Group Case COSTCO

Picture this scenario. You are the CEO of one of the largest retailers in the U.S., trying to guide your company through an anticipated economic downturn. What would you do to cope with the financial uncertainty? Would you cut staff or wages? After all, many retailers have because they know it is one the most straightforward ways to reduce costs. Jim Sinegal, co-founder and recently retired CEO of Costco did the opposite by giving all hourly employees a $1.50 hour wage increase during the last recession.

So why the wage increase? Because Costco understands that its profitability relies on customers renewing those memberships year after year. It needs customers to buy product when they visit, rather than offering a “showroom” where customers look in the store and then going to order online at Amazon. In addition, Costco has a different business model. It prices all its groceries, home electronics, and office supplies at just 15% above cost, making it the price leader on virtually everything it sells. Costco’s profits come from its $55 – $150 membership fee, which its customers pay annually. And—when the downturn comes to an end—Costco needs those customers to keep shopping as part of their routine. All of that requires committed and loyal employees who are knowledgeable and invested enough to make the Costco shopping experience fun and convenient.

Joe Carcello, is just one of those employees. The 59-year-old has worked for Costco for 26 years, noting “I am just grateful to come here to work every day.” Indeed, Costco pays its hourly workers an average of $20.89 an hour, three times minimum wage. Explains new CEO Jim Jelinek, “We know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty —- If you treat customers with respect and treat employees with respect, good things are going to happen to you.” Costco, has an industry leading turnover rate at (5%) and has doubled stock prices since the economic downturn in 2008-2010.

As it tries to build on its success, Costco faces competition from two flanks. First, of course is Walmart—the only U.S. retailer bigger than Costco. Although they compete for many of the same customers. Costco and Walmart are very different in several respects. Costco employees $20.89 and Walmart employees make $15. Eighty-eight percent of Costco’s employees have health sponsored insurance whereas Walmart is around sixty percent. Costco employees belong to the International Brotherhood of Teamsters, whereas Walmart actively avoids unionization. “I think people need to make a living wage with health benefits” explains CEO Jelinek.

Costco’s second competitor – Amazon – has a business model that, in part, relies on in-store shopping being so annoying that ordering online becomes the more relaxing alternative. Although the rise of Amazon signals the demise for several retailers, Costco has been able to hold its own. This has been accomplished by bulk discounts, Costco’s grocery market, and having its own website and online presence. Costco Chairman Jeff Brotman summarizes the sobering nature of trends: “I used to get up every morning worried about Walmart… Now I worry about them, and I worry whether we are up to challenge of the shift in retail buying habits.”

The differing threats offered by Walmart and Amazon present something of an organizational commitment and job performance dilemma for Costco. On the one hand, its 5 percent turnover rate gives it a cost and stability advantage that helps it beat traditional competitors. On the other hand, that retention limits the fresh ideas that outsiders can bring to a company. Indeed, Costco’s executive turnover rate is only 1-percent, and it refuses to hire business school graduates (instead opting to send rank and file employees to school to earn degrees.) Indeed, even recently retired CEO Sinegal, who is 77, has maintained his advisory role. That potential for stagnation does not seem to be lost on Costco, however, John Matthews, Vice President of Human Resources, acknowledges that the company has become “awfully inbred.” And admits succinctly: “We’re all old.”

Questions to be answered in the breakout session:

How does low turnover rate help to battle tough competition? Will any of these factors help during Covid 19 recovery?
What impact do you think maintaining “full employment” during economic downturn has on the anticipated recovery?
If you oversaw human resources at Costco, would you retain the policy of sending rank and file to school or would you change the policy (post Covid 19) of hiring business school graduates? How will this decision affect organizational commitment and job performance of Costco employees?