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Work and prosperity
20 June 2013

How about this: A thriving company that cuts costs for consumers without squeezing its workers

Yesterday, the Deep End had a rather pessimistic take of the state of modern capitalism. Today, by way of balance, we feature an encouraging example of what a profitable, responsible business can achieve even in the fiercest of competitive environments.

The story comes from Brad Stone in Bloomberg Businessweek; see if you can guess which company (a household name in America) it's all about or, failing that, the sector in which it operates:

  • “Despite the sagging economy and challenges to the industry, [the company] pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, [a major competitor] said its average wage for full-time employees in the U.S. is $12.67 an hour… Eighty-eight percent [of the company’s] employees have company-sponsored health insurance… with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans.”

You might think this must be some high-margin, luxury goods maker or, perhaps, a cutting-edge technology company from Silicon Valley.  In fact, the company is Costco and the sector is discount retail. In other words, just the sort of set-up where you’d expect to find an underpaid, unmotivated workforce.

Having chosen a different path, how’s it working out for Costco?

  • “… the second-largest retailer in the U.S. behind Walmart, is an anomaly in an age marked by turmoil and downsizing… Costco has thrived over the last five years. While competitors lost customers to the Internet and weathered a wave of investor pessimism, Costco’s sales have grown 39 percent and its stock price has doubled since 2009.”

There are some frugal elements to Costco's operation. Executive pay is not as high as in comparable companies and it has no “public relations staff” (a tip for the Conservative Party, there). But this is more than a case of making economies elsewhere in order to afford a better deal for the workforce:

  • “[Costco] treats its employees well in the belief that a happier work environment will result in a more profitable company. ‘I just think people need to make a living wage with health benefits,’ says [CEO, Craig Jelinek]. ‘It also puts more money back into the economy and creates a healthier country. It’s really that simple.’”

It’s interesting that “eighty percent of [Costco’s] gross profit comes from membership fees” and that “customers renew their memberships at a rate of close to 90 percent.” Maintaining the relationship between company and customer is clearly important, therefore it's vital that the company invests in the workforce through which that relationship is primarily conducted:

  • “Most retailers ‘see their employees as a cost to be minimized and typically end up underinvesting in them,’ says Zeynep Ton, an adjunct associate professor of operations management at the MIT Sloan School of Management. She thinks that ends up creating operational problems that shoppers are all too familiar with: surly employees in stores engulfed in chaos, an environment that makes ordering online look a lot better. One solution to surly cashiers is to get rid of them completely… Costco has… experimented with self-service checkouts, but Jelinek says he’s now removing them because employees do the work more efficiently.”

So, in conclusion it would seem that, in business, people are important after all. Let’s hope that certain other companies one could mention manage to learn from this exciting new discovery. 


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