should the state step in and support a family when the market value of their labor is insufficient to support that family?"

And to what level is support needed?

No answers here, just questions.

One-income families of four are only below the poverty line if the sole income earner cannot produce enough value to support a family of four. The problem isn't that people are being exploited and underpaid for the work they do. Maybe it's that the education system has failed to produce more valuable workers: maybe it's that the value of (most) human labor has dipped so far that some level of basic income is necessary.

Nearly a quarter of the US population was officially in poverty in the 1950s. Doing unskilled work as a sole breadwinner with multiple children has always pretty much meant you would live in "poverty."

On a side note, a family of four making $20,000 will qualify for an additional $10,000 in EBT and EITC as well as free healthcare (Medicaid), bringing the wages paid by Walmart and Costco much closer together.

This. WalMart basically receives a huge public subsidy to underpay their employees in the form of welfare costs. Minimum wage and benefit laws try and shift those costs back to the employer.

And if Wal-Mart didn't exist, these people would have no jobs and require even more public assistance.

True, but we (society) wouldn't be much worse off than we are now. If Wal-Mart didn't exist, something else would exist to fill the gap, supply and demand must reach an equilibrium.

We should focus on helping people become self sustainable, not perpetually on the dole. Wal-Mart doesn't help here.

If it wasn't for Wal-Mart, there would be a Wal-Mart shaped niche in the economy and whatever filled it would look a lot like Wal-Mart.

Well society could also refuse to offer those services, it isn't fair to blame WallMart for not paying their employees so they can afford to buy a good we have decided that they should enjoy.

yes your quite right in the UK I have no problem with paying for the NHS et all I do have a problem with subsidizing crap employers "jumped up fucking caterers" as John Clese memorably called them.

The problem with your suggested strategy is that societies that follow it are headed for evolution's recycle bin, to be replaced by societies that don't.

This. One of the things people undervalue is the fact that at least some of the US's success comes from being a big populous country. Dominating the world in science and warfare isn't a let capita sort of thing. Absolute numbers and absolute wealth help.

Well, actually if all poor people followed this logic, then all children would grow up in more affluent households. Then the next generation could afford college, and all of the nice things that come with having parents that have money.

But of course, it seems that only the poor people want to reproduce anyway.

Except college is a negative sum game, an expenditure of resources to boost one's relative status at somebody else's expense; it was a ticket to money when few people had a college degree, but the more people who have one, the more find you can have a degree and still end up poor.

And as you say, affluent people typically behave as though they don't want to reproduce anyway. In some cases that's actual lack of desire, and in others it's because by the time they finish climbing academic and career ladders and jumping through all the hoops, they're too old, but the end result is the same.

Except not really because there ARE literally thousands of companies who want software engineers right now, but there are not enough of them to go around in the United States.

This is only going to get worse as everything moves from manual labor to software. We will need more and more developers and less janitors, less cashiers, etc.

In 50 years there will be very few unskilled jobs. And they'll probably be something stupid like clicking ads or filling out surveys full time.

> This is only going to get worse as everything moves from manual labor to software.

True, but there's an interesting twist. As more people are hired to write software and build computers, some of those people create robots, the robots take over more of the unskilled jobs, which further accelerates the process.

Maybe, but isn't programming pretty much the only job where there is such a shortage these days? It's also a job where the product is pure information, so I'm still of the opinion the solution to the problem is to drop the requirement for physical presence and start hiring remotely.

It's less than "only the poor people want to reproduce" and more than "people wanna reproduce" and "so many people are becoming poor these days".

The middle class is GONE, and the lower class has grown immensely. So as a proportion, sure, they reproduce more. But that's just because we've grown so many of them.

This isn't entirely accurate. The shrinking of the middle class is accounted for entirely by movement into the upper-middle (and higher) income classes, and what you say about the lower class ignores per capita data.

I don't want a world where people consider their own income before having children and find that they can't afford to have children and not live in poverty, and have to miss out on having children.

Restrutoring your argument:

>I don't want a world where people consider their own income before going on a trip around the world _and_ find that they can't afford to take a trip around the world and not live in poverty, and have to miss out on traveling the world.

Everything, including children, are a cost. Is it not better that people look at the cost before, rather than after, they make a purchase? Especialy with something as important as a childs wellbeing.

Anyway it takes a lot less money to raise a family than you might think it does. My grandparents raised my mother on next to nothing, my parents raised me on very little initially.

