Reference no: EM131228896

As it tries to build on its success, Costco faces competition from two different flanks. The first, of course, is from Walmart—the only U.S. retailer bigger than Costco. Although they compete for many of the same customers, Costco and Walmart are very different in a number of respects. Costco’s employees make $20.89 per hour; Walmart’s make $12.67.110 Eighty- eight percent of Costco’s employees have company-sponsored health insurance versus half of Walmart’s. Around 15 percent of Costco’s employees belong to the International Brotherhood of Teamsters, whereas Walmart actively avoids unionization. “I just think people need to make a living wage with health benefits,” explains CEO Craig Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.” In contrast, Walmart has drawn criticism for cutting staff from 343 employees per store to 301 over the past five years.111 Those cuts have resulted in longer lines, less help for customers, disorganized aisles, and unstocked shelves.

Costco’s second competitor—Amazon—has no shelves to stock. Indeed, Amazon’s business model relies, in part, on in-store shopping being so annoying that ordering online becomes the more relaxing alternative. Although the rise of Amazon has signaled a decline for a number of retailers, Costco has been able to hold its own, for three reasons.112 First, the bulk discounts

it receives from suppliers allow Costco to have lower prices than Amazon. Second, much of Costco’s business revolves around groceries—a market that Amazon has yet to crack. Third, Costco does have at least some online presence, with its own website being the 17th most popu- lar retail site in the United States. Still, online retail grew 16 percent last year according to the U.S. Census Bureau, versus a 5 percent growth rate for retail overall. Costco chair Jeff Brotman summarizes the sobering nature of such trends: “I used to get up every morning worried about Walmart. . . . Now I worry about them, and I worry whether we are up to the challenge of the shift in retail buying habits.”113

The differing threats offered by Walmart and Amazon present something of an organiza- tional commitment dilemma for Costco. On the one hand, its 5 percent turnover rate gives it a cost and stability advantage that helps it beat traditional competitors. On the other hand, that retention limits the fresh ideas that outsiders can bring to a company. Indeed, Costco’s execu- tive turnover rate is only 1 percent, and it refuses to hire business school graduates (instead opt- ing to send rank-and-file employees to school to earn degrees).114 Indeed, even recently retired CEO Jim Sinegal, who is 77, has maintained an advising role. That potential for stagnation does not seem to be lost on Costco, however. John Matthews, vice president of human resources, acknowledges that the company has become “awfully inbred.” And Rotman admits, succinctly: “We’re all old.”

1. How exactly does Costco’s low turnover rate help it in its battle against Walmart? Will any of those factors also help against Amazon?

2. What would a “perfect turnover rate” be for a company like Costco? Describe the conse- quences of a turnover rate that’s too low.

3. If you were in charge of human resources at Costco, would you retain the philosophy of sending rank-and-file employees to school rather than hiring business school graduates? Why or why not?