Reference no: EM132275140

Most major retailers follow a simple path—low prices made possible in part by low wages and minimal benefits for their employees. Walmart, for instance, is often criticized for its low wages (an average of $12.14 an hour) and the fact so many of its employees do not get health care benefits (about half, the company reports). Others, like Radio Shack, have run afoul of the law by requiring their store managers to work extra hours doing nonmanagerial tasks (e.g., emptying trash cans and sweeping floors) for no extra pay. But in recent years, another set of retailers has started to thrive, often using a different business model—paying employees more and treating them better, under the assumption that they will be more satisfied and provide better customer service. These retailers include Nordstrom, The Container Store, Whole Foods, and REI. But perhaps none sets the bar quite as high as Costco. For starters, Costco pays its employees an average hourly wage of $21.45, and all its full-time employees get health insurance heavily subsidized by the company. Costco got its start back in the 1950s, went through several permutations, and eventually took shape in its current incarnation in 1993 under the leadership of James Sinegal. Sinegal developed the idea that superior customer service could be a distinctive competitive advantage in the discount retailing industry. Accordingly, he set Costco on a course toward mass-market, low-price, warehouse retailing (like Walmart) but with superior customer service (like Nordstrom). And today, Costco is the largest wholesale club operator in the United States with more than 600 members-only warehouse stores in 42 states. Costco also owns and operates warehouse clubs in Australia, Canada, Japan, Mexico, Puerto Rico, South Korea, Taiwan, and the United Kingdom. In 2015, the firm had more than $100 billion in revenues and employed 186,000 people. Most merchandise in Costco stores is bulk-packaged and marketed to businesses and families. The firm doesn’t carry multiple brands of the same product, instead offering only the one it can sell for the lowest price. Average markup is only 15 percent. Most products are carried to the sales area on pallets in their original boxes. Customers must bring their own shopping bags or else use the boxes products are displayed in. Costco stores have skylights, and sensors reduce the in-store lighting on sunny days. But as already noted, one area where Costco most assuredly is on the right track is its employees. The company pays well and offers very good benefits. In addition to the health benefit, employees get up to five weeks of paid vacation time a year, and Costco matches their contributions to a 401(k) retirement plan. Sinegal retired in 2012, and Craig Jelinek, a long-time Costco executive, took the helm. Under Jelinek’s leadership, the retailing behemoth seems to have actually improved its trajectory. Its stock price has never been higher, for example, and sales are growing at a red-hot pace. Jelinek has vowed to not alter Costco’s HR strategy. He recently commented, for example, “Could Costco make more money if the average wage was two or three dollars lower? The answer is yes. But we’re not going to do it.”44 Case Questions

1. Compare your shopping experiences at retailers such as Costco, Nordstrom, or Whole Foods with experiences you may have had at Walmart, Sears, or Kroger.

2. Under what circumstances might Costco have to start paying its workers less?

3. Costco has a policy of not hiring business school graduates because it wants employees to start at the bottom and work their way up. What are the advantages and.