From the opposite end of the spectrum: If everyone could have as many children as they wanted regardless of any outside consequences, wouldn't that be just as harmful or not more?

> especially two.

Or for that matter, three, since the statement seems to be assuming 3 children and one adult (if there was a second adult, why would it be a single-earner household if they are under the poverty line that way? Surely the other adult should at least be on welfare or disability...)

Also, people with children to support should refrain from being laid off and having to find lower paying jobs.

They should...but if everyone did that we'd have much less population growth. Most people, particularly lower classes, don't particularly care.

I don't have a citation, but it's kind of self-evident. At the very least, people don't expect a family to cost so much, and think if they're prepared for it beforehand they'll be fine. You can't be prepared for poverty with a family.

Also, single earner household? Its not 1950.

Low-skill workers might make better use of their time/money to dedicate one parent to raising children full-time instead of what many dual-earner households do which is send their kids to pre-schools, summer camps, and daycares, and then hire a variety of household helpers.

Also, I think our society should still be structured to allow a single earner on minimum wage to support a family of four, without going on welfare of sorts. It's really complicated though, and for every argument supporting one side of this argument you can always find a really good rebuttal.

Our society is structured that way, except for the "without going on welfare" stipulation. A sole breadwinner with a spouse and two children making $20k will receive another $10k in EBT and EITC, free healthcare, and pay a tax rate close to 10%. Effectively his or her income will be above $30k, which isn't bad considering per capita GDP is only about $45k.

How could society be structured to guarantee higher wages to unskilled workers?

I'm not sure about your comparison to per-capita GDP there.

What you just described is a family of 4 with a total income of $30k+.

Per capita GDP of $45k means that GDP per 4 people is $180k. That $45k number is per person, not per worker.

So either the claim is that $30k is not that bad compared to $180k (unclear, a priori) or ... something?

>The median household income in the United States was $44,389 as of 2004.[9][dead link] The median income divides households in the US evenly in the middle with half of all household earning more than the median income and half of all households earning less than the median household income. According to the US Census Bureau, the median is "considerably lower than the average, and provides a more accurate representation."[49]

http://en.wikipedia.org/wiki/Household_income_in_the_United_...

As it happens, the _median_ household income is about the same as the _mean_ GDP per capita in the US right now. That's because incomes typically have distributions in which the mean is a lot higher than the median, as your link notes. Note that GDP per capita is also higher than mean per-capita income for people because there are non-household components of GDP (e.g. you would need to count unrealized capital gains as income to get closer to "income" approximating GDP).

I agree that household income is a more interesting thing to compare to for this case, though, but even more interesting would be comparing to similar households. Otherwise you're comparing the income of our hypothetical family of 4 to the incomes of 1-person households, incomes of households containing just a student, incomes of households containing one or two retirees, and so forth.

Luckily for us, such information is out there; http://www.census.gov/hhes/www/income/data/statistics/4perso... lists the median family-of-four income in the US at $67,000 or so in 2005 (though by state the median ranges from about $50k to about $90k, which shows the problem with talking about aggregate "United States" numbers). http://www.census.gov/hhes/www/income/data/Fam_Inc_SizeofFam... has similar numbers for a few years later... http://www.census.gov/hhes/www/income/data/historical/househ... has quite a bit higher numbers than that for 2011 ($75k median nationally), which is a bit surprising to me, actually.

None of which answers the question of how reasonable an income of $30k is for a family of 4, of course.

Maybe the dad stays home, or it's a gay couple, so it's modern single earner.

Unless I have been grossly mislead, if singer-earner salaries had appreciated like CEO salaries from the 1950's to now one parent could afford to stay home or just work part time. I don't know why it should be necessary for both persons of a marriage to work full-time on average.

Being a single-earner household is a luxury and a 20k/year household cannot afford it.

There are always going to be shit jobs meant for teenagers that pay wages good for teenagers (cashiers, part-time lifeguards, sandwich assemblers, etc). If an adult tries to support 3 other people with such a job, they are going to have a very difficult time and that should not surprise or disturb us.

You aren't going to get companies to scale their pay based on what the individual employee needs. If you did, would McDonalds have to pay the fry chef with 7 kids more than the fry chef with 3 kids, who is in turn paid more than the 19 year old fry chef who is trying to pay for community college and car insurance? That would be absurd. If you think that somebody needs to take up the slack, you need to look to government, not corporations.

Supply-and-demand.

