Positive Power of Principled Profit
Volume 2, Number 12 — August, 2005

Positive Power Spotlight: Costco Proves a Deep Discounter Doesn't Have to Cut Throats

The New York Times calls Costco "the anti-Wal-Mart" -- and let's look for a moment at why that's important.

I consider Wal-Mart a predatory company. Its supplier policies (demanding 10 percent reductions in contract costs every year, as I understand it) are largely responsible for the wave of outsourcing that has cost thousands of Americans good jobs--and for the severely substandard working conditions that prevail in many of those foreign sweatshops. Its employees subsist on wages so low that many of them are also on government assistance--a quiet subsidy from the United States to the world's largest retailer, despite it huge profits. When workers in the meat department of one store in Ontario, Canada formed a union, the company closed the entire store rather than recognize the bargaining unit. And the company's steamroller tactics in bringing in new stores where they're not wanted and then abandoning many of them after a few years do not make it a good neighbor, in my opinion.

But the mantra we hear from business analysts is that this kind of operation is the only way for a retail giant to be profitable.

-->It's really refreshing, therefore, to read Steven Greenhouse's article, "How Costco Became the Anti-Wal-Mart," in the New York Times last month. Utterly and totally disproving the idea that you have to be a back-stabber to succeed with a retail warehouse concept.

For starters, Costco pays its workers--many of them unionized--enough to live on, averaging $17 per hour with a generous health plan and 401K retirement plan on top of that. And maintains high profitability with retail markups just 14 to 15 percent, in an industry where 25 percent markups are common. Oh yes, and when I was a member (I left because I moved out of convenient range), I always looked forward to the monthly newsletter: an informative and thorough business magazine, some 90 or 100 pages in newsprint format. it was the most useful houseorgan I've ever gotten from any company. Given all this, it's not surprising that both employees and customers are fiercely loyal.

It all seems to be working. Costco's per-store average across 457 stores in 6 countries is $121 million, while Wal-Mart-owned Sam's Club brings in only 57 percent as much: just $70 million per store. Pro fits were a very healthy $882 million last year, on $47.1 billion in sales--up 22 percent from the previous year. And of that $882 million, a relative trickle--a mere $350,000--pays CEO Jim Sinegal's salary (he did receive another $200K in bonuses last year).

Of course, these principles of true value, service to others, and leaving something on the table for the other stakeholders are among the points I discuss in Principled Profit: Marketing That Puts People First, my award-winning blueprint for ethical business success. Visit http://www.principledprofits.com to learn more.

(For the complete New York Times article, "How Costco Became the Anti-Wal-Mart," ask your librarian for in the July 17, 2005 Sunday Business section, or purchase from the times archive at http://query.nytimes.com/search/abstract?res=F30D10FA3B540C748DDDAE0894DD404482&incamp=archive:search)

Another Recommended Book: "Think Big, Act Small: How America's Best Performing Companies Keep the Start-up Spirit Alive" by Jason Jennings

A simple premise: to find the best-performing companies in America, with consistent double-digit growth in both revenues and pro fits. There are only nine that meet both the revenue tests and an additional test around ethics, and they have several things in common that bear out my contention that ethical companies perform better.

Among these: they are highly ethical, extremely customer-focused, create and maintain loyal employees within a specific company culture (and enjoy extremely minimal turnover), and have CEOs who are accessible scorn the trappings of power, and list their home phone numbers in the local directory.

(More about how to design a business around these ideas in my own Principled Profit: Marketing That Puts People First.)

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