Judith Eve Lipton
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It was classic Wall Street logic. In August 2003, the financial community decided it was fed up with Costco, the Issaquah-based discount warehouse chain and, at least until the recently announced Sears/Kmart merger, sixth largest retailer in the country on the basis of revenue. Costco was experiencing flat earnings growth for the year, and Wall Street thought it knew just what to blame. The company, proclaimed analysts, treated its employees too well. Costco's average U.S. hourly wage of approximately $16 an hour is widely considered to be the best in the retail business. And its approach to health care, as noted in a report at the time by the financial research and investment firm Sanford C. Bernstein & Co., "has been to provide employees with the best plan at the least expense to the employee." On Wall Street, this is not seen in a positive light. "Whatever goes to employees comes out of the pocket of shareholders," says Bernstein analyst Ian Gordon.
The financial guys noted another sin: Costco also treats its customers too well. Its bargain prices are legendary and, at the time analysts were tsk tsking, Costco was planning to add staff at checkouts in order to shorten lines. You might think that caring for customer is the No. 1 principle of business success. But again, Wall Street views the matter in terms of its slice of the pie. "It was spending what could have been shareholders' profit on making a better experience for customers," Gordon says. Or, as Deutsche Bank analyst Bill Dreher famously told BusinessWeek, "At Costco, it's better to be an employee or a customer than a shareholder."
Wall Street exacted its punishment: Costco's stock price plunged 19 percent in one day. Afterward, Gordon remembers, Costco's chief financial officer "dragged [co-founder and CEO] Jim Sinegal around to investors. He got beaten up a little." Regardless, Sinegal appeared unwilling to kowtow to the people who control his company's stock price, a highly unusual quality for a CEO, especially one who owns a lot of company stock. "He basically told them, 'I don't care,'" recalls Teamster Rome Aloise, the lead representative of Costco's unionized employees who make up one-fifth of its U.S. workforce.
"Why shouldn't employees have the right to good wages and the right to good careers?" asks Sinegal one day last month, sitting in his strikingly unpretentious office, more like an alcove really, devoid even of a door separating him from his employees. Costco has told Wall Street again and again that it believes the key to its success rests with taking care of employees and customers. Analysts "may not like it," Sinegal says, but "it's not a secret." It's also not a secret how he feels about the denizens of the Street. "Those people are in the business of making money between now and next Tuesday," he says. "We're trying to build an organization that's going to be here 50 years from now."
The dustup with Wall Street has given the 21-year-old Costco a new kind of prominence. At once, the company has become an icon of what are known around business schools as "high-road" values. Forget Ben & Jerry's, now under new management that's not quite as progressive as its hippie founders. Costco is a retailer of ever-growing size with, according to the latest figures, $47 billion in annual revenue, 113,000 employees, and 449 warehouses internationally in locations including the United Kingdom, Japan, and Mexico. It walks the walk on a whole different scale. Costco's values stand out all the more because they contrast dramatically with those of its main competitor, Wal-Mart, which operates the 550-store warehouse chain Sam's Club.
As many have recently noted, Wal-Mart's business model relies on relentless cost-cutting. According to Wal-Mart, its 1.2 million U.S. employees earn an average of $9.99 an hour, less than two thirds of Costco's average. Only 42 percent of Wal-Mart's workers have health care coverage through the company, compared with more than 83 percent at Costco.
The flagship Issaquah warehouse has even sold diamonds for $250,000 a pop.
(Kevin P. Casey)
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Given the overpowering influence of Wal-Mart, the nation's largest private employer and the world's largest retailer, at times there has seemed no way out from the downward competitive pressure it exerts. Which is why Costco's defiantly different approach has grabbed the attention of the folks who study these things. Annette Bernhardt, a policy analyst at New York University's Brennan Center for Justice, says she and her colleagues frequently bring up the Costco/Wal-Mart dichotomy in order to illustrate high- and low-wage business models. "It has really given researchers and activists a language to talk to the American public about these issues," she says. Peter Cappelli, a professor of management at the Wharton School, plans to analyze the differences between the two companies for an upcoming study. Rutgers University labor economist Eileen Appelbaum pronounces Costco a company that "shows that you can compete without having to drive down the wages of employees."
Not entirely coincidentally, this debate over business values has been playing out amidst a highly charged battle of political values. The economic race to the bottom, particularly as it relates to outsourcing, figured in John Kerry's campaign against George W. Bush. Unsurprisingly, Costco and Wal-Mart are polar opposites in this arena as well. Sinegal and fellow Costco founder Jeffrey Brotman endorsed Kerry and made large financial contributions to Democratic campaigns. Wal-Mart's political action committee donated overwhelmingly to Republican campaigns, a pattern mirrored by the company's executives.