As women entered the workforce, this created more supply, which drove wages down, which forced more women to enter the workforce. Similarly, two-earner households could outbid single-earner households when purchasing real estate, which also drove the need for a two-earner household.

This transition is not reversible. However, it only happens once (excepting polygamy).

20k is on the low side, but one should still consider their own income before having children, especially two.

I don't think people are concerned with the wage earners as much as they are about the welfare of their children when they say things like this.

20,230 is what is reported by the US Government: http://www.bls.gov/oes/current/oes412011.htm

So the number stated is the mean, not the mode or median.

Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea, because no person could master 108,000 SKUs.

Having done a few years time in retail, I find this part a bit telling. I'm curious if the author has ever worked in a department store? Many department stores assign various employees to ....departments in the store. The actual SKU count you need to mentally juggle in your head is a fraction of what the entire store carries. Increasing the number of employees in a department and paying them better should give you a better knowledge on the floor of where something is if only because customers can find a department member. In my Wal-Mart it seems like you'd be lucky to find a department member in any particular department, except maybe automotive or electronics.

Economic realities notwithstanding about where the money comes from to hire more employees or pay them more of course.

She uses the term "department store" incorrectly.

She means "hypermarket," where groceries are sold alongside general merchandise.

Perhaps so, but still. Wal-Mart segments its departments like a department store would. Groceries are usually on one side of the store. Outdoor and auto are usually in a corner near each other. Electronics is its own thing. Home Improvement, Pet, Beauty, Pharma, Household, Crafts...they're all segmented by where their assigned shelf-space is. Each one has folks that are in some way assigned to it. This is my point.

Segmentation at the end point doesn't necessarily mean that those 100,000+ SKUs under one roof isn't a lot. There are many places in the retail operations process where it's still a very big deal, including shipping and receiving, merchandise assortment planning, and departmental space planning. Additionally, the departments tend to be quite large, at times almost a store themselves. Whereas an employee working at a Best Buy or Circuit City could specialize in certain categories of electronics, a Walmart employee would have to be knowledgeable about all categories.

Through ambiguous verbage, this author very carefully skirts an unfortunate fact which ruins his argument. And that is: Trader Joe's has a very high number of employees per square foot. TJs is swarming with employees. They're trained to do every task and can fill in for one another. My local TJs, a microscopic one and the smallest in DC by far, usually has over 15 employees, often 20, day and night. I know: I counted them.

I think that this guy is saying that Wal-Mart can't do what Costco does because it has more SKUs and thus a higher density of employees. But TJ's density is much higher still, and it pays like Costco does.

The (female) author's point isn't that "Wal-Mart can't do what Costco does because it has more SKUs and thus a higher density of employees." It's that Wal-Mart, Costco, and TJ's have so many differences on so many axes that it is quite silly to make naive comparisons between their level of employee compensation while ignoring everything else that makes them different.

I find this example particularly baffling, as one visit to TJ's should be all one needs to recognize that it's not even in the same category as a store like Wal-Mart.

He is saying its a fundamentally different business. A higher number of SKUs necessitates a much larger space and lower per employee productivity.

A Trader Joes customer is willing to pay for customer service and a Walmart customer is not. As a society we may say well thats an unacceptable attitude on the part of Walmart's customers and then put them out of business. But at the end of the day its not like Walmart's executives would be the ones picking up the tab, its the customers.

One thing is that Trader Joe's has a much higher profit margin on their produce. Its customers are willing to pay these because they like the tradeoffs of good customer service and the stuff that the store has.

Walmart's customers are not willing to pay that. They're willing to deal with no customer service and bad quality for rock-bottom prices.

It's a big difference that showcases the two business models. When I know exactly what I want to buy, (A thing of Lemon Pledge, some Worcestershire sauce, and a package of cue chalk) Walmart is wonderful. When I'm not quite sure, a store with good customer service beats Walmart every day. I would never buy a bicycle at Walmart, for example.

TJ is a grab bag of expensive and inexpensive items often justified by a difference in lifestyles, e.g foodies and hipsters. They're a different target demographic than Walmart and Costco, most of their inventory is comprised of their own brand, and they control their entire supply chain. Most shoppers at TJs have half empty carts or use baskets.

Quite the fundamental difference.

>>I think that this guy is saying that Wal-Mart can't do what Costco does because it has more SKUs and thus a higher density of employees. But TJ's density is much higher still, and it pays like Costco does.

