Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World(businessweek.com)
businessweek.com
Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World
http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world
8 comments
I was studying business in Australia when Aldi came in and had a tutor who was a little obsessed with them.
Most supermarkets (Coles, Woolworths/Safeway) employed a lot of cheap, casual or part time, high turnover staff. Award rates (Australia complicated alternative to minimum wages) are lower for younger employees (up to 21 yrs) so they employed a lot of high schoolers. The jobs were very narrow. Checkout chicks don't leave the counter. When no one is waiting, they need to pretend to be cleaning their workstations.
Aldi paid slightly above award. They preferred to hire adults. They preferred to hire for the long term. They had raises & advancement opportunities. They kept costs down by with efficiency instead of low wages. Intelligent efficiency with brains in use at all levels. Employees are far more independent. If there are long queues, they open another counter. If not, the stock shelve. If they have time, they take stock counts or do something else. The job satisfaction is way way higher.
The upshot of all this is that they can run stores with far fewer employees. A lot of other things go into this (store layouts, fewer product choices, display-in-bulk packaging), but better treated, more empowered employees is a big one. Hourly rates is just a part of the picture.
Most supermarkets (Coles, Woolworths/Safeway) employed a lot of cheap, casual or part time, high turnover staff. Award rates (Australia complicated alternative to minimum wages) are lower for younger employees (up to 21 yrs) so they employed a lot of high schoolers. The jobs were very narrow. Checkout chicks don't leave the counter. When no one is waiting, they need to pretend to be cleaning their workstations.
Aldi paid slightly above award. They preferred to hire adults. They preferred to hire for the long term. They had raises & advancement opportunities. They kept costs down by with efficiency instead of low wages. Intelligent efficiency with brains in use at all levels. Employees are far more independent. If there are long queues, they open another counter. If not, the stock shelve. If they have time, they take stock counts or do something else. The job satisfaction is way way higher.
The upshot of all this is that they can run stores with far fewer employees. A lot of other things go into this (store layouts, fewer product choices, display-in-bulk packaging), but better treated, more empowered employees is a big one. Hourly rates is just a part of the picture.
I grew up in Anchorage, Alaska, and its not uncommon for people who live in remote areas of the state to travel hundreds of miles to go to Costco. Mind you, they don't exactly have a local grocery store for the most part, but its interesting how widespread that usage pattern is.
That probably ties in nicely with Costco's emphasis on extreme bulk sales. If the nearest Costco is hundreds of miles away, at least you can buy a month+ worth of most supplies while you're there and load them all into your vehicle.
Also an Australian, Costco is also a single location here, 20km away. My house travels out there once every ~3 months for everything and spend ~$500
The only things we really buy from the supermarket are week to week things like meat etc.
The only things we really buy from the supermarket are week to week things like meat etc.
>40+km
Ha! Only 40km? I know many people who drive ~300km to get to a Costco. Hell, several people I know refuse to move to a city without easy access to Costco -- even if it means not taking a promotion. That's some serious store loyalty there. I love Costco, but not that much!
Ha! Only 40km? I know many people who drive ~300km to get to a Costco. Hell, several people I know refuse to move to a city without easy access to Costco -- even if it means not taking a promotion. That's some serious store loyalty there. I love Costco, but not that much!
Costco is also interesting due to subtle non-uniformity between stores and a steadily changing product line-up. I'm lucky to live in an area where I'm an easy drive to 3 Costcos within 10-15 minutes and 2 more within 25-30 minutes from my home and they all have subtly different products.
We'll find some item that we like there only for it to be completely gone 3 months later and never to return. While at another local Costco they have palettes full of it. 3 months after that the product will disappear from all Costcos and a different, but better one will show up everywhere. Things like Wine selection will also differ quite a bit from store to store.
That or there will be sudden changes to the packaging of staple items in the store for no real reason. Milk, for example, seems to get a packaging overhaul every year or so.
Either way, even with limited choice, over time the number of products you might buy at a Costco turns out to be quite a few.
Other retailers, on the other hand, are surprisingly more uniform in their product selection. The half dozen Targets in my area offer more or less the same products and fit it all within 1 or 2 master floor layouts.
