There was a great article in the NY Times this week on warehouse retailer Costco, and how its generous salaries and employee benefits have made it the “anti-Wal-Mart.” Costco shareholders enjoy one of the highest price-to-earnings ratios in the industry, but apparently, that’s not good enough for some investors.
Some Wall Street analysts assert that Mr. 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.”
Mr. Sinegal begs to differ. He rejects Wall Street’s assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street’s profit demands.
Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco’s customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers’ expense. “This is not altruistic,” he said. “This is good business.”
Costco’s health plan includes extensive dental benefits, and part-time workers are eligible to join after just six months on the job, versus two years at Wal-Mart. As a result, 85% of Costco’s workers enjoy health insurance, compared to less than half of Wal-Mart employees. Costco also contributes generously to workers’ 401(k) plans, starting at 3% of salary after two years, and rising up to 9% after 25.
“When Jim talks to us about setting wages and benefits, he doesn’t want us to be better than everyone else, he wants us to be demonstrably better,” said John Matthews, Costco’s senior vice president for human resources.
The Wall Street response?
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.”
It is typical of the angry righties in my comment threads to fling accusations of communism and socialism when unable to formulate a more reasoned rebuttal, but of course, that’s just plain silly. (Debating Tip: the Cold War’s over.) I’ve worked for a number of start-ups, including one of my own, and embrace the entrepreneurial spirit that has built the U.S. into the greatest economic power in history. But I find our nation’s focus on maximizing short-term profits to be cruel, selfish, and in the long run… stupid.
The current winner-take-all attitude of many of our business leaders is not an essential part of a market economy… indeed, I have always believed that the best business transaction is one in which (gasp) both sides benefit. In my own business, I eventually tired of software retailers trying to screw me into one-sided co-op advertising deals, simply because they could. Longtime vendors would eagerly drive me into bankruptcy in a heartbeat if only I were stupid enough to sign the wrong deal — in the end, I pulled back from the consumer market because I refused to work with salespeople who I could never trust to treat me honestly and fairly. Hundreds of other small, independent developers pulled back, sold out, or gave up too, and as a result, the software catalogs are now a shadow of their former selves.
Happy customers are repeat customers. Happy employees are loyal, productive workers. And both are key ingredients to building a stabile, profitable business. Costco CEO Jim Sinegal clearly understands this.
“On Wall Street, they’re in the business of making money between now and next Thursday,” he said. “I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.”
Hmmm. Personally, I hate the warehouse shopping experience, but it almost makes me want to renew my lapsed Costco membership.