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Costco Discounts Its Merchandize, But Not Its Values

Word broke last week that Costco is planning a store for my hometown Toledo, replacing a section of a beloved but beleaguered shopping center. Like many of my neighbors, I initially found the news unsettling, imagining one more big-box discount store that would destroy the residential skyline and exploit a few hundred under-rewarded employees. But it turns out Costco is different--Costco's leaders live by the they profess.

Consider one of Costco's mission statement promises--to take care of its employees. In an industry where minimum wages prevail, Costco's average worker earns $17 per hour. And while typical retail employees pay 25 percent of the cost of their healthcare, Costco workers pay only 8 percent.

But rather than earning the company's leaders praise, their generosity has earned them the wrath of Wall Street analysts. Emme Kozloff, an analyst at Bernstein Investment Research and Management, said Costco's CEO Jim Sinegal "has been too benevolent" when it comes to healthcare costs, adding that "he could force employees to pick up a little more of the burden." And analyst Bill Dreher of Deutsche Bank has complained that, at Costco, it's better to be an employee rather than a shareholder.

How does Sinegal respond? "This is not altruistic. This is good business." It must be: Costco's profit rose 22 percent last year. Sinegal dismisses analysts' assumptions that companies can only succeed by squeezing employees. "On Wall Street, they're in the business of making money between now and next Thursday. We want to build a company that will still be here fifty and sixty years from now." For his part, when the salaries of most CEOs are stratospheric, Sinegal earned a relatively low $550,000 last year, including bonus.

Do employees care when leaders live by the values they profess? Apparently Costco's employees do: Costco's annual turnover rate is only 24 percent, compared to 50 percent for its rival Wal-Mart and 65 percent for the retail industry. And in 2004, Costco's 68,000 hourly U.S. workers generated $34 billion in sales; competitor Sam's Club needed 102,000 employees to generate sales of $35 billion.

Only those organizations that recognize the role values play in leadership, and that live by the values they profess, can win the war for talent by attracting and retaining the best workers. Costco does just that.
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