Investor Place: Costco Is More Than Low Prices

Its success stems from its focus on its customers -- and workers

By Will Ashworth
Investor Place, October 11, 2012

Discount retailer Costco announced its fiscal fourth-quarter earnings Oct. 10, the third quarterly report since the retirement of long-time CEO and co-founder Jim Sinegal. As is most often the case, Costco’s results were better than expected.

However, when we do go, we always notice (my wife has 20 years retail experience) how genuinely happy the employees are to be working there. Costco’s starting wage for those working on the floor is $11 per hour, which is higher than the San Francisco minimum wage of $10.24 per hour, by far the best in the U.S. The federally mandated minimum wage is an embarrassing $7.25 per hour, 26% less than the minimum wage in Alberta, which is Canada’s worst offender at $9.75 per hour.

According to Holly Sklar of the Business for a Fair Minimum Wage project, when Wal-Mart’s first store opened in 1962, adjusted for inflation, it paid $8.74 per hour. Since then the Walton family has gotten rich while the workers haven’t. Costco Senior Vice President Jeff Long said the following about raising the minimum wage in New York State:

“At Costco, we know good wages are good business. We keep our overhead low while still paying a starting wage of $11 an hour. Our employees are a big reason why our sales per square foot is almost double that of our nearest competitor. Instead of minimizing wages, we know it’s a lot more profitable for the long term to minimize employee turnover and maximize productivity and commitment, product value, customer service and company reputation.”

You don’t have to be a rocket scientist to understand why Costco’s formula is successful. When people want to come to work, it makes for a better customer experience. Most people who’ve spent a decent amount of time shopping at Costco will probably have noticed that the employee name tags also list the year they started at Costco. Most have been there for over a decade.

Treat people right, and they’ll want to stick around. Costco’s employee turnover is 24%, about half that of Wal-Mart, and much less than the retail average. Training new employees costs money. Interestingly, Costco’s selling, general and administrative expenses for its latest fiscal year were 9.8% of its revenue compared to Wal-Mart’s 19.2%. Despite spending more on its frontline employees (the backbone of any retail operation), it ends up costing Costco less. That’s how you run a business.

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Copyright 2012 Investor Place