The Kind of Happiness Money Can Buy—Costco’s Stakeholder Business Model

What puts the nation’s second largest retailer over the top in the competition for the “Happiest Company in the World?” According to the recent cover story in Bloomberg BusinessWeek, Costco clinched the title with the domino effect of value: Costco values their retail workforce, leading to lower costs, which leads to more values for happy shoppers and an increasingly valuable share price.

This stakeholder approach to management—which identifies a practical duty toward all parties in the business: owners, employees, customers, and communities—sets Costco apart from its big retail competitors. It also brings home the profits. According to Bloomberg, the company has seen its stock price double in the past 4 years, despite an economy struggling with weak consumer demand.

It turns out that the secret to being the happiest company in the world is to care about happiness, starting with the people who provide the smiling face of the firm. Costco recognizes that in the long run the interests of employees mirror those of the company. As the CEO, Craig Jelinek, told Bloomberg:

“I just think people need to make a living wage with health benefits. It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

The simple story goes like this: Costco pays its workers wages well-above the industry standard, offering a reported average of $20.89 per hour plus affordable health coverage, vacation time, and a matched 401(k). This investment pays off in terms of a shockingly low rate of employee turnover, with only 5 percent of those employed for more than one year leaving their jobs. Costco’s loyal and experienced workforce returns high productivity to the firm and good service to shoppers—and results in a solid bottom line.    

Compare this stakeholder business model to Costco’s competitor Walmart, where “Always Low Prices” come at the expense of employees. Walmart reports an average wage of $12.78 per hour – though independent analysis from IBIS World has pegged it much lower, at $8.81. And Walmart shows little interest in the happiness of its workforce, repeatedly referring to calls for respect and fair treatment from employees around the country as a “publicity stunt.” In return, sales per employee at Walmart warehouse store Sam’s Club are half those at Costco, according to a study published by the Harvard Business Review. And their customers have noticed; in March Bloomberg reported that shoppers abandoned the number 1 retailer due to understaffing and disorganization on the shop floor.  

Moreover, while the November 2012 Demos report Retail’s Hidden Potential shows how employment practices like those at Costco can feed the US economy, recent evidence shows that Walmart’s wage policies are cannibalizing it instead. Low wages and part-time schedules keep Walmart workers below the poverty line, resulting in as much as $1 million in taxpayer support to subsidize wages at each Walmart location. With 4,663 locations in the US, that makes Walmart the biggest welfare queen in history.  

It also means that Walmart is not winning any prizes for happiness.  As retail consultant and author Doug Stephens put it to Bloomberg: 

“A lot of people working at Walmart go home and live below the poverty line. You expect that person to come in and develop a rapport with customers who may be spending more than that person is making in a week? You expect them to be civil and happy about that?”

Americans in general should not be happy about propping up the low-road business model with tax subsidies that allow firms like Walmart to perpetuate income disparity and hold back economic growth.  But Costco serves as an example of how retail can find the higher ground, providing stimulus for employees, customers, shareholders, and the economy overall.