business news in context, analysis with attitude

MNB reported Friday about how Costco gets knocks from analysts for paying its employees too much.

"From the perspective of investors, Costco's benefits are overly generous," Bill Dreher, retailing analyst with Deutsche Bank Securities, told the WSJ. "Public companies need to care for shareholders first. Costco runs its business like it is a private company."

Jim Sinegal, Costco's CEO, responds, "The last thing I want people to believe is that I don't care about the shareholder. But I happen to believe that in order to reward the shareholder in the long term, you have to please your customers and workers."

The WSJ reports that Costco shares trade at about 20 times projected per-share earnings for 2004, compared with about 24 for Wal-Mart - and that analysts believe the disparity is because of employee salaries and benefits.

Costco's reputation is for having the best benefits in retail, and with regular raises, a full-time hourly worker can make $40,000 annually within 3.5 years. Cashiers are paid $10.50 to $17.50 an hour.

Our comment: Sinegal is right. The analysts are wrong. And it seems to us that this whole discussion is a crock.

Only in the current environment can a discussion take place in which store employees - the very people who are on the front lines, dealing with the customers who make or break a business - are marginalized as costing too much money.

Costco clearly has figured out how to make money while paying its employees well. It has lower turnover rates than many other companies, which means that it has lower training costs. And it has continuity of personnel, which means a lot to continuity of store excellence.

This discussion re ally annoys us, because it is yet another example of how the investment community has become the customer of choice for too many chains.

And memo to Wal-Mart. We've been to Sam's Club. We've been to Costco. And Sam's Club is no Costco.


Those were our comments. Here are yours…

MNB user Glen Terbeek wrote:

Thirty year old investment analyst often get confused by defining a low unit cost of doing business, in this case payroll costs per hour, as a productivity advantage. That is only true if each retailer operated identically. It is the marginal value added that is generated from leveraging the total expenditure on a yield basis that counts, not the unit cost. The analysts thinking is the same type of logic that took the industry down the ECR route, trying to benchmark everyone to a standard, while there are many proven ways to create differentiated value, and thus sustainable profits.

Shame on the investment analysts, if Costco is trading at only 20 times projected earnings while Wal-Mart is trading at 24. Maybe they should spend more time in stores. I agree with you, Kevin, Costco beats Sam's hands down.

Remember, a happy place to work is a happy place to shop!


Another MNB user wrote:

A Costco opened here locally, about 2 years ago, and I've been a loyal customer ever since. The checkout experience is wonderful.

- Motivated employees who will quickly open a new register if too many people line up at existing registers
- Smiling employees who engage in pleasant banter while I'm checking out (without holding me up)
- Quick employees; fastest checkouts in town!
- Knowledgeable employees - they can answer questions on store items, quantities in stock, etc.

I love shopping at Costco! Great products, good prices, pleasant shopping experience. Can't say the same for most other retail establishments. And it makes me feel very good as a shopper to know that I'm spending my money with a retailer who takes good care of their employees. The last thing I want to do is support a lower quality of life for my fellow citizens.

Wall Street needs a wake-up call… If the service isn't good, people will go elsewhere eventually (unless they don't have a choice, because other retailers have been run out of business…)


Yet another MNB user chimed in:

You're right Sam's doesn't come close to Costco in atmosphere and employee attitude.

MNB user David J. Livingston wrote:

KC you have it right. Sam's Club is no Costco. Congrats to Costco for not buckling to Wall Street analyst. That shows character and strength.

Another MNB user wrote:

I have never responded to a story from your newsletter, but I just wanted to say that I couldn't agree with you more. I am all for shareholder value, but this is refreshing that Costco is not grinding their employee compensation into the ground. They offer tremendous value for their shoppers, but obviously recognize and value the contributions of their employees.

MNB user Chris Riesbeck offered:

Is this the best that analysts can come up with to justify a discrepancy between COSTCO and their competition? Had they been losing money at a rate surpassing it's closest competition, that's one thing, but I thought they've been quite successful. Many companies could do well by focusing on their success instead.

MNB user Charles Lemos wrote:

As a former retail analyst who covered Costco, I cannot believe the comments of Deutsche Bank Securities analyst Bill Dreher. Any company, and especially retailers, that does not put its customers first is a company likely on a death spiral. Customers are the lifeblood of any business, take care of them and most of the rest takes care of itself. I'd also ask Mr. Dreher to look at Costco's shrink rate, the lowest in the industry, and employee turnover ratio, exceedingly low for a retailer. High shrink rates are often attributable to employee theft and a low employee turnover saves employee recruiting, hiring and training costs. Longer-term employees are more reliable, miss work less, and can serve as models for newer employees. A happy employee goes a long way to a happy customer. This isn't rocket science, it's retailing 101. Unfortunately, among the companies in my former sector only Costco, Whole Foods, Target, and Walgreens really get it. Best Buy, Bed Bath and Beyond are two others that also know this model works for customers, employees and shareholders alike. Mr. Dreher should try working retail once in his life and he'll find most are underpaid, undermotivated, and offer a customer experience that doesn't enhance shareholder value. Thank god, Jim Sinegal does know what does enhance shareholder value.

