Megan McArdle explains why and how Costco and Walmart have very different business models and serve different functions. We can’t expect Walmart to pay like Costco (or Trader Joe’s).

I’m going to quote here the same paragraphs David Henderson quoted at EconLog:

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Both these strategies work in part because very few people expect to do all their shopping at Trader Joe’s, and no one expects to do all their shopping at Costco. They don’t need to be comprehensive. Supermarkets, and Wal-Mart, have to devote a lot of shelf space, and labor, to products that don’t turn over that often.

Excerpted chart:

Notice the major difference in revenue per employee.* 

McArdle goes on to discuss how some people really need those low prices at Walmart:

That’s not the only reason that the Trader Joe’s/Costco model wouldn’t work for Wal-Mart. For one thing, it’s no accident that the high-wage favorites cited by activists tend to serve the affluent; lower income households can’t afford to pay extra for top-notch service. If it really matters to you whether you pay 50 cents a loaf less for generic bread, you’re not going to go to the specialty store where the organic produce is super-cheap and the clerk gave a cookie to your kid. Every time I write about Wal-Mart (or McDonald’s, or [insert store here]), several people will e-mail, or tweet, or come into the comments to say they’d be happy to pay 25 percent more for their Big Mac or their Wal-Mart goods if it means that the workers are well paid. I have taken to asking them how often they go to Wal-Mart or McDonald’s. So far, no one has reported going as often as once a week; the modal answer is a sudden disappearance from the conversation. If I had to guess, I’d estimate that most of the people making such statements go to Wal-Mart or McDonald’s only on road trips.

However, there are people for whom the McDonald’s Dollar Menu is a bit of a splurge, and Wal-Mart’s prices mean an extra pair of shoes for the kids. Those people might theoretically favor high wages, but they do not act on those beliefs — just witness last Thanksgiving’s union action against Wal-Mart, which featured indifferent crowds streaming past a handful of activists, most of whom did not actually work for Wal-Mart.

Yeah, pretty much that. I would gladly pay more for better service and better paid employees–in fact, I do. But I’m a college-educated person in the top 5% of US income-earners. I go to McDonald’s only on road trips. I go to Walmart only if we ordered something special through their online catalog and need to pick it up in their store. I pay $13500 a year so my kid can play with blocks at a Montessori school. I’m not the typical customer, and probably you also aren’t.  Neither are any of my philosophy colleagues who criticize these stores.

Try this experiment, which works especially well in Northern Virginia. Look at the cars in the Trader Joe’s parking lot (Mercedes C300s, BMW 335is, etc.) and then the cars in the Walmart parking lot (Nissan Versas, Toyota Corollas, old Honda Civics).

*Revenue per employee is not the employee’s marginal product, by the way.

McArdle’s final word:

This is not actually just a piece on how Wal-Mart can only pay low wages — I don’t know how much more they could afford to pay before they started to lose customers (or the board kicked the CEO out), and neither does anyone else writing about this. I’m actually interested in the larger point: the way that things most people rarely think about — like the number of products that a store carries — have far-reaching effects on everything from labor, to location, to customer service and demographics. We tend to look at the most politically salient features of the stores where we shop: their size, their location, the wages that we pay. But these operations are not so simple. They are incredibly complex machines, and you can no more change one simple feature than you can pull out your car’s fuel injection system and replace it with the carburetor from a 1964 Bonneville.