If Wal-Mart represents red-state America's ruthless race to the bottom line, then Issaquah-based retailer Costco offers a blue-state alternative. The company is proving Wall Street wrong by adhering to a radical idea: Treating customers and employees right is good business.
It was classic Wall Street logic. In August 2003, the financial community decided it was fed up with Costco, the Issaquah-based discount warehouse chain and, at least until the recently announced Sears/Kmart merger, sixth largest retailer in the country on the basis of revenue. Costco was experiencing flat earnings growth for the year, and Wall Street thought it knew just what to blame. The company, proclaimed analysts, treated its employees too well. Costco's average U.S. hourly wage of approximately $16 an hour is widely considered to be the best in the retail business. And its approach to health care, as noted in a report at the time by the financial research and investment firm Sanford C. Bernstein & Co., "has been to provide employees with the best plan at the least expense to the employee." On Wall Street, this is not seen in a positive light. "Whatever goes to employees comes out of the pocket of shareholders," says Bernstein analyst Ian Gordon.
The financial guys noted another sin: Costco also treats its customers too well. Its bargain prices are legendary and, at the time analysts were tsk tsking, Costco was planning to add staff at checkouts in order to shorten lines. You might think that caring for customer is the No. 1 principle of business success. But again, Wall Street views the matter in terms of its slice of the pie. "It was spending what could have been shareholders' profit on making a better experience for customers," Gordon says. Or, as Deutsche Bank analyst Bill Dreher famously told BusinessWeek, "At Costco, it's better to be an employee or a customer than a shareholder."
Wall Street exacted its punishment: Costco's stock price plunged 19 percent in one day. Afterward, Gordon remembers, Costco's chief financial officer "dragged Jim Sinegal around to investors. He got beaten up a little." Regardless, Sinegal appeared unwilling to kowtow to the people who control his company's stock price, a highly unusual quality for a CEO, especially one who owns a lot of company stock. "He basically told them, 'I don't care,'" recalls Teamster Rome Aloise, the lead representative of Costco's unionized employees who make up one-fifth of its U.S. workforce.
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