It isn't the density per se, it is the density of a a much larger store that doesn't have the margins that trader joes has. They are two fundamentally different business models. Retails stores targeted at upscale consumers can afford to spend on salaries to give the service that their customers want. Wal-Mart needs low prices and lots of products to satisfy theirs.

I have heard of this journalist before. Apart from the absolute lack of an explanation as to WHY Walmart cannot pay higher wages (spoiler - it's complicated!)

also, I find the link in the S.H.A.M.E. project of interest.

http://shameproject.com/profile/megan-mcardle/

Meh. Either her content is substantially right or it's substantially wrong. Let's just debunk her theories if we don't believe her vs personally attacking her. This "She's a conservative activist from the heart of Koch!" is no different (or less offensive) than "She's a bleeding heart liberal from Berkeley!"

There was a lot of content, but the premise of the article - that it would explain why Walmart paid less than Costco, was missing.

From that I wondered if the article itself was just some form of PR or politically motivated rather than unbiased journalism.

I have a limited amount of time in my life and no wish to spend it playing "spot the logical fallacy in every paragraph" with McArdle. I have found it more efficient to learn that she is a feckless human being who will lie (by omission and otherwise) and entirely ignore her than teasing out the truth in her writings, which would require reading in detail the primary sources she is allegedly summarizing as well as the ones she silently omits.

Calling ad hominem is well and good and something to keep in the back of your mind, but I tend to agree with Daniel Davies that "giving known liars the benefit of the doubt" is more likely to steer you wrong.

>Meh. Either her content is substantially right or it's substantially wrong. Let's just debunk her theories

Let's also get some context about where these theories are coming from. If people understood why people like her are shills and who they're shills for they might be a little more skeptical.

Large tech companies earn much higher margins than Walmart. Why aren't telling them to pay their janitors more?

The market does that. Their janitors get paid a lot.

No, like Costco's sample hawkers, most janitors at tech companies are contractors, and probably not paid all that well.

Except that WinCo has been expanding rapidly and directly competing against Wal-Mart. They also pay their employees more than Wal-Mart. They are only a grocery store, but they are competing.

http://business.time.com/2013/08/07/meet-the-low-key-low-cos...

Well written article, enjoyed it although I also noticed the much-higher margin Walmart has.

It's very obvious that Walmart allows less wealthy people to buy more. Paradoxically, the very people suffering from stagnant blue-collar wages are Walmart's customers.

I'd be interested in seeing how the distribution of pay for all employees, through a Gini coefficient or other means, stacks up for Walmart vs Costco.

Is this pretty much the market speaking and saying that Wal-Mart has a crumby business? Especially factoring in that a lot of people couldn't even work there without government subsidies in the form of food stamps, etc.

http://www.motherjones.com/mojo/2013/06/report-walmart-force...

I don't get this "subsidy" argument. Bob pays $200 for his rent, and $150 for groceries. He applied for a job at Costco and was turned down, but Walmart offered him a job so he took it.

Without government benefits, he couldn't afford his rent and he couldn't afford his groceries. Without his job at Walmart, he'd be eligible for even more benefits. But somehow it's Walmart that's being subsidized, and not his grocer or his landlord? Not to mention Costco, who's paying him $0, while Walmart pays him something, at least.

> Without his job at Walmart, he'd be eligible for even more benefits

This is false. The biggest government benefit that someone employed at Walmart gets is the EITC, the _Earned_ income tax credit. For a person earning 20k with family of 4, the EITC would be near 5k, or a quarter of the salary. If the person was not working, the government (usually) does not pays anyone 25k for non working. Moreover, without the $5k EITC, it would not be economically feasible for this person to work at Walmart, and Walmart would have to simply pay its worker more to at least find people who can eat enough. The government is absolutely subsidizing Walmart in tune of $3-4k per worker.

False. A person with less than $5k in earnings has consumption of nearly $23k/year.

ftp://ftp.bls.gov/pub/special.requests/ce/standard/2009/income.txt

Also, the threshold for "find people who can eat enough" is far below $25k (proof: Mexicans eat enough with a GDP/capita of $16k, and Mexico is a fairly rich nation).

if not for government programs, nobody would work at Walmart they would literally not be able to afford to work there, so they wouldn't even accept the job if offered because it wouldn't pay their expenses since the opportunity cost would be too great

a few retirees or people living with parents would work there, but not enough to fill out their work force this is because wages for unskilled labor tend to approach the minimum you have to pay for people to live and since the government is footing the bill to reduce that minimum to very little, Walmart can get away with paying very little

if government decided to take away all benefits for people currently employed, Walmart would have to raise their wages because the workers would quit in droves to sit on welfare instead

if not for government programs, nobody would work at Walmart...they wouldn't even accept the job if offered...opportunity cost would be too great

Could you explain, ideally by using numbers (either real or example) to illustrate your argument? Something along the lines of:

No government subsidies, no job at walmart: earnings + unearned income = $x

No govt subsidies, job at walmart: earnings + unearned income = $y

etc.

