Costco

Costco's average employee makes $17 an hour -- 42 percent more than the average Wal-Mart employee -- and ceo Jim Sinegal says the higher pay engenders loyalty not only among employees but also customers, as reported by Steven Greenhouse in The New York Times (7/18/05). Jim suggests that "Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense." Says Jim: "This is not altruistic ... This is good business." Indeed it is. While Wal-Mart's stock price has slipped five percent over the last 12 months, Costco's "has risen more than 10 percent." And while Wal-Mart's shares sell at about 19 times expected earnings, at Costco, costco.com, the multiple is 23. Funny thing is, a lot of folks on Wall Street don't like the way Jim Sinegal is running his 457-store, $47.1 billion empire, with $882 million in profits.

Not only does The Street think Jim pays his people too much, they think he doesn't charge his customers enough. But Jim stands firm on both counts: "On Wall Street, they're in the business of making money between now and next Thursday," he says. "We want to build a company that will be here 50 and 60 years from now ... The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8.'" Jim is equally hawkish when it comes to the number of items he sells. Where a typical Wal-Mart might have some 100,000 items in stock, a Costco has more like 4,000. Among other things, the tighter assortment helps Jim negotiate deeper deals from the preferred suppliers. That's not to say that Costco has squeezed the life out of its shopping experience in the name of efficient product assortment, though.

Jim triggers the thrill of shopping via "treasure hunts" -- "occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces -- scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise." And he applies his standards of quality even to commodities. Sure, it's possible that Wal-Mart sells its ketchup for less than Costco, "but you can't compare Hunt's ketchup to Heinz," notes Jim, whose customers have an average household income of "$74,000 -- with 31 percent earning over $100,000." Ultimately, Costco's formula is pretty simple, and not all that different from the one that launched the first Costco store in Seattle in 1983: "sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships and aim for upscale shoppers, especially small business owners." And, oh yes, one more thing: "don't advertise -- that saves 2 percent a year in costs."