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Choose Costco

Ezra Klein and Kevin Thurman both print the following quote, which in my mind is the Best Reason Ever to avoid WalMart and Sam’s Club.

Wal-Mart is “the unstoppable, insatiable force” in retailing, “rul[ing] the commercial strip the way Julius Caesar once ruled the Roman republic.” That isn’t hyperbole. Against the Wal-Mart bulldozer, nothing can stand. Yet somehow Goliath’s Sam’s Club operation is being thrashed by Costco.

Sam’s Club has 71 percent more U.S. stores than Costco, yet Costco’s total sales are 5 percent higher. The average Costco store generates almost double the revenue of a Sam’s Club. By any hard-nosed business measure, Costco is succeeding brilliantly against what may be the most formidable competitor in any industry on Earth.

Furthermore, Costco’s success translates directly into benefits for workers and customers in the very manner that cheerleaders for corporate America have long described. The company offers “the best wages and benefits in retail.” Its starting hourly wage is $10. Full-time hourly workers earn annual salaries of $40,000 after four years.

And get this: Whenever Costco buyers negotiate a good deal on products, the savings are actually passed on to customers. No, seriously; markups are capped at 14 percent.

Well then, you say to yourself, Costco CEO James D. Sinegal, the architect of this marvel, must be taking bows as a Hero of the Republic. Wrong. Instead he’s defending himself from powerful forces that better understand how a business ought to be run.

In a single paragraph tucked matter-of-factly into Fortune’s hymn to Sinegal and his company, as if it were one more piece of incidental data, we learn that “some of the practices that made Costco great have lately come under attack by Wall Street.” What the complaint boils down to is that Sinegal is too generous to the peasants. Stock analysts have “pounded on” him to trim workers’ health benefits “and to otherwise reduce labor costs.” The critics’ view is summarized by “Deutsche Bank analyst Bill Dreher, who recently wrote, ‘Costco continues to be a company that is better at serving the club member and employee than the shareholder.’ ”

For whatever reason, both of them got the URL to the piece that contains this quote wrong. It’s here, which a commenter on the Pandagon post noted. The Fortune article it references is here, though you can only see the beginning of it unless you’re a subscriber.

I don’t quite get Ezra’s conclusion that Wall Street’s disdain for Costco’s generosity towards its employees means that businesses need regulation. Some amount of regulation (we can certainly argue over how much) is necessary in our capitalistic society, but I don’t see the connection here. I’d say what’s needed is more a reevaluation of our priorities. Why should a successful company have its stock denigrated by analysts because of its health care plan? Aren’t profitability, good growth prospects, and a loyal customer base enough? The implication seems to be that shareholders are somehow more important, and should be more rewarded, than employees. Suffice it to say that this is a value system that I just don’t understand, and I speak as an owner of various stocks.

(I keep wondering when, in this age of offshoring, downsizing, increased productivity, and automation, executive compensation will start to be treated as an out-of-control cost that needs to be reined in to enhance long-term competitiveness. Oh, shareholders and the business press have been grumbling for some time, but it hasn’t had any effect as yet. We’re talking tens, even hundreds of millions of dollars, often going to one person while the company in question is bleeding. Applying a little of the hardheaded realism and dedication to cutting costs here would go a long way, it seems to me. But I digress.)

Anyway, for those here in the Houston area, we’ve had a Costco for some time now. Now that I know the difference, I’m going to make sure we have a membership.

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18 Comments

  1. Palolo lolo says:

    I plan on going to my grave a Sprawl-Mart virgin. And I love Costco-except for the fact their stock rotates so often,if you see something you like,buy it now as it may not be there next time. Drives me nuts

  2. Michael says:

    Wasn’t paying employees decently one of Henry Ford’s sins according to analysts at the time?

  3. precinct1233 says:

    I LOVE Costco! The stores are clean, the employees cheerful, and the merchandise is priced less than at Sam’s.

    Now, if they would only open stores in Dallas proper, instead of in the suburbs, I’d shop there more than every couple of months.

  4. precinct1233 says:

    Oh, and their gasoline is usually 10 cents a gallon less than the prevailing price in the area, thus forcing all the other stations in their immediate zone to limit their gouging. (in California, it’s more like 20 cents less)

  5. Tibor says:

    Of course I agree with you on almost every point, but I think the answer to your rhetorical question is pretty obvious.

    Why should a successful company have its
    stock denigrated by analysts because of its
    health care plan? … The implication seems
    to be that shareholders are somehow more
    important, and should be more rewarded,
    than employees.

