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Thinking Outside the Big Box

How Costco Wins with Happy Employees and Investors

Posted on October 01, 2015

When it comes to traditional “warehouse stores” or retailers selling large quantities of discounted goods direct to consumers in exchange for an annual membership fee, the conventional wisdom has been that whomever sells products the cheapest wins. These massive retailers often forego frills to keep costs low. Unfortunately, the cutting of these costs at some big box retailers can be extended to employee benefits, retention and training as well. But no two retailers are exactly alike, and while some believe the only way to make a profit while offering bottom-line pricing is by shortchanging employees, others have found investing in their people is far more profitable.

Sam’s Club, owned by Wal-Mart, openly pursues the conventional path – holding down all expenses, including worker wages, in pursuit of delivering the lowest possible price for consumers. The company is ruthless in streamlining in good times and bad. They even laid off 2,300 workers in 2014, despite an overall sales increase the year prior.

Costco, a competing warehouse store, also offers competitive low prices on the items they sell, but by a different means. In contrast to Sam’s, Costco pays its workers an average of $17 an hour and covers 90% of health-insurance costs for both full and part-timers. Both are compensation well above retail norms. So, how does Costco manage to keep prices low to be competitive with Sam’s Club while still offering such impressive benefits?

Valuing Employees and Their Suggestions

Following former CEO James Sinegal’s lead, Costco management differs from Sam’s Club by focusing attention on putting their employees first. This high prioritization leads to much lower employee turnover rates. In fact, Costco has the lowest employee turnover rate in retail. Considering that turnover is extremely expensive, the high wages Costco pays are returned in a high retention rate that becomes a competitive advantage.

Further, the high wages and benefits attract a certain caliber of employee – ones who are driven to provide outstanding service. As Sinegal says, “When employees are happy, they are your very best ambassadors.” Costco has always been noted for its high levels of customer service.

But these highly motivated employees also provide value in other ways. Costco management openly encourages their employees to provide suggestions for improving efficiency. Incentives and bonus plans are in place to support this behavior. Additionally managers are given autonomy within their store to experiment with departments to boost sales and reduce expenses.

Harnessing the power of employee suggestions, Costco instituted a number of notable changes. Solar panels and skylights were installed in stores to reduce the amount of electricity used for lighting (and the resulting bill). Packing boxes were simplified to reduce the amount of fuel used in shipping them to individual stores. Although it was a minor change, switching the cashews sold from a round canister to a square one, saved the company 560 truckloads a year for that one product.

Good For Employees and the Bottom Line

Perhaps it is not surprising but by valuing their employees and embracing their suggestions, Costco’s per-employee sales are considerably higher than those of rivals such as Target and Wal-Mart. This isn’t just feel-good management, it delivers real value and results.

While some may still insist on streamlining and reducing employee value, investors in Costco are doing very well - $10,000 of the company’s stock in 1992 was worth $43,564 ten years later, a return of 354% (15.855%, annually). Between 1985 to 2012, stock in the company rose five thousand percent.

The Costco story is instructive in the gains that can be realized by letting employees know they matter and encouraging their contributions. Acting up and incentivizing employee suggestions are a key portion of that plan.

When your organization is ready to start encouraging employee suggestions, increasing your value and seeing the results that it can produce, then it is time to call the Vocoli team at 888.919.5300.


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