Costco is refreshingly boring
Costco is pretty boring. Or at least it used to be.
Providing good pay and benefits, minimizing payouts to shareholders, and concentrating on doing one thing well were once considered just good business sense. These days, they feel like a refreshing deviation from the crowd.
Readers probably have at least a glancing familiarity with Costco. The wholesale retailer was founded in 1983 by Jeffrey Brotman and James Sinegal, with the latter remaining CEO until 2011. As of 2019, it ran 785 giant warehouse-like stores globally, including 546 in America. It employed 254,000 people globally and 163,000 nationally. Costco sells its items at lower prices, but you also usually have to buy them in bulk, and there's no stockroom to the store — everything stacked out for customers is everything they have to sell.
Shopping at Costco requires a membership, which you do have to pay a fee for, but the chain is known for a sometimes-fanatical base of return customers. In fact, membership dues are largely how it makes money. The company more or less breaks even on its sales, which is how it keeps prices down. And Costco currently boasts about 99 million cardholders.
Meanwhile, Costco has also garnered a steady reputation as a good place to work.
As of early last year, no employee at the company makes less than $15 an hour. In 2018, the median annual pay at Costco was $38,810, which is actually pretty good considering the median wage for all Americans was $33,706 that year. And it's even better in light of Costco's direct rivals in the notoriously low-pay retail sector, like Walmart and Amazon — whose median 2018 pay was $19,177 and $28,446, respectively.
Beyond wages, Costco also stands out for its other job benefits: Anyone who's worked at the company for 15 months gets health coverage (including vision and dental), a 401-K, seven paid holidays, multiple paid breaks each day, and Costco recently began offering paid parental leave as well. "The best part is all the perks — guaranteed hours, benefits, time and a half on Sundays, free turkeys at Thanksgiving, four free memberships, a livable wage," one worker told Business Insider.
Costco also takes its workers' careers seriously. The company works hard to promote from within its ranks — including the CEO that replaced Sinegal, Craig Jelinek, who had already worked at Costco for almost three decades. The company's employee turnover rate is a mere 6 percent, suggesting its workers aren't just putting up with the job until they can get something better. In fact, an index of good jobs developed by an MIT professor put Costco at the very top of food retailers in 2015.
Now, the reason so many companies in the U.S. work hard to drive down labor costs — paying workers less and giving them fewer benefits — is so they can have more money to spit out to shareholders. Ultimately, every corporation has to decide how to divvy up its revenue: Spend it on workers? On new investments and expansions? Or just hand it over to ownership? In recent years, U.S. companies have enthusiastically gutted their own finances to shovel money to shareholders, in the form of both dividend payments and huge indulgences in stock buybacks. It's the mirror image of America's stagnating wages and declining job benefits.
As you probably guessed, Costco's shareholder payouts are notably restrained. The company is still an attractive investment — it's grown by 70 percent over the last 10 years and brought in a profit of $889 million in 2018. And Costco's share price is accordingly high. But, given its success, Costco also has a reputation among stocktraders for being somewhat stingy. "[Costco's] stock yields only 1.1 percent… well below the S&P 500's average of about 2 percent," as a Barron's analysis put it in 2017. "Costco's low yield is reflected in the stock's modest payout ratio, which measures how much of a company's net income gets paid out as dividends."
Another thing to note is Costco's debt load. It's above average for companies overall, but Costco is also a big and successful company, and by all accounts it has the resources and cash flow to justify that debt. This is also significant, since one way a lot of U.S. companies have juiced shareholder payouts is by taking on additional debt to finance them.
Now for the caveats.
The pressure in the U.S. economy for companies to essentially operate as ATMs for shareholders is overwhelming and ubiquitous. And while Costco has been resistant, it also seems to be getting dragged in that direction. Its regular dividend payments remain low, but it has also started issuing special one-time dividend payments to give its shareholders some extra bonuses. Over the last eight years, it's also started a stock buyback program, though thus far the buybacks have been modest — only around 1 percent of Costco's overall market capitalization.
The ratio of Costco's CEO compensation to its median worker compensation has also shot up: In 2013, it was 48-to-1, but by 2019 it was 169-to-1. Granted, these calculations can be slippery: CEO compensation involves stock holdings as well as actual salary, so that jump in the ratio is due at least in part to the company's successful stock market run over that time period.
The thing to keep in mind, however, is that it's precisely this compensation structure that has led so many companies to essentially cannibalize themselves. Since the shareholder revolution of the 1980s, CEOs have been incentivized with stock options to put the interests of shareholders above all other considerations. (This was not the case at mid-century.)
There's no one trick to avoiding this fate, particularly in an economy where it's the norm. It's just a question of how firmly the company's internal culture sticks to its values. If Costco is flirting with the share buybacks and a rising CEO pay ratio, that's possible evidence it's not holding its ground as firmly as before.
So far Costco deserves credit for demonstrating you can be a successful business while treating your workers' well-being as an asset rather than an inconvenience. Like Best Buy, Costco also seems to have avoided the worst temptations of shareholder capitalism by keeping its finances balanced and adapting to the demands of retail competition in the internet age — in short, by running a sensible and prudent business model.
Like I said, it's all pretty boring, yet refreshing.