Again, if not for government programs Bob could not afford the groceries he buys. Shouldn't you be demanding that every grocery store that accepts food stamps lower their prices because they're being "subsidized"?

And if Walmart is relying on under-paying what its employees are worth, why don't those employees find jobs elsewhere? At worst, it's the government's fault for incentivizing them not to with benefits that drop off faster than their earnings grow.

The size of the SKU assortment has such a profound impact on so very many areas of the business, I would venture to say that if two retailers don't have a comparably sized SKU assortment, they're well-nigh incomparable.

Reminds me of the paradox of choice - http://en.wikipedia.org/wiki/The_Paradox_of_Choice:_Why_More...

1. Costco dropped the "absolute satisfaction guarantee" on All of their products.

2. If you want to retun something; you need to talk with the Angry Manager.

3. Now this was fine and dandy with electronics, but it's a whole other story with grey market high end watches.

4. I try to pass this information along whenever I can.

5. I only use Costco for prescriptions. I try to use someone else's card to by toilet paper.

6. Costco used to be great, but they need smart senior management. I don't think you can take an angry employee, and increase revenue. I've just seen bad marketing decisions over the last decade.

1. Not true: We guarantee your satisfaction on every product we sell with a full refund. The following must be returned within 90 days of purchase for a refund: televisions, projectors, computers, cameras, camcorders, touch screen tablets, MP3 players and cellular phones. [1]

2. Not true. Regular folks at CS desk usually ask only one question: "Anything wrong with it?". You refund does not affected by the answer.

4. Don't spread FUD.

[1] http://www.costco.com/membership-information.html

The ease of returns in the retail world moves in waves. One store will make it easy, then all stores will make it easy, and then the stores will get swamped by the scammers who return goods they bought at other stores or goods they used and now are trying to return, and then retail stores will move against easy returns.

> Some stores cannot thrive unless they are within SHORT drives of many customers.

My prediction is that within ten years, you will be able to tell the success of upmarket stores by the number of electric car chargers in front of them. The wealthy has always found ways to reduce their costs in ways that poorer people cannot easily duplicate, like reduced banking fees to draw their business.

There is probably an other reason, the opposite of why Ford paid higher wages "so employees can afford his cars".

Well, Wallmart employees are so poor they are forced to shop at Wallmart. If they got higher wages, they would probably shop at Trader's Joe or Wholefoods.

By keeping poor people poor, they actually increase their customer base.

Um, where are the actual numbers of SKUs at Walmart and Costco? She implies they're in the graphic, but they're not. She mentions 108,000 SKUs at Walmart further down, but I have no idea what it is at Costco, except that it's less than 108,000.

As she links in the post, she wrote basically this same article almost a year ago. Why are we rehashing it?

that means they can afford to pay their workers around 3,000 more a year and their profit margins will the be the same as costco's

The minimal wage that is mostly what is paid in WalMart and is about $15,000 a year. Let's put it in historical perspective. In 1969 the minimal wage was $1.60. And in 1969 the price of ounce of silver was about $1.70.

In other words 40 years ago the minimal wage in the USA was about $22 USD using today's silver price as an inflation indicator. Using 2013 data 22.00 USD is on par with average American hourly pay. This what was the minimal wage of 1969 became an average pay in 2013. So if you ever wonder why your grandad working single simple job could support his family with stay at home wife, 3 or 4 kids, have vacation house and literally no debt – that's why. The average pay is 3 times lower today than it was 40 years ago when the real money – gold and silver – are used as an indicator. Of course some will point out to believe that gold and silver prices are in the bubble territory and that's why my numbers don't make any sense.

The problem with that reasoning is that gold is not experiencing bubble pricing. How do I know that? Because gold mining cost is at $1,200 with gold price merely covering it at $1,400. Bubbles are experienced in assets that sell by multiples of their real price, not the ones that are sold basically at the production cost. The staggering truth is that the current gold price simply reflects the high cost of living in the US today. The only correct conclusion seems to be that an average American worker is as poor today as minimal wage worker was 40 years ago.

