Hot Pizza and Sour Grapes: How the Hostility Towards the Employer Mandate is All Wrong

        Once again, a pizza man came to the forefront of the nation’s debate over Obamacare’s employer mandate.  With the requirement for large businesses to provide affordable health care to their employees being rolled out in 2014, a Papa John’s shareholder conference call in August 2012 would prove to be a staging point for a national debate over the economic effects of the Affordable Care Act. With the implicit threat that he would raise pizza prices “11 to 14 cents” per unit as a result of the law, CEO John Schnatter became the second pizza chain executive after Herman Cain to speak out in opposition to the act. In Cain’s famous 1993 exchange with President Clinton, he stated that “the cost of [health care reform] is simply a cost that will cause us to eliminate jobs,” and Schnatter continues to echo those sentiments now that the reform has been enacted two decades later.

        Under closer examination, Papa John’s estimation of the costs of Obamacare, both in pizza pie price increases and damage to business, appear to be exaggerated. In terms of simple dollars, Schanttner’s estimated 5 to 8 million dollar increase in costs translates to a 0.4% to 0.7% bump in expenses for the company, which likely would result in costs less than five cents a pizza if the company chose to pass on all expenses to consumers [1]. Furthermore, the great majority of Papa John’s locations are run by independent franchise owners, most of whom would be exempt from Obamacare since businesses with less than 50 workers are exempt from having to provide insurance. The Affordable Care Act also does not require companies to provide health care for part time workers, defined as those who work less than 30 hours a week. Even without the release of such information by the company, it’s not unreasonable to assume that many of their workers are part time, further reducing the impact to the business. Finally, it hasn’t yet been determined precisely which businesses would be subject to the labyrinthian law, pushing Schanatter’s estimate into the zone of staunch ideological opposition instead of honest cost assessment.

        With these factors calling into question the 11 to 14 cent estimation, it becomes clear that the statement was more a symbolic political statement rather than a substantive analysis of costs to the business. Schnatter further cast his conference call as, above all, a symbolic statement when he justified potential cost increases by stating that he doesn’t “think people know what they’re going to pay for [Obamacare],” which would explain why he seemingly exaggerated the effects of the law. Papa John clearly believes the public should feel the costs as much as he believes his company will. This reaction garnered strong support among the business owners slated to be affected by the Affordable Care Act, effectively placing Papa John at the head of the business community’s opposition to the law.

        Political motivations aside, the central question remains: does forcing a business to increase worker compensation inherently result in long term harm to a company, as Schnatter would have us believe? There are major companies in the United States for whom high wages and affordable health care are not only tolerated, but integral to their business strategy.

        Costco Wholesale represents the small number of businesses who consider amenities such as generous health care benefits integral to their business strategy. Costco has an exceptionally generous health care plan, with its workers paying just 8 percent of their earnings towards health costs, less than a third of the retail average of 25 percent [2]. Their hourly wage follows a similar pattern, averaging $17 an hour. Former CEO Jim Sinegal made it clear why Costco paid such generous wages, saying simply, “This is not altruistic. This is good business.” To Sinegal, the creator of Costco, compensating workers more makes his company more money–the exact opposite position that Papa John adopted.

        In simple dollars and cents, Sinegal’s assertion appears to hold water, resulting in especially profitable stores. Costco reported $986 in sales per square foot in 2010. Sam’s Club, the Wal-Mart-backed competitor that uses an identical membership-based, low-variety, big box store model, reported just $588 in sales per square foot [3]. This results in higher profits per square foot for the former [4]. The key difference in business practices between the two companies comes down to worker compensation; Sam’s Club pays 42 percent lower wages than Costco, and has a vastly inferior health plan. Clearly Costco’s approach has worked for them, and serves to demonstrate that high compensation in low wage environments may result in a more stable business.

