INTEGRATIVE CASE 8.0 Costco: Join the Club

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Following high school, James Sinegal worked for discount

warehouse Fed Mart unloading mattresses. Then,
in the 1970s as an employee of California-based Price
Club, he absorbed every detail of the high-volume, lowcost
warehouse club formula pioneered by Sol Price.
Armed with knowledge and ideas, Sinegal partnered
with Jeffrey Brotman to establish Costco Wholesale
Corporation. The duo opened their first store in Seattle
in 1983. Today, after more than 30 years in business,
Sinegal’s vision and success not only eclipsed those of his
mentor but led to the merger of Costco and Price Club.
No Frills
With its reputation for rock-bottom pricing and razorthin
profit margins, Costco is the nation’s second-largest
retailer (behind Walmart) and the number-one membership
warehouse retailer with 663 stores (468 in the United
States), 185,000 employees, and 71 million members.
Between 2009 and early 2013, sales zoomed 39 percent.
For fiscal year 2013, sales reached $105 billion, reflecting,
in part, a consumer tendency in a poor economy to focus
on value but more significantly a unique corporate culture
that gives not only lip-service to the value of employees
but also maintains a reputation for honoring that value.
The no-frills warehouse-club concept exemplifies the
much-maligned “big box” store—merchandise stacked
floor to ceiling on wooden pallets, housed in 150,000
square footage of bare concrete, and illuminated by fluorescent
lighting. Customers flash member cards and push
oversized carts or flatbeds down wide aisles unadorned
by advertising or display. Costco reflects industry standards
and consumer expectations for providing limited
selection, volume buying, and low pricing.
Valuing People
Costco’s current CEO, Craig Jelinek, who took over
the top job in 2012, has vowed to continue Sinegal’s
philosophy. The owners believe the secret to Costco’s
success lies in the many ways the company ventures from
the norm by overturning conventional wisdom. Because
the owners view people as the organization’s “competitive
edge,” labor and benefits comprise 70 percent of Costco’s
operating costs. Despite Wall Street criticism, the company
maintains its devotion to a well-compensated workforce
and scoffs at the notion of sacrificing the well-being
of employees for the sake of profits. The 2010 Annual

Report declares, “With respect to expenses relating to
the compensation of our employees, our philosophy
is not to seek to minimize the wages and benefits they
earn. Rather, we believe that achieving our longer-term
objectives of reducing turnover and enhancing employee
satisfaction requires maintaining compensation levels
that are better than the industry average.” The report
admits Costco’s willingness to “absorb costs” of higher
wages that other retailers routinely squeeze from their
workforce. As a result, what the company lacks in margin
per item, management believes it makes up in volume,
in maintaining “pricing authority” by “consistently
providing the most competitive values,” and in purchased
loyalty memberships, which, as Sinegal once pointed out,
“locks them into shopping with you.”
Jelinek, like Sinegal before him, is a no-nonsense
CEO whose annual salary is a fraction of the traditional
pay for large corporate executives and reflects an organizational
culture that attempts to minimize disparity
between management and workers. Luxury corporate
offices are out of the question. Almost 70 percent of
warehouse managers started out ringing cash registers
or pushing warehouse carts. Even top managers dress in
casual attire, wear nametags, answer their own phones,
and spend a significant amount of time on the warehouse
sales floor.
This unorthodox employer–employee relationship
is in sharp contrast to the industry norm, with
employees in most companies feeling the added stress
of infrequent site visits by suited corporate executives.
During an interview for ABC’s news magazine “20/20”
in 2006, Sinegal provided a simple explanation for the
frequency of warehouse visits. “The employees know
that I want to say hello to them, because I like them.”
Indeed, Costco employees marveled at the former CEO’s
ability to remember names and to connect with them as
individuals. It is that “in the trenches together” mind-set
that defines Costco’s corporate culture, contributing to a
level of mutual support, teamwork, empowerment, and
rapid response that can be activated for confronting any
situation. A dramatic example occurred when employees
instantly created a Costco emergency brigade, armed
with forklifts and fire extinguishers, whose members
organized themselves and rushed to offer first aid and
rescue trapped passengers following the wreck of a commuter
train behind a California warehouse store.

