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The Costs of Being Costco: Why Ethics Matter

Almost everyone has heard of the membership warehouse retailer, Costco Wholesale, whether or not you actually choose to shop there. You can find one of their warehouses in over 400 locations around the United States, as well as an additional 200 warehouses in Canada, Mexico, Australia, the United Kingdom, and parts of Asia. Although they are not quite as instantly recognizable as their main competitor, Sam’s Club of Wal-Mart Inc., Costco has attracted somewhat of a cult following due to their unusual business operations. In many financial comparisons, Costco seems to beat out all of their industry competitors. Even in the recent economic downtown, Costco still posted growth in their stock, as well as higher than industry average profits. So what exactly makes Costco so successful? Many business analysts argue that Costco’s focus on corporate social responsibility is what sets them apart from other retailers such as Sam’s Club or BJ’s Warehouse. Their focus on doing “the right thing” for all of their stakeholders, as well as a vision that aims for long-term success, is a unique business model that has interesting implications for many debates within the business world today. Should a company’s main focus be profit? Do they have a responsibility to act in the best interest of all stakeholders? What are the effects of these decisions? Using Costco as a prime example of a socially responsible corporation, I hope to prove that acting in a socially responsible manner towards all stakeholders is ultimately more beneficial for a company.

            A traditional view of business ethics is that is it acceptable, and even encouraged, to operate only for maximum profit. In his article “The Social Responsibility of Business is to Increase Profits”, Milton Friedman argues that having any sort of other “social responsibility” will only hurt a company in the long run. As he claims, your ethical responsibility as a business owner or executive is to ensure the highest profits possible, in order to maximize the gains of your stockholders. On the surface, this certainly appears to make sense. A prime example of this business model is Wal-mart Inc., Costco’s main competitor, who is famous for their high profit margins. Yet, Wal-mart is also notorious for their low employee wages and poor insurance coverage; according to one comparison of Wal-mart and Costco, in 2006, Wal-mart employees were spending 8% of their income on health care insurance- that is “nearly twice the national average” (Cascio, 33). Additionally, almost half of the children of Wal-mart employees were uninsured or on public health care. By comparison, “85% of Costco’s employees have health-insurance coverage, compared to less than half at Wal-mart and Target” (Cascio, 32). As of 2010, average hourly wages for Costco employees were $17 per hour, while average hourly wages at Sam’s Club were 42% less at just over $10 per hour (Schmaltz). By spending less on employee health benefits, we now have more money to invest back into the company. Surely, Friedman would approve of this. Won’t that give us the greatest profit?

            Costco proves that the answer to that question may be no. Wal-mart may be able to save some money through depriving their employees, but the employee loyalty shown by Costco’s employees more than makes up for that difference. Atypical benefits for Costco’s employees include above average hourly wages, comprehensive health insurance coverage after 6 months, above average 401(k) matching, and mandated 86% of top position hires from within, although the real percentage ends up being 98%. Consequently, employees at Costco are much happier than their peers. Employee turnover for Costco is 17% per year, while Sam’s Club is 44% per year, close to the industry average. As Cascio explains, a conservative estimate of the full cost to replace an hourly employee at Costco or Sam’s Club is 60% of an employee’s yearly salary. At Costco, this is a cost of $21,216 per employee; at Wal-mart, this is a cost of $12,617. When you put these figures together, you realize that Costco saves almost $368 million each year in employee turnover costs. That is a staggering amount of lost profit. Yet, it is not just turnover that proves the worth of Costco’s exceptional employee treatment. Costco’s employees appear to be more productive than their competitors. In 2005, while Sam’s Club generated $37.1 billion in US Sales, Costco generated $43.05 billion with 38% fewer employees (Cascio, 35). Imagine if they had the same numbers of employees! Additionally, Costco’s employees sell $886 of sales per square foot of store, compared with $525 of sales per square foot at Sam’s Club and $461 at BJ’s Wholesale Club.

            In almost every way, the loyalty and rewards shown to Costco’s stockholders only lead to increased profit for Costco. The good relations with their employees as well as suppliers and customers means that Costco’s inventory shrinkage is the lowest in the industry, which in turn, only helps to keep prices low for Costco’s consumers (Cascio, 32). With the figures from above, can you imagine what the financial statements would show if Sam’s Club and Costco had identical employee and warehouse operations?

            Another famous business ethicist, Edward Freeman, argued in support of Costco’s ways. In his article “Stakeholder Theory of the Modern Corporation”, he proposes that a corporation’s stakeholders actually include far more than the shareholders. Rather, this list includes employees, the community, suppliers, consumers, etc.; anyone who is necessary to the survival of the firm. He even asserts that groups that may not be considered essential to a firm’s survival, such as competitors, governments, neighbors, etc. may also be considered stakeholders. Freeman then lays down his list of ground rules for a company’s operations, which can be summarized as act in the best interests of all stakeholders, not just your shareholders. But why should we listen to Freeman? I would argue that Costco is a shining example of why the Stakeholder Theory is a sound model of business operations. Costco does a wonderful job of acting in the best interests of many stakeholders that their competitors ignore, particularly in the area of their consumers. Costco is cutthroat with their suppliers, dropping anyone that may give competitors a lower price, or forcing Starbucks to drop their prices in order to continue selling at Costco warehouses (Cascio, 32). Yet a lecture by Gary Kotzen just a few months ago explained how Costco has been an eco-friendly partner for over 20 years, and “was instrumental in improving the quality of coffee by paying more for beans long before the issue of ‘Fair Trade’ entered popular culture” (Foster Global Business Forum).