        Viewing cost of labor as a driver of sales and profits, as opposed to a cost to be minimized, is key to Costco’s strategy. The benefits from adopting the approach that Costco, Trader Joe’s, Whole Foods, and others take are sorely missed in many operations, including Papa John’s. When asked whether he anticipated employee hours being cut to avoid providing healthcare, Schnatter declared that it would be only “common sense”[5]. One of the key mistakes made with the all-out suppression of labor costs like this is that it puts serious stress on operational execution. Retailers like Costco have thousands of SKUs, making a simple task such as restocking a logistical nightmare. This requires good judgement and hard work by seasoned employees, not a poorly motivated workforce with high turnover. By retaining workers through good wages, a retailer can ensure that its machine runs smoothly. Having workers who are sure to stay for the long term contributes heavily to a boost in efficiency. Many managers of retail stores, unable to affect sales in the short term, resort to cutting staff hours in off hours in order to even out short-term profits[6]. The result of this in the long term is a workforce too small or too inexperienced to efficiently run their own store, and the effects can be drastic.  The difference in operational efficiency between the best and worst Borders stores in a survey taken by Harvard Business School was 4300%–predictably, the stores with employees who had higher turnover, less training, and greater workloads were the offenders[7].

        In addition to worker efficiency, improved customer service as a result of high compensation improves every store’s bottom line. Conventional knowledge dictates that bargain-driven businesses like Wal-Mart or Costco aren’t affected much one way or another since consumers shop there for the prices, not the service. But research shows that argument to be problematic as well. In a survey taken by the Wharton School, a retailer with more than five hundred stores was found to gain between four and twenty-eight dollars for every additional dollar spent on employees[8]. The benefits were strongest with stores that were understaffed, but even those with enough employees experienced cost-efficient gains in sales. It’s only logical that better customer service would drive more sales; a single bad experience with an employee can lose a business a customer, whereas compensating employees well ensures that this needless loss of consumers can be avoided. Trader Joe’s follows this philosophy: its starting wages are more than twice that of their competitors, and it profits enormously, with three times as many sales per square foot than the average American supermarket [9], thanks in part to their excellent customer service.

        The success companies like Costco and Trader Joe’s have had implies that business owners like Papa John might benefit far more from leveraging the benefits of compensating their employees well instead of trying to push apocalyptic rhetoric about the health care reform law to the public. To be sure, the benefits the above stores enjoy from high compensation are tailored towards the specifics of their business model; dealing with many different SKUs, for example, is likely to be much easier contained in a pizza bar than a large retail store. Regardless, adopting aspects of the Costco model in conjunction with Obamacare could pay serious dividends. With higher employee retention rates, retailers should find it vastly more efficient to add a greater variety of products to their stores; likewise, pushes for more efficient practices or better customer service become more viable for management to implement.

        Regardless of how it is handled, the Affordable Care Act has forced the debate of whether ruthless cost cutting in worker compensation is good business sense. Perhaps there’s a future where owners will find themselves thanking the architects of Obamacare for challenging the business community’s orthodoxy.

 

 

[1] http://www.forbes.com/sites/calebmelby/2012/11/12/breaking-down-centi-millionaire-papa-john-schnatters-obamacare-math/

[2] http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?_r=2&adxnnl=1&pagewanted=all&adxnnlx=1354032365-YXjie91WPtiLYVUwojmNxg&

[3] http://www.ou.edu/russell/UGcomp/Cascio.pdf

[4] http://www.newyorker.com/talk/financial/2012/03/26/120326ta_talk_surowiecki

[5] http://www.naplesnews.com/news/2012/nov/07/papa-johns-ceo-obamacare-likely-to-raise-costs/

[6] http://retailactionproject.org/wp-content/uploads/2012/08/WhyGoodJobsAreGoodforRetailers_ZTon.pdf

[7] http://retailactionproject.org/wp-content/uploads/2012/08/WhyGoodJobsAreGoodforRetailers_ZTon.pdf

[8] http://www.newyorker.com/talk/financial/2012/03/26/120326ta_talk_surowiecki

[9] http://retailactionproject.org/wp-content/uploads/2012/08/WhyGoodJobsAreGoodforRetailers_ZTon.pdf

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