    Well, yeah… an analyst’s allegiance is supposed to be owed to the stockholders. And even though, as Enron et al. tought us, that often is not the case, it is assuredly never to the employees. The analysts are saying, ‘expect a disproportionate amount of the profits to go [where they are supposed to] rather than to the stockholder in terms of dividends [or to the management in terms of bonuses and stock options]’.

    That the analyst’s recommendations provide useful information to us as consumers as well as to potential employees is but a happy coincidence. Thanks for pointing them out.

  6. sy says:

    A company which serves its customers, employees, and stockholders by having clean well-stocked stores with helpful employees and very high per-store sales. CostCo’s story, not WalMart’s or Sam’s, is the story of an American company whose business operations and strategy should be praised and rewarded!

  7. Phil_uk says:

    Glad to see lots of sense posted here, We now have Costco (as well as Wal Mart) here in the UK and, guess what? Lots of people are finding that Costco stores are clean, well stocked, low priced and have cheerful employees – and lots of smiling customers. Not a shock that their customer base grows daily through the best advertising in the world – word of mouth personal recommendation. Good luck Costco where ever you go

  8. philuk says:

    Glad to see lots of sense posted here, We now have Costco (as well as Wal Mart) here in the UK and, guess what? Lots of people are finding that Costco stores are clean, well stocked, low priced and have cheerful employees – and lots of smiling customers. Not a shock that their customer base grows daily through the best advertising in the world – word of mouth personal recommendation. Good luck Costco where ever you go

  9. Richard says:

    It seems as if the very thing that has catapulted Costco to the top is the very thing that has stockholders whining. Weird. Well, it just goes to show you that owning stock doesn’t make you a smart businessman. If the stockholders had their way, it seems, they’d ruin their own investment with their “business sense.” Costco has a model that has *very easily* cut off competitors. Stockholders would be wise to notice the new economy’s flagrant ability to move discounts to the end consumer. Costco can do it – with a smile. Stockholders should be smiling too.

  10. karl says:

    I’ve worked at Costco for 11 years. Right out of high school. All i need to say is that its the best part-time job available and have only a handful of complaints about the way employees get treated. Love the fact we’re not Union. It’s built me up in so many ways that now, I’m developing a tv show, have my own health and fitness company and a band while buying a house at the age of 21 and starting a family at the age of 26. I don’t think too many companies would allow the availability the way Costco does. Hey, can i switch a shift or get this day off???? Not a problem!

  11. Double Dedicated says:

    I am a Costco employee as well as shareholder and there are quite a few of us out here. We have no complaints. Rest assured Wall Street, we (shareholding employees) double guarantee you that we are quite happy within our Costco Family.

  12. kevin whited says:

    I’m confused.

    It seems to be that you like Costco and its values/marketing/self-promotion.

    No shame in that, but then you make out the quote somehow to reflect negatively in a moral sense on Wal Mart. It doesn’t really.

    Why not just say you like Costco’s values and that’s a reason you prefer their offerings?

    That’s quite different than saying a quote that isn’t really about Wal Mart’s “values” in any sense is the (caps!) Best Reason Ever to avoid Wal Mart and Sam’s Club.

    That last sentence just isn’t supported by the quote you give. It may be a reason to go to Costco, but it really isn’t a reason to AVOID Wal Mart.

    In any case, Costco is a good retailer, yes. So is Target. Sam Walton’s enterprises could use some competition, and consumers benefit from it all. But Wal Mart and Sam’s are great retailers too, and there’s no denying that. Not quite sure why it’s so important for some folks to make them into something evil.

  13. Nancy says:

    Please, please consider opening a Costco store in the Cedar Falls, Iowa area! Thank you!

  14. Susan Adams says:

    How do I get a great product in your warehouse for your customers?

  15. Robyn says:

    I live in KY do you have a Costo near me?

  16. Kammie says:

    I don’t know if people realize how badly workers at Wal-Mart stores are treated. They are over worked and underpaid and therefore their moral is low. They never have enough help and I am sure that reflects in their attitudes and work ethics. I think Sam Walton would be apalled if he knew what goes on in his stores today. I have found that they are not always nice to customers either. I assume employees of Sam’s don’t have it any better. I can’t wait to join Costco.

  17. albert says:

    hey precinct1233,

    Be glad that DFW has 5 costcos! and Houston only has 2!!

  18. F. E. MONACO says:

    I like everything about Costco. The return policy is superior. It seems that the employees
    are satisfied. The business atmosphere seems warm and very genuine. All employees are cheerful.
    They get my vote.

    F.E. MONACO