The so-called Costco Effect is a phenomenon that boosts the wages of local economies as companies aim to compete with Costco's (NASDAQ: COST) wages, as defined by the "Micro" YouTube channel.
"Surrounding businesses raise wages up to 40% more," the video said.
Costco Helps Local Businesses
Costco's ability to help local businesses is shocking when you compare it to Walmart (NYSE: WMT). While "Micro" discusses the Costco Effect, it also touches upon the Walmart Effect, which demonstrates how a big box retailer can destroy a local economy.
"The rate of business closures materially increases on blocks surrounding a new Walmart location," "Micro" said in the video. "When they become the only employer in town, it also pushes local wages down."
However, that's not the case for Costco openings.
"The recorded effect of a Costco opening is almost exactly the opposite," "Micro" said. "Costco pays even its entry-level floor staff very well."
Surrounding businesses raised their wages to keep up with Costco, but those extra costs were a net positive.
"Most \surrounding businesses\] saw a significant increase in foot traffic and revenue after the center opened," "Micro" said, [citing Reuters. "Costco stores become a destination attracting shoppers from a much wider area rather than just serving the community that was already there."
Costco Shoppers Spend More Money
Shopping at Costco requires more planning than buying items at a nearby Walmart, and that's part of the reason Costco shoppers spend more on average. It's also why customers favor Costco over Walmart, "Micro" said, citing Business Insider.
"Costco shoppers went to the store half as often as Walmart shoppers," "Micro" said. "But when they were there, they spent more than twice as much on average.”
Some of that increased spending shows up in local businesses, which explains why they performed well despite giving their workers higher wages. Costco locations are often positioned just outside of cities, which attracts larger customer bases. Then, some of those customers make a day out of it and shop at local stores and restaurants.
Local Businesses Can Raise Prices
Costco brings in more customers, which suddenly results in surging demand for local businesses, and that gives them an opportunity to raise prices. Higher prices compensate for employee raises and positions surrounding companies for higher profits.
"A Costco raises the floor on wages, but it makes up for it by bringing in more customers to an area," "Micro" said.
The Costco Effect has helped the retailer build a strong reputation among its customers. High salaries also reduce the company's turnover rate, which saves the company money on training and hiring expenses. Local businesses experience a similar effect by raising wages to compete with Costco, and their ability to raise prices helps them retain workers.
Costco is one of the few retailers that has a positive impact on its locations. It doesn't gobble up local economies but relies on them instead.