What Costco Knows About Customers and Everyone Else Ought to Learn

If there’s one central theme running through news stories and commentary about the business imperative at retailers and other “dirt world” companies these days, it has to do with cost reduction, automation, efficiency, and shareholder value. And the primary victims of this drive for efficiency are the hourly workers who find their pay squeezed and their jobs outsourced or automated. 

But Costco knows you can’t create shareholder value without loyal customers, and you can’t create an experience worthy of customer loyalty without first having capable and committed employees.

By some estimates Costco pays employees an average of about $21 an hour, compared to Walmart’s $12 an hour, and investors sometimes give the company grief about it. In early 2004, for instance, Costco saw its stock hammered by Wall Street because the company wasn’t focused enough on short-term profits. According to BusinessWeek at the time, Costco

“…pays its workers much better than archrival Wal-Mart Stores Inc. does and analysts worry that Costco’s operating expenses could get out of hand. ‘At Costco, it’s better to be an employee or a customer than a shareholder,’ said Deutsche Bank analyst Bill Dreher.”

But Costco founder and former CEO Jim Sinegal told financial reporters he didn’t care about Wall Street’s criticism, and that it would continue to be Costco’s practice to put good treatment of employees and customers ahead of pleasing shareholders. Rather than simply making more money in the short term by paying employees less, he said,

“We want to build a company that will still be here 50 and 60 years from now.” 

I think there’s a lesson here for everyone. From the perspective of a customer, the person at your company who comes face-to-face or voice-to-voice with them – that single, individual person is your company. So if you want your customer to have an experience worthy of the customer’s future loyalty, then one of your tasks is to ensure that the person the customer encounters is up to the task.

And there is strong circumstantial evidence that Costco is actually creating more overall value than Wall Street is giving the company credit for. Costco’s work force has substantially lower turnover than Walmart and other large retailers, so the company has less recruitment and training expense, not to mention a happier, more satisfied and cheerful set of employees coming face to face each day with customers. According to BusinessWeek’s analysis at the time, for instance, Sam’s Club’s required 50% more employees to generate the same basic volume of sales as Costco did.

Hourly workers represent the lifeblood of any consumer-facing business, whether it’s retail, or telecom, or financial services, or any other industry. So while it could be argued that Costco’s business model isn’t actually the same as Walmart’s, or Target’s, or Sam’s Club, a company’s hourly workers will still make a difference.

Costco’s lesson for the rest of us is this:

Yes indeed, it makes sense to automate and streamline and cut costs. But hourly workers are the heartbeat of human interaction, and wherever there is still human interaction, it also makes sense to invest.