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Costco: Walking a Fine Line between Corporate and Co-op

For a Costco member there are some fairly chilling statements in this article, Costco: The "anti-Wal-Mart." So far Costco has managed to be great for both members and investors, for the former by eschewing debt and adhering strictly to their 1% operating margin goal, for the latter by relying on membership dues for most of the profits, which are used primarily for growth of the company and periodic stock buy-backs. By older economic standards, this is a textbook "good company." But today many of these items--low debt, fairly-compensated employees, putting a high value on customer satisfaction--are seen as negatives to investors. Costco has even been accused of something like socialism, for "giving in" to labor unions in California (where 30% of Costcos are located), and extending union-level benefits to all employees.

The co-op-like approach, putting members and employees first, runs all the way to the top: Costco CEO Jim Sinegal takes a modest compensation package (by current standards), and has voluntarily forgone bonuses at times. But Costco is not a co-op; it's a publicly held and traded corporation. Ultimately, it answers to the stockholders. And what the stockholders want is return on investment, either through growth of their stock value or dividends. The problem is, most of the obvious and immediate methods for boosting share value (taking on debt for instance, or raising profits via higher markup) are not good for members. Maintaining a balance takes enormous discipline and commitment on the part of the board and corporate management--bump up the margins and cut services and members and employees may flee, but allow the stock price to dip and you have angry shareholders (hence a board more likely to take action) and even open yourself up for a takeover. It's not coincidence that Sinegal is one of the founders--holding a minority position in the company, only a founder has the combination of vision and charisma to maintain a corporate culture like Costco's. Sinegal knows this, and it's why he's vague, even at 70, on when he plans to retire. When he inevitably does leave, as a member I can only hope that Costco is able to promote from within that corporate culture a person who holds the same values, the idea that the success of Costco comes more from the loyalty of coddled members and well-treated employees than it does from scale and markup.

posted by Rich @ 3/13/2007 01:03:00 PM