We'll find some item that we like there only for it to be completely gone 3 months later and never to return. While at another local Costco they have palettes full of it. 3 months after that the product will disappear from all Costcos and a different, but better one will show up everywhere. Things like Wine selection will also differ quite a bit from store to store.
That or there will be sudden changes to the packaging of staple items in the store for no real reason. Milk, for example, seems to get a packaging overhaul every year or so.
Either way, even with limited choice, over time the number of products you might buy at a Costco turns out to be quite a few.
Other retailers, on the other hand, are surprisingly more uniform in their product selection. The half dozen Targets in my area offer more or less the same products and fit it all within 1 or 2 master floor layouts.
Those packaging overhauls are evil, even from a suppliers perspective. However, they're almost never for no reason, as they're very expensive for a supplier to do.
Club packaging requirements are very particular to how they sell, in large bulk packs directly off pallets or steel racks. Usually the packaging is completely custom to the club, from the product packaging itself to the pallet packing. And no club wants the same as another (if they even stock the same product). This leads to new packaging having all kinds of unforeseen problems that slip through testing; from shifting in transit when using certain trucks, pallet crushing due to stack design, stretch wrap ripping for some reason, sub-optimal presentation when the pallet is thrown on the floor for sale, etc.
The package refresh itself will take the supplier ~6-12 months (unless it's a critical deficiency in the packaging), so even if the problems present themselves immediately you're looking at a "yearly" overhaul. And then the cycle repeats itself, when new bugs are introduced (you just can't test for everything that's gonna hit at Club scale sales).
Standard retailers use the same basic packaging styles, even if slightly customized for that client, so most of the 'gotchas' with those have been rooted out and accounted for, so refreshes are much less frequent.
Edit: Unless you were talking about simple label changes. In which case you are correct in there being no real reason beyond the marketing department trying to keep itself employed. Supply chain departments hate it due to the headaches and costs associated with switching over (and writing off unused labels/packaging).
Club packaging requirements are very particular to how they sell, in large bulk packs directly off pallets or steel racks. Usually the packaging is completely custom to the club, from the product packaging itself to the pallet packing. And no club wants the same as another (if they even stock the same product). This leads to new packaging having all kinds of unforeseen problems that slip through testing; from shifting in transit when using certain trucks, pallet crushing due to stack design, stretch wrap ripping for some reason, sub-optimal presentation when the pallet is thrown on the floor for sale, etc.
The package refresh itself will take the supplier ~6-12 months (unless it's a critical deficiency in the packaging), so even if the problems present themselves immediately you're looking at a "yearly" overhaul. And then the cycle repeats itself, when new bugs are introduced (you just can't test for everything that's gonna hit at Club scale sales).
Standard retailers use the same basic packaging styles, even if slightly customized for that client, so most of the 'gotchas' with those have been rooted out and accounted for, so refreshes are much less frequent.
Edit: Unless you were talking about simple label changes. In which case you are correct in there being no real reason beyond the marketing department trying to keep itself employed. Supply chain departments hate it due to the headaches and costs associated with switching over (and writing off unused labels/packaging).
I have heard that Costco is brutal with their suppliers and has no compunction about dropping products if they can't get them at a price that makes sense, given the limited number of SKUs they're prepared to stock. Their customers are now more or less trained to expect this, but I think it's a definite weakness in their model. If Amazon can reliably provide me with my "favorite" detergent, I'm likely to forgive a few dollars a year in added cost.
Wine selection is probably a little easier to explain, given the bizarre maze of the three tier system. Thank god for the 21st Amendment, but the way states handle alcohol distribution makes me thankful for an expansive reading of the Commerce Clause.
Wine selection is probably a little easier to explain, given the bizarre maze of the three tier system. Thank god for the 21st Amendment, but the way states handle alcohol distribution makes me thankful for an expansive reading of the Commerce Clause.
I'm not sure that's a weakness so much as merely a difference.
Some people have a "favorite detergent". Other people, such as myself, just want something of decent quality, and could not really care less what name is on the container.
For you, Amazon's approach is better, because you're willing to pay more for the specific item you want. For me, that's completely unimportant, so why would I pay more?
The two companies are covering different niches in that respect. Nothing wrong with that. No single company needs to be all things to all people, although I suspect Amazon wants to (and Costco does not).