Costco’s benevolent and motivational management
approach manifests itself most dramatically in wages and
benefits. Employees sign a one-page employment contract
and then join co-workers as part of the best-compensated
workforce in retail. Average hourly wages of $21.00 smash
those of competitors ($10 to $11.50 per hour). Rewards
and bonuses for implementation of time-saving ideas
submitted by an individual employee can provide up to
150 shares of company stock. In addition, employees
receive a generous benefits package including health care
(82 percent of premiums are paid by the company) as well
as retirement plans.
Costco’s generosity to employees flies in the face of
industry and Wall Street conventional wisdom whereby
companies attempt to improve profits and shareholder
earnings by keeping wages and benefits low. Yet Sinegal
insisted that the investment in human capital is good business.
“You get what you pay for,” he asserted, and Jelinek
agrees. “If you treat consumers with respect and treat
employees with respect, good things are going to happen to
you,” Jelinek says. As a result, Costco enjoys the reputation
of a loyal, highly productive workforce, and store openings
attract thousands of quality applicants.
By turning over inventory rather than people, Costco
can boast an annual employee turnover of only 5 percent,
compared to retail’s dismal 50 percent average. Taking
into account the cost of worker replacement (1.5 to 2.5
times the individual’s annual salary), the higher wages
and benefits package pays off in the bigger picture with
higher retention levels, a top-quality workforce, low
shrinkage from theft (0.2 percent), and greater sales per
employee. The combination results in increased operating
profit per hour. Whether used for attracting customers or
employees, the need for PR or advertising is nonexistent.
Sinegal told ABC that the company doesn’t spend a dime
on advertising, as it already has over 140,000 enthusiastic
ambassadors scattered through Costco’s warehouses
(today, that number of enthusiastic employees is around
185,000).
Design to Fit
Equal care has been given to organization design. Sinegal’s
belief in a “flat, fast, and flexible” organization encouraged
de-facto CEO designation for local warehouse managers.
Local managers have the freedom and authority to make
quick, independent decisions that suit the local needs of
customers and employees. The only requirement is that any
decision must fit into the organization’s five-point code of
ethics. Decisions must be lawful, serve the best interests of
customers and employees, respect suppliers, and reward
shareholders. Likewise, employee training places a high
priority on coaching and empowerment over command
and control.

All of this fits together in a culture and structure in
which the focus on meeting customer needs goes beyond
rock-bottom pricing. Costco’s new store location efforts
seek “fit” between the organization and the community
it serves. Typical suburban locations emphasize the bulk
shopping needs of families and small businesses, and
Costco has extended its own private label, Kirkland
Signature. While other companies downsize or sell their
private labels, Costco works to develop Kirkland, which
now accounts for approximately 400 of Costco’s 4,000
in-stock items. The private label provides additional
savings of up to 20 percent off of products produced
by top manufacturers, such as tires made by Michelin
specifically for the Kirkland label. Additional efforts
to better meet the needs of customers contributed to
Costco’s decision to run selected stores as test labs. Over
the past decade, selected Costco stores paved the way
for launching a variety of ancillary businesses, including
pharmacies, optical services, and small business services to
better serve the one-stop-shopping needs of the company’s
suburban customers.
Meanwhile, urban Costco locations acknowledge the
customer’s desire to purchase in bulk while also serving the
upscale shopping desires of condo-dwellers. In these locations,
the urgency to “purchase before it’s gone” tempts
consumers into treasure hunts with special deals on luxury
items such as Dom Perìgnon Champagne, Waterford crystal,
or Prada watches.
The rapid growth of Costco from one store in Seattle
to America’s warehouse club leader and global retailer has
come with a share of growing pains as the organization
attempts to adapt to its various environments. The merger
with Price Club brought an infusion of unionized workers,
forcing owners and management officials to push Costco’s
“superior” wages and benefits as a way to negate the need
for unionization.
New Issues
Costco’s own reputation for high ethical standards and
self-regulation has, in the face of rapid expansion, come
up against myriad new problems ranging from complaints
about a lack of notification for management job openings
to persistent complaints of a glass-ceiling that provides
few opportunities for the advancement of women within
the organization. In response, the company instituted online
job postings, automated recruiting, the use of an outside
vendor for hiring, and a recommitment to equity in
promotion.
International issues are often more complex and
often run up against local needs and perceptions. For
example, efforts to expand into Cuernavaca, Mexico,
were viewed from the company perspective as a winwin
situation, opening a new market and providing jobs
and high-quality, low-priced items for area shoppers.
When the site of a dilapidated casino became available,
Costco moved quickly but suddenly found itself facing
charges of cultural insensitivity in Mexico. Accusations in
Cuernavaca that Costco was locating a parking lot over
an area with significance in artistic and national heritage
led to negotiations under which Costco set aside millions
of dollars to preserve landscape, restore murals, and work
alongside city planners and representatives of the Mexican
Institute of Fine Arts & Literature in the building of a
state-of-the-art cultural center and museum.
The story illustrates the emphasis on moral leadership
that has come to characterize Costco and its senior
management. Business decisions based strictly on financial
terms take a back seat to success based on broader criteria:
Are we creating greater value for the customer? Are
we doing the right thing for employees and other stakeholders?
Management believes that the answers to these
broader questions help keep the company relevant to the
issues and trends shaping the future of business.
Indications are bright for Costco’s future, but questions
loom on the horizon. Everyone from Wall Street pundits to
customers, shareholders, and employees is still wondering
how the organization might change now that Sinegal has
stepped down. So far, things look good, but will future leaders
be willing to maintain the modest levels of compensation for
top management and maintain the company’s above-average
wages and benefits for employees? And how will increased
globalization alter the strong corporate culture?

After reading the case, please answer the following questions:

1. Describe the culture at Costco.

2. How does Costco motivate it employees?

3. What environmental issues does Costco face?

4. How is Costco a socially responsible company?

Read and examine the case then write your opinion on the case. It should probably be a couple of pages based on your assessment of the case and your opinion. It may be in any format you wish and does not need any references. The opinion may include anything you wish about why you agree or what you would have done in that situation. Please submit to me through my email. If you have questions feel free to call me. Have a great final week.

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