Is being generous good for business? Costco CEO profits as he offers top pay benefits

Discussion in 'Economy' started by -Cp, Jul 20, 2005.

  1. -Cp

    -Cp Senior Member

    Sep 23, 2004
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    Is being generous good for business?
    Costco CEO profits as he offers top pay, benefits
    New York Times

    ISSAQUAH, WASH. - Jim Sinegal, the chief executive of Costco Wholesale, the nation's fifth-largest retailer, crows about Costco's private-label pinpoint cotton dress shirts.

    "Look, these are just $12.99," he said while lifting a crisp blue button-down inside Costco's cavernous warehouse store here in the company's hometown. "At Nordstrom or Macy's, this is a $45, $50 shirt."

    Combining high quality with stunningly low prices, the shirts appeal to upscale customers — and epitomize why some retail analysts say Sinegal just might be America's shrewdest merchant since Sam Walton, the founder of Wal-Mart.

    But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Sinegal is overly generous not only to Costco's customers but to its workers as well.

    Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Wal-Mart's Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

    Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

    Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like the fact that low prices do not come at the workers' expense.

    "This is not altruistic," he said. "This is good business."

    He also dismisses calls to increase Costco's product markups. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall.

    "When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," he said. "We don't want to be one of the casualties."

    At Costco, one of Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

    "They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

    But Sinegal warned that if Costco increased markups to 16 percent or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

    Sinegal, whose father was a coal miner and steelworker, gave a simple explanation.

    "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now."

    If shareholders mind Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent.

    Emme Kozloff, an analyst at Sanford C. Bernstein & Co., faulted Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

    "He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."

    Sinegal says he listens to analysts' advice because it enforces a healthy discipline, but he has largely shunned pressure to be less generous to workers.

    "When Jim talks to us about setting wages and benefits, he doesn't want us to be better than everyone else, he wants us to be demonstrably better," said John Matthews, Costco's senior vice president for human resources.

    Costco was founded with a single store in Seattle in 1983; it now has 457 stores, including two in the Houston area. Despite Costco's impressive record, Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among American companies.

    "I've been very well rewarded," said Sinegal, 69, who is worth more than $150 million thanks to his Costco stock holdings. "I just think that if you're going to try to run an organization that's very cost-conscious, then you can't have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."
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  2. freeandfun1

    freeandfun1 VIP Member

    Feb 14, 2004
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    One big advantage Costco has... they are HUGE DNC contributors and therefore they don't face the legal battles Wal-Mart is always having to fight.
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