July 19, 2005
Doing business the Costco way

Every time I read an article like this, I'm glad to be a Costco member. I also never cease to be amazed at the values of the people who criticize Costco for how they do their business.

[N]ot everyone is happy with Costco's business strategy. Some Wall Street analysts assert that [CEO Jim] Sinegal is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

There was a time when good customer service and treating one's employees well were highly regarded. Well, I'm pretty sure there was such a time. I'm not that old.

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."

I wonder how much Ms. Kozloff pays for her health care. I'm sure Sanford C. Bernstein & Company's bottom line would improve if she were forced to pick up a little more of the burden. What do you think, Emme?

Well, if shareholders dislike how Costco does its business, they're free to dump its stock in favor of a more Wall Street friendly retailer like, say, Wal-Mart.

Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.

Oh. Never mind.

Anyway. Ezra finds a nice little metaphor in the comparison between Costco and Wal-Mart that some clever candidate might consider using. Me, I'm just going to keep spreading the word.

Posted by Charles Kuffner on July 19, 2005 to Bidness | TrackBack

Anyone who saw A&E's program "Wage Slaves: Not Getting By In America" (based on the best selling book) or saw the CNBC program on Wal-Mart can see what the differences are between Costco and Wal-Mart.

$17 an hour as an average in retail is much higher than I would expect from Costco. I guess people buying everything in bulk allows the company to pay more, but I don't see how.

"There was a time when good customer service and treating one's employees well were highly regarded. Well, I'm pretty sure there was such a time. I'm not that old."

I remember those days as well, so you're not that old. Those days are gone, just like 8-track tapes and OS/2. :-)

Posted by: William Hughes on July 19, 2005 12:53 PM

Well, the real comparison is between Costco and Sam's Club, which is an eerie attempt to duplicate Costco down to the last detail except that they missed the part about product quality and customer service. Wasn't there a NYT article last year about how Sam's Clubs were locking their employees into the stores at night and they couldn't get out without losing their jobs even when severely injured?

Wal-Mart's counterpart is Target, K-Mart and regional chains like Fred Meyer in the Northwest.

Speaking of Costco. I've been a loyal member since I was a grad student at UW in Seattle in the early 90s when Costco was just a northwest chain. And I shopped there almost exclusively during the 8 years that I lived in Juneau. Now I drive the 1.5 hours from Waco to Fort Worth to shop Costco. Or sometimes head to the Austin Costco although that's always worse traffic and hassle than Fort Worth.

Oh, and by the way, I just switched to Costco auto insurance and saved over $500 on annual premiums. They sent out a flyer last month and I filled it out for a quote out of curiousity. I had been with GEICO for 15+ years as a former federal employee and would shop around with State Farm and the others every few years but GEICO was always the best. Until now. My wife and I have two relatively new cars, a 2004 Toyota Sienna and a 2003 Honda CR-V and carry full coverage. Costco is saving us $251 every 6 months on car insurance.

Posted by: Kent on July 19, 2005 8:56 PM

Tim and I have been shopping there for 13 years and we'd never consider shopping at Sam's. I wouldn't even go to Sam's if I didn't have a Costco to shop at. We've never had a problem at Costco and we like that they actually treat their employees right. It's nice to be able to walk into a store and know that the merchandise is good, service is good and the employees are happy.

Posted by: Sue on July 20, 2005 8:04 AM