I ran into a really interesting business case today that I thought you'd like to noodle over, too. The Business Insider has had a couple of articles about Costco recently and earlier in the year. Seems Costco has consistently outgrown Wal-Mart and Target, its main competitors, every year since 2008.
Oh bargain-hunting colleagues, if you look closely at your retail experience in each of the stores you'll know why. In MBA-speak, the assessment that The Motley Fool offers is that, "Costco is materially outperforming competitors such as Wal-Mart and Target thanks to its differentiated business model that allows it to charge competitive low prices for its products."
Key word is, of course, "differentiated." Costco makes most of its profits from membership fees. This allows them to sell at about a 12.5% profit margin, compared to profit margins of 25% to 30% at those other stores. That's right, less than half the profits. You've got to admit, that's a pretty shrewd way of running a mass-merchant retailing business.
The difference in their strategy doesn't stop there, of course. They do other things like limit their range of product offerings. You can choose from breath freshening, tooth whitening or dental sensitivity toothpast at Target, but don't expect to do much comparison shopping at Costco. Odds are you'll find a multi-pack of the most recent version of Crest, and that's about it. Of course I buy it happily, along with some pre-estimated subset of their membership.
I love the customer service at Costco, and I'm not alone. Costco has the highest customer satisfaction rating in the industry.
And here's why I thought you'd like to know more about Costco's winning strategy. Costco's average hourly wage is $20.89 per hour, according to Business Insider, almost TWICE Walmart's average hourly wage. High fixed costs cut into profits, some of you may say; what's going on here? Others are thinking, happy employees mean better customer service; that's why they are doing it, isn't it?
But here's what I thought you'd really find interesting, given all the variables we kick around at the Compensation Cafe every day. I'm passing along some thoughts on Costco's pay practices from Megan McArdle of Bloomberg View:
Paying workers more than the going market rate for their skill level can bring a lot of benefit to your company. You get lower turnover, and arguably, better on-the-job performance. . .
If all the employers of minimum-wage labor followed Costco's lead and paid higher wages and benefits, Costco would be less profitable, because the quality of its labor force would revert to the mean.
Anyone have experience in wage wars that can lend some war stories to the conversation? And how about comments on a quote from another of her articles:
A strategy of paying efficiency (marketedly higher) wages to attract, and retain, a higher-quality labor force is by definition a business model that cannot be followed by everyone in the market.
Us consultants tried to begin a lot of conversations until 2007 on just that point. We can tell you how effective a conversation starter that was . . . but how great it is to hear it said out loud now, in public. Don't you think?
Margaret O'Hanlon, CCP is founder and Principal of re:Think Consulting. She brings deep expertise in communications, compensation and career development to the dialog at the Café. Before founding re:Think Consulting, Margaret was a Principal with Towers Watson. She's wondering if you've read what's on page 8 of Everything You Do (in Compensation) Is Communication? Find out at www.everythingiscommunication.com. Think about it as you get ready for your 2014 self assessment. Margaret collaborated with Ann Bares and Dan Walter to bring this ebook into the world. Filled with innovative ideas, practical tips and experienced advice, it's a quick read and a valuable resource for building your influence as a compensation strategist. Come visit and tell us what you think!