Some people have a "favorite detergent". Other people, such as myself, just want something of decent quality, and could not really care less what name is on the container.
For you, Amazon's approach is better, because you're willing to pay more for the specific item you want. For me, that's completely unimportant, so why would I pay more?
The two companies are covering different niches in that respect. Nothing wrong with that. No single company needs to be all things to all people, although I suspect Amazon wants to (and Costco does not).
Sure. If you can live the "Kirkland Life", you are Costco's perfect customer. But as the parent comment pointed out, their strategy puts them in a somewhat awkward position. As a rule, you want your customers to love your products. But then your business model requires that you take away products whether they're loved or not. Indeed, if they're loved so much that your supplier thinks they're entitled to a higher premium than an un-loved competitor, it's the more popular product that goes! Even the Kirkland products are doubtlessly farmed out to varying suppliers (with varying results).
You're probably right that there's a big market for consumers of "good enough, consistency be damned". But I think a lot of Costco's market is after convenience and "low enough" prices. If Amazon can hit "low enough" prices and a wider, more consistent selection, Costco could be in trouble. Zero trips to the store is better than one, especially when you don't need to supplement Costco with other retailers to cover their gaps.
You're probably right that there's a big market for consumers of "good enough, consistency be damned". But I think a lot of Costco's market is after convenience and "low enough" prices. If Amazon can hit "low enough" prices and a wider, more consistent selection, Costco could be in trouble. Zero trips to the store is better than one, especially when you don't need to supplement Costco with other retailers to cover their gaps.
Costco needs their customers to love their products in aggregate, but not any one product in particular. They're good about quality, so I don't really have to care about brands. If I want detergent or paper towels or whatever, I just pick whatever looks good. If they pull one in favor of another, I don't care. If you want to buy specific brands on any given trip, Costco isn't for you, but if you just want something decent and don't care who made it, it works out well. You don't have to love the specific brands, just the stuff they carry in general.
I'm sure Amazon could cause a lot of trouble for Costco if they can match their prices or come close, but I don't see that happening. I basically buy three categories of products at Costco: frozen food, fruit, and non-perishable bulk items like paper towels or toilet paper. I can't see Amazon ever coming close on the first two, simply because the inherent costs of delivering perishable items to the house are too high. They can pull off Prime because they're delivering items that have no problem being in transit for two days, but I can't see how they could deliver e.g. strawberries for a reasonable price ever. I'd love to be wrong, but I don't see it happening.
I'm sure Amazon could cause a lot of trouble for Costco if they can match their prices or come close, but I don't see that happening. I basically buy three categories of products at Costco: frozen food, fruit, and non-perishable bulk items like paper towels or toilet paper. I can't see Amazon ever coming close on the first two, simply because the inherent costs of delivering perishable items to the house are too high. They can pull off Prime because they're delivering items that have no problem being in transit for two days, but I can't see how they could deliver e.g. strawberries for a reasonable price ever. I'd love to be wrong, but I don't see it happening.
I think I agree with both you and the commenter to whom you're replying. My general purchasing process involves:
1. Go to Costco and purchase as many huge things in bulk as I can. People like to equate 'buying in bulk' with 'pricing', but honestly for me its just as much about the convenience: I don't care about saving $.50 on toilet paper so much as I care about having to buy toilet paper only once a year. I'm picky with some things (like hand soap), but like you said I know Kirkland products are going to be good enough.
2. For everything else, buy off Amazon/Target/TJ's.
One of the cues I'm surprised Costco hasn't taken is subscription-based shopping (as in, I set up a list of X items that I can schedule for a pickup every few months) that would make this process even better. Given the decidedly non-marketing-oriented layout of their stores, I don't think they'd miss the opportunity for up-selling.
1. Go to Costco and purchase as many huge things in bulk as I can. People like to equate 'buying in bulk' with 'pricing', but honestly for me its just as much about the convenience: I don't care about saving $.50 on toilet paper so much as I care about having to buy toilet paper only once a year. I'm picky with some things (like hand soap), but like you said I know Kirkland products are going to be good enough.
