James Sinegal is the CEO of Costco Wholesale Corp., which compensates its workers far better than rival Wal-Mart Stores (WMT) does. A recent study by BusinessWeek found that by paying its employees more, Costco (COST) gets lower turnover and higher productivity. That, coupled with a business strategy that includes a mix of higher-margin products, enables Costco to keep its labor costs lower than Wal-Mart's as a percentage of sales (see BW, 4/12/04, "The Costco Way"). Sinegal recently spoke about Costco's strategy with BusinessWeek Associate Editor Michelle Conlin. Edited excerpts from their conversation follow:
Q: Is your treatment of employees limited to those in the U.S.?
A: In every country where we conduct business, we pay good wages. Not just the U.S. We have Costcos in the UK, Canada, Mexico, Japan, South Korea, Taiwan, and Puerto Rico. We always strive to be the best in the wage package.
A: We think it's good business. In the final analysis, you get what you pay for. Better employees mean higher productivity. We've proven that with our business model. We want to turn our inventory faster than our people. We are a company that promotes 100% within the company. So it's even more important to hire good people and give them good jobs and good wages. They are the people who are going to run your business.
Q: What about your competition that pays workers rock-bottom wages?
A: We obviously think that's wrong. It doesn't pay the right dividends. It doesn't keep employees happy. It keeps them looking for other jobs. Plus, managers spend all their time hiring replacements rather than running your business. We would rather have our employees running our business. When employees are happy, they are your very best ambassadors.
Q: Yet you've paid a price on Wall Street for that.
A: If we take care of the business and keep our eye on the goal line, the stock price will take care of itself. You just can't get too focused on worrying about what's going to happen in the next quarter. You have to worry about where the business is headed long-term.
Q: Do you support the effort to increase the minimum wage?
A: It's a political issue. But I think that we've always been in favor of improved wages for workers. When you have a strong middle class, they want to buy more stuff at Costco. It doesn't do Costco any good if nobody can afford to buy anything.
Q: But increasingly, that's what's happening. Retail workers are unable to afford the stuff in their own stores.
A: Absolutely. And that concerns me. One of the strengths of our nation has always been a strong middle class who could afford their own homes and send their children to school.
Q: And if we have less of that?
A: You wind up with a greater and greater shift of wealth into the hands of the few. And you also destroy the initiative of the working people. Especially if they don't feel they have a fighting chance to be a part of the American Dream.
Then you don't have a very motivated working class. And then it starts to affect the dynamics of the economy. If workers are disenchanted and disenfranchised, obviously productivity losses will go along with that eventually.