No wonder fast-food strikes set for cities nationwide: http://www.seattlepi.com/news/us/article/Fast-food-strikes-s...

>when the real money – gold and silver – are used as an indicator.

The basis of your argument is wrong. An individual commodity like gold can't be used as indicator of economic levels. It is just as affected by supply and demand as any other commodity.

This is similar to when people try to compare the price of gas at the pump to the economy as a whole ("back when I was kid, gas was 10 cents a gallon, and now it's $3.50! Why aren't wages 35 times higher!").

Gold isn't commodity - why the central banks of the world are storing it? And not oil. And not steel. And not coal? Because gold still functions as _money_ in people's minds. This includes central bankers. And gold historically, for the past 5,000 years, has been used as an indicator of economic levels. One of the good reasons is that you can't have a Government play with it. Did you know that if the same formula for accounting for inflation was used today as was used in Reagan years the US official inflation would be at 10% ? That's right, if we just used the official Government formula of counting inflation from 1980s we are at 10% today. While they try to push this propaganda it is non-existent.

I love your quote: "back when I was kid, gas was 10 cents a gallon, and now it's $3.50! Why aren't wages 35 times higher!"

I think mine is better: "back when I was kid, gas was 10 silver cents a gallon, and now it's still 10 silver cents! Why wages are 3 times lower in silver terms!"

Because if you google it, you'll know that barrel of oil price in real money has been the same for the past 50 years. About 1/15 price of ounce of gold. I.e. 1 ounce of gold buys you 15 barrels of oil. With +/- 5 barrels deviation depending on the market cycle. But the average is 15. Your quote presents exactly why gold is much better indication of inflation than some government burocrats and their ever-changing formulas to please the Government.

You are missing the step where mining activity will frantically respond to the commodity price. That is, if gold were trading at $100 an ounce, no one would be working $1200 mines.

The consumptive demand for gold could be met for some absurdly long time using the gold sitting in repositories, there is no actual need to produce it, it doesn't particularly have a production cost.

That's simple supply and demand. When supply weakens and the demand stays they same, the price goes up. So the price ends up higher because there are less producers but the same amount of people who want to buy gold. This what you describe creates shortages and shortages produce higher prices.

There is also at least the possibility of demand weakening. Very weak gold demand would be a catastrophe for gold miners.

Very true. It's all supply & demand. That's how markets correct themselves: when the supply is vast but demand non-existent, the prices fall causing supply side (mines in our case) go bankrupt, have financial difficulties, etc. - forcing them to cut cost and improve, be more efficient. On the other hand in the meantime while the supply side isn't really there, the demand starts occurring again because the product becomes very rare. And then the rarity causes the prices to go up again. That's how it usually works not only in gold mining industry but eveywhere.

Let's say iPhone apps. Once they become so plentiful and cheap (free), supply side (developers) start doing other stuff, for example programming web sites, or desktop software. This causes rarity of new iPhone apps, so people start to be willing to pay more for an (let's say) iPhone game because there are less and less game issued every week. The prices going up makes new developers entering the scene, etc.

Another point, I'd like to make is that gold mining cost has been just $800 per ounce 2 years back. This just shows you how inflation works. Gold mining is energy intensive and labor intensive. Once labor cost and energy cost are up, gold price is up too. That's why the Government hates it so much because it just simply shows how big the real inflation is while the Government tries to tell us all we have below 1% inflation per annum.

That is an insane conclusion, since you forgot to take into account that the price of all the things we buy, with a few exceptions, have dropped dramatically.

Very few people are interested in the price of silver, we are far more interested in what a steak cost, or a car, how far they go on a gallon, what a gallon costs, that fresh vegetables are available and that we can buy them, etc.

O wow! Steak cost down? Tell me where? I'd love to see that steak. Car cost down? BMWs that I'm interested in are 20% up year to year.

Turn off CNBC talk and go shopping yourself and show me falling prices. Because there are none. Cost is going up across the board for everything. Can't believe there are still people out there who prefer to listen to Government propaganda of low inflation to opening their own eyes and seeing prices of everything going up. Health insurance, cars, food, even water. While their price in gold terms has been stagnant for the past 50 years. You tell me why.

Reply on news.ycombinator.com