2. For everything else, buy off Amazon/Target/TJ's.
One of the cues I'm surprised Costco hasn't taken is subscription-based shopping (as in, I set up a list of X items that I can schedule for a pickup every few months) that would make this process even better. Given the decidedly non-marketing-oriented layout of their stores, I don't think they'd miss the opportunity for up-selling.
Given the decidedly non-marketing-oriented layout of their stores, I don't think they'd miss the opportunity for up-selling.
I think they're more marketing-oriented than you're suggesting. There's a reason I have to walk by the big-screen TVs every time I walk in to my Costco, and why they hire all those workers (who are contractors, no?) to give out food samples. Come to think of it, at my local store, everything you might want to "browse through", from clothes to books to seasonal stuff, is in the low-shelved center of the store, while the "dependables" are in the back.
I'm sure they make money from the members who buy the same dozen things every time they visit, but I bet they make a lot more from the folks who browse the sample stations and who buy TVs on impulse.
Anyway, that counters my argument about Amazon, since they'll never be able to hand out Bagel Bites!
I think they're more marketing-oriented than you're suggesting. There's a reason I have to walk by the big-screen TVs every time I walk in to my Costco, and why they hire all those workers (who are contractors, no?) to give out food samples. Come to think of it, at my local store, everything you might want to "browse through", from clothes to books to seasonal stuff, is in the low-shelved center of the store, while the "dependables" are in the back.
I'm sure they make money from the members who buy the same dozen things every time they visit, but I bet they make a lot more from the folks who browse the sample stations and who buy TVs on impulse.
Anyway, that counters my argument about Amazon, since they'll never be able to hand out Bagel Bites!
I wouldn't be surprised if Amazon eventually reached the point where they start including samples in your shipments. "Based on your purchase history, your e-mail traffic, and data from the webcam we hid in your shower, we think you might like Product X. We've included a few, give them a try!"
I order TP and paper towels via Amazon prime and the other day I was shipped gratis a bar of soap. It wasn't an accident, it was listed as a gift on the invoice.
Fun. Clearly I'm behind the times. Either that, or it happened to me as well, and I forgot, but that subconsciously prompted the idea.
I discovered this when going to a Target in Seattle after two decades of going to Targets in Virginia, and was pleasantly surprised when I could more or less find everything easily.
It's, in a way, a similar value proposition as Starbucks/McDonald's: you trade quality for consistency. The fact that Aisle 17 is for dishwashing and cleaning supplies becomes a core principle of your company.
It's, in a way, a similar value proposition as Starbucks/McDonald's: you trade quality for consistency. The fact that Aisle 17 is for dishwashing and cleaning supplies becomes a core principle of your company.
Another company that treats its employees very well and enjoys similar success (though as it's privately held, it's not as easy to analyze) is Trader Joe's.
Astonishing as it belongs to the same foundation as Germanys Aldi, and Aldi is not known for it's people management.
http://en.wikipedia.org/wiki/Trader_Joe%27s
http://en.wikipedia.org/wiki/Trader_Joe%27s
I never knew Trader Joe's and Aldi's were related companies. I had jokingly referred to Trader Joe's as the "Aldi's" or organic food stores, but never thought the comparison was so close. I was mostly basing it off of the cheap prices and smallish store sizes.
I've generally been impressed by Aldi's ability to maintain a quality shopping experience while maintaining such low prices. Typically in the US, bargain-type stores tend to skimp on things like cleaning, repairs, merchandising/stocking, etc. This isn't really the case with Aldi.
I've generally been impressed by Aldi's ability to maintain a quality shopping experience while maintaining such low prices. Typically in the US, bargain-type stores tend to skimp on things like cleaning, repairs, merchandising/stocking, etc. This isn't really the case with Aldi.
As I remember hearing it... Companies are willing to do white label products for trader joe's because of the purchasing leverage of aldi
Aldi pays really really well. Graduates get paid 50k GBP(80k USD) straight away, everywhere in the UK
I always got the sense that Aldi paid very well at every stage, just that it was a tough job with long hours.
I remember investors getting mad at the CEO for paying his employees too much, that had me confused as a 12 year old amatuer stock picker. Great company, my friends work there and they love it
Costco is one of 2 companies I truly admire. Always looking for more. Anyone with other suggestions?
