Costco's Culture: More than $1.50 Hot Dogs

Companies often cite culture as their unique differentiator.

But they often fail to provide specific examples. It’s easy to talk about it. But it’s harder to be about it.

One company that makes culture tangible? Costco.

Costco’s top of mind as I was listening to their conference call last week recapping quarterly results. It was a great listen. I listen to hundreds of conference calls a year and Costco is one of the few where it doesn’t feel like a robot is conducting the call.

(Related: I stopped listening to Google conference calls for this reason. They were ungodly boring. Now I “Ctrl+F” the transcript for topics I care about.)

But the Costco call reminded me of a famous story that ran in Bloomberg a few years ago. They were in negotiations to renew an exclusive credit card deal with American Express.

Spoilers: the partnership didn’t work out and went to Citi.

The Bloomberg article detailed the cultural differences between two companies.

From the article:

“When (AmEx CEO) Ken Chenault made the reverse trip to Issaquah (Costco’s headquarters), the Costco guys were tickled by how meticulously Amex choreographed his movements. “Ken Chenault would have an advance team come to our office before he visited,” says Paul Latham, Costco’s vice president for membership and marketing. “They planned everything—where he would enter the building, the route to the boardroom, where he’d sit at the table.” After breakfast, Chenault would often give an elaborate presentation about the performance of Amex’s Costco affinity card, using PowerPoint decks that looked like they took weeks, maybe months, to prepare. Costco just jotted down some notes for their CEO, Craig Jelinek, to talk about.

The Amex people, most of whom had MBAs, sometimes found it amusing to deal with Costco veterans who spoke about starting out stocking warehouse shelves. Less endearing was the habit Costco executives had of referring to Amex as a “vendor.” That made the Amex people seethe. After all, they represented one of America’s oldest corporations.”

In summary, AmEx conducts a fire drill every time their CEO gives a presentation. Costco gives their CEO a Post-it note when he walks in and he goes to work.

There’s probably an argument out there for why AmEx does this and why it’s good … but I’ll take the Costco approach.

That type of approach permeates through an organization. The focus becomes: focus on the shit that matters.

There’s been plenty of stories and podcast that cover what makes Costco an amazing retailer. The membership model, the low prices, the $1.50 hot dog, and so on.

But their culture is real. The culture formula is simple:

Happy employees = Happy Customers = Happy Shareholders

How do they put that into motion?

It starts with employees. Costco CEO Craig Jelinek said this on the call:

“We've always prided ourselves in providing the best hourly wage package out there, wages, benefits, contributions to 401(k). I'm using U.S. numbers here, but our average U.S. (90% of our employees like many big retailers are hourly). And our average hourly wage is approaching $26. That's on top of a very rich healthcare plan, where the employee only pays around 12% of the costs.”

He continued:

“And on top, irrespective of what employee contributes to his or her 401(k), we contribute anywhere from 3% to 9% based on years of service. So you've got a 20-year cashier making on a full-time basis in the mid-$60,000s with another $4,000 or $5,000 being contributed to his or her 401(k) plan with a very rich healthcare plan. So we stand apart in our view compared to anybody.”

That’s a good recipe to keep workers happy.

And it’s one reason more than 120 million people are willing to pay $60 annually (soon to increase!) to shop at Costco.

It keeps shareholders happy as well. Costco stock has compounded at 17.5% annually over the last 20 years vs. 7.5% for the S&P.

One specific shareholder—Charlie Munger—has served on the company’s board since 1997 and has heaped praise on the company many times, even stating earlier this year:

“I love everything about Costco. I’m a total addict, and I’m never going to sell a share.”

Pretty high praise.

And to be clear: I’m not a culture warrior by any means. It’s not something I debate, discuss, or think about all that often. It’s simply something that jumped out at me listening to the call.

Being able to effectively manage and sell over 4,000 items—which Costco does—is a bigger priority than establishing the perfect culture.

Culture’s not going to manage that supply chain!

But a strong culture feeds the beast that is Costco business model, and retail generally.

And it’s certainly one of the qualitative aspects that has compounded over time and been a real factor in driving performance for Costco.

Many companies talk about culture, but not everyone practices.