Another MNB user wrote:

Kevin, you are SO RIGHT!!! Companies that are managed well and provide the type of value to customers that Costco does are able to return profits to investors as well as properly compensate the people who make it happen at store level. The analysts' comments are shameful and self-serving.

MNB user Jack Moffett wrote:

Has Mr. Dreher shopped at even one Costco? We can't have a strong country on hamburger chain wages.

Keep up the good work Costco. You are doing a great job for your shareholders.


But another MNB user wasn't so sure:

I used to agree with you, however the newest Sam's club here in Renton, WA has vastly upgraded. It is hard to tell the difference between the two and Sam's prices are slightly lower as well.

Not surprising in Washington…it is Costco's home turf, and that's where Wal-Mart would bring its "A" game.

Another MNB user questioned some of our logic:

Just how much do you think companies in the retail business spend on training?

I believe you can cut your guess by 50% to be close to what it may be.

While I have no idea what it actually costs in dollars and cents, I can't believe it's a major factor in running the business for Wal-Mart, Costco, or any other major retailer; going only on what I've seen. And I can't believe it costs any more at other companies than my employer's, based on the help I receive, or not receive, at other retailers.

While it's been a few years since living in your part of the woods, or in the Dallas-Ft. Worth or Evanston-Wilmette area of Chicago, I never found much difference in receiving good or bad help no matter where I shopped. And it certainly isn't any difference here in Atlanta; maybe only worse in some stores.


And another MNB user wrote:

These things bring out so much negativity on your part, one can only sit and laugh. You're just a little too much east coast and west coast uppity and not enough Middle America to balance it off.

Maybe they don't allow trailer parks in your New England area.


Guilty. Born in Greenwich Village, educated by Jesuits in Los Angeles.

However, we refuse to believe that having that background makes us "uppity." Sometimes we think there is a reverse bias against people from either coast; we spend a lot of time reminding ourselves (and our children) that where we live is not America…just one small part of America.

We've spent a lot of time traveling this country, have reported from 40 out of the 50 United States and from some 20 different countries around the globe. If we hadn’t, we suspect MNB might not be worth reading.




We also continue to get general email about our Wal-Mart coverage and commentary.

MNB user Sandra Caldwell wrote:

Personally, I think you are all jealous. The entire reason for being in business is to make money. Wal-Mart made, as you reported, $259 billion in one year. They make more than the total GNP of some countries. They have reached the top of the Fortune 500 list for three years running. Are you surprised by the fact that they lobby? Is this a new creation of Wal-Mart's or has it been done for years, albeit less honestly or openly by others? Is there a problem with Wal-Mart wanting to succeed further? Is that not what all of the conglomerates seek? When did we get so Politically Correct that it became impolite to want to succeed?

My personal experience with Wal-Mart is this. At first, I totally bought the image and disdained them. Then I shopped in one of their Supercenters. I took the time to read the labels, and search through their inventory. I compared it to my experiences at Stop & Shop in Boston, Star Markets in the Boston area and Genuardi's in Philadelphia, my three favorite markets. None of those markets are available to me in this rural part of Pennsylvania. However, my family still has to eat! It took me less then a month to realize that the store label of Great Value is equal to any of the name brands. And I only need look at the register receipt to realize that I can purchase food, staples, and fluffy things (gardening objects, frames, candles, etc.) for less then it would cost me to purchase just meat and vegetables in another store. Bottom line -- just as all business wants to make money, consumers want to save money for equal goods. Pretty much that is end of story. But for good measure, you can add to this the fact that many of us are surviving on one income due to the downturn; money has had to do some pretty slick gymnastics of late to stretch over lost income.

I hate to admit it, but I have evolved from a Wal-Mart snob to faithful shopper. And it is because they give me what I need and want in an affordable price. Go figure.


MNB user Justin Anderson wrote in about our commentary about Wal-Mart's Gordon Erickson saying that the company didn’t really want to take over the world:

I see you are not getting enough rise out of your readers lately so you choose to let loose on Gordon Erickson at Wal-Mart. Your cynicism toward Wal-Mart is only superceded by your ignorance for the common American's budget.

Maybe. On the other hand, we're a writer and Mrs. Content Guy is a teacher, and we have three kids, one of whom is going to college next year. So we know a little something about budgets…
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