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It depends on what you admire them for.
For good treatment of people? Look up Semco.
For strong brand management? Look up Procter & Gamble.
For strong marketing? Look up Nike.
For great engineering? Look up Google.
Ones that are good at all of the above? Very rare!
For good treatment of people? Look up Semco.
For strong brand management? Look up Procter & Gamble.
For strong marketing? Look up Nike.
For great engineering? Look up Google.
Ones that are good at all of the above? Very rare!
In-n-Out Burger has a similar reputation. Privately held so it's hard to get info.
low turnover = higher profit
longer term employees = more knowledgeable = better customer service
some decade walmart and target might get a clue about this
longer term employees = more knowledgeable = better customer service
some decade walmart and target might get a clue about this
The implication that Walmart and Target executives have a worse idea about what's best for their business model than someone who reads an article about CostCo is hilariously disingenuous.
The implication is that Wal-Mart and Target executives have a worse idea about what's best for their business model than Costco executives, which is not necessarily correct, but neither is it obviously wrong.
Walmart employees are HEAVILY subsidized by welfare programs; to my knowledge, Costco employees are paid well and do not need these programs.
Are you talking about Costco? I like Costco, but they have so few people out on the warehouse floor, and those that are there dress like civilians so it's hard to find them. My takeaway is that there is zero customer service, aside from the cashier. Everywhere else I am on my own.
If only I could get back a fraction of the time I've spent searching for products that they moved from one aisle to another.
If only I could get back a fraction of the time I've spent searching for products that they moved from one aisle to another.
I'm not sure that formula works as well for retailers like Wal-Mart. The nature of wholesale operations is less labor intensive, and the value of wholesale labor can increase greatly with more experience and knowledge like you're talking about. Compare that to Wal-Mart - 10 years of experience isn't likely to make you a much better employee than 1 year.
I'm happy to see that they're treating their employees well. I really am. And I know this seems petty but; why the hell do they insist on starting Christmas in August? I walked into my local Costco last summer and one of the first things I see are Christmas tree's for sale. In August. I've grown to HATE the Christmas holidays because of retail behavior like this.
Awesome company, I just hope it's sustainable.
Good pay + Low prices seems like a difficult combination
Good pay + Low prices seems like a difficult combination
They pay their employees well and actually limit profit margins so that they're sustainable.
I watched a documentary[1] a few months ago wherein it was outlined that the company's former CEO witnessed the rise and fall of several other big-warehouse wholesalers. He noticed that what kept happening was that companies would start with lean margins, capture lots of customers, raise the margins, and collapse as soon as another wholesaler with leaner margins appeared. To avoid that fate, he apparently put a hard cap on Costco's profit margins.
That said, now that Costco's so big, they could theoretically raise their prices and still muscle out competitors. Let's hope that doesn't happen.
[1] https://www.youtube.com/watch?v=1f6gRxwHGII
I watched a documentary[1] a few months ago wherein it was outlined that the company's former CEO witnessed the rise and fall of several other big-warehouse wholesalers. He noticed that what kept happening was that companies would start with lean margins, capture lots of customers, raise the margins, and collapse as soon as another wholesaler with leaner margins appeared. To avoid that fate, he apparently put a hard cap on Costco's profit margins.
That said, now that Costco's so big, they could theoretically raise their prices and still muscle out competitors. Let's hope that doesn't happen.
[1] https://www.youtube.com/watch?v=1f6gRxwHGII
You say that like it hasn't been around for 30 years...
They've been around for almost 40 years and are highly profitable. You don't have to "hope" it's sustainable, as it clearly is.
I was also thinking about them in terms of tech, relative to the marketplace.
If Amazon decides to open "Costozon" will Costco be able to compete?
If Amazon decides to open "Costozon" will Costco be able to compete?
If you mean a giant retail store, I think Costco will do fine. They have a lot more experience in that area, and they've done fine so far against existing cost-cutting retailers like Wal-Mart.
I'm not sure how the focus on pay & conditions translates across the pacific however; our national minimum wage for casual workers is already AU$20.34 (US$18.54) and we have universal healthcare. So I'm guessing the relative benefits of working for Costco are lower as compared to in the USA.