            This reflects back onto one of Costco’s core beliefs, which is the importance of quality. Even though it cost more, Costco was willing to buy better coffee because the quality at their stores would be higher. This can be found all over their product lines, especially as Costco specializes in higher-end products than Sam’s Club, BJ’s, or Target; for example, Costco has been known to carry Ralph Lauren and Prada. As a result, Costco has attracted a different sort of following than Sam’s Club; Costco’s consumers tend to be more affluent, or in the upper middle class of society. This means that when economic times get tough, Costco’s consumers are far more willing and able to stay loyal with their business. This is why, from 1997-2007, Costco’s stock climbed 222%, while Wal-mart’s climbed 146% and the S&P 500 climbed only 59% (Mueller). Even during the recent economic downtown, Costco’s stocks showed a steady price increase from 2009 to late 2011 (Freedland). In an interview in late 2009, then-CEO Jim Sinegal explained that Costco’s continued success was due to their high customer return; as he explains, “the frequency with which customers are shopping with Costco is the highest it’s ever been” (Schonberger). This increased inventory turnover means that financially, Costco is far sounder than their competitors, due to a lower debt to assets ratio.

            It is clear that through their fair and honest treatment of all stakeholders, Costco ends up with the financial stronghold, both short-term and long-term. After all, the average Costco store in 2004 totaled $115 million in annual sales, almost double the figure for Sam’s Club. The money does not lie. Costco’s wide range of stakeholder friendly actions, to their suppliers, employees, and consumers alike, has given them a strong competitive advantage. Their satisfied employees boast the most efficient and effective work in the industry, and their consumers are highly loyal, even in tough economic times. Costco has achieved all of this while acting in an ethical manner in several ways; working only with certain organic or community-minded suppliers, ensuring a good quality of life for employees, and focusing on product quality rather than price or profit. They have truly proven that Freeman’s Stakeholder Theory works for a large, competitive industry setting, even in an economy suffering from a recession. One might even go so far as to say that Costco’s personal social ethics are deontological; after all, according to their mission statement, their ultimate goal is to reward their shareholders. However, they can only achieve this by obeying their full code of ethics: to obey the law, to take care of their members, to take care of their employees, and to respect their suppliers. It is clear that treating their stakeholders right is essential to their operations, and it is equally as clear that their vision works. Costco has proven that stakeholder theory leads to higher profits, and happier shareholders as well.

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About Caitlin H.

I am a senior at Bucknell University, double majoring in management and music. I hope to work post-graduation as a corporate event planner, and to eventually go to the Olympics for three-day eventing. I enjoy singing opera, riding horses, playing frisbee, laughing, and big bowls of coffee ice cream.


2 thoughts on “The Costs of Being Costco: Why Ethics Matter

  1. So as not to take up extra space in the post:
    Works Cited:
    “Costco’s strong performance, great products and social responsibility”. From Foster Global Business Forum. Washington University. 31 January 2012. http://faculty.washington.edu/categ/bussolutions2012/wordpress/?p=579
    Costco Wholesalers Mission Statement. Accessed from company website. http://media.corporate-ir.net/media_files/NSD/cost/reports/our_mission.pdf
    Cascio, Wayne. “Decency Means More than ‘Always Low Prices’: A Comparison of Costco to Wal-mart’s Sam’s Club”. Academy of Management Perspectives. August 2006. Pp 26-37. Accessed via class moodle site. http://moodle.bucknell.edu/file.php/1645/Decency_means_Wal_MArt_and_COst_co_Cascio.pdf
    Freedland, Robert. “Costco: Recession Resistant”. Seeking Alpha. 5 October 2011. http://seekingalpha.com/article/297646-costco-recession-resistant
    Goossen, Rick. “Costco, Social Responsibility & Competitive Advantage: Exclusive Interview with Richard Galanti, CFO”. MakeGood.com. 4 June 2010. http://www.makegood.com/blog/2010/06/04/costco-social-responsibility-part-i-exclusive-interview-with-richard-galanti-cfo/
    Mueller, Jim. “Fool Awards 2007: Most Socially Responsible Company”. The Motley Fool. 11 December 2007. http://www.fool.com/investing/general/2007/12/11/fool-awards-2007-most-socially-responsible-company.aspx
    Schonberger, Jennifer. “Costco CEO Jim Sinegal Talks Recession, Super-Inflation, and Giant Jars of Mayo”. The Motley Fool. 25 September 2009. http://www.fool.com/investing/general/2009/09/25/costco-ceo-jim-sinegal-talks-recession-super-infla.aspx
    Stringer, Kortney. “Costco’s Deep Discounts Don’t Extend to its Share Price”. The Wall Street Journal. New York, NY. 22 February 2005. http://search.proquest.com/abicomplete/docview/398899390/135FB3156F029FB550F/10?accountid=9784
    Zimmerman, Ann. “Costco’s Dilemma: Be Kind to its Workers, or Wall Street?”. The Wall Street Journal. New York, NY. 26 March 2004. http://search.proquest.com/abicomplete/docview/398891964/135FB3156F029FB550F/9?accountid=9784
    Financial information and records: Mergent Online database. Accessed 8 April 2012. http://www.mergentonline.com/companydetail.php?compnumber=16720&pagetype=synopsis

    Posted by Caitlin H. | April 9, 2012, 9:16 am
  2. I don’t quite get the title. What are the costs of being Costco? Do ethics cost more?

    Posted by Jordi | April 26, 2012, 5:45 am

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