Should the Quality of Customer Service Factor Into Your Investing Strategy?

Having worked in the service industry for more than a decade, I've come to appreciate those who work on the other side of the counter. I personally know the rigors of dealing with a cornucopia of attitudes that can range from deplorable to overwhelmingly pleasant.

But just as I dealt with consumers year after year, those same consumers compiled a predisposition to either liking or disliking the company I worked for in most cases just based on the experience they had received from me. Corporations realize that their employees are their company ambassadors and keeping them happy will often translate into a one-time customer becoming a repeat customer.

However, not everything is as cut-and-dried as making your employees happy. Consumers have a varying set of factors they look for in their shopping experience that they deem as crucial in order for them to be satisfied.

What matters to consumers
According to a survey released last year by Money/Zogby International, 47% of respondents felt that overall staff knowledge was the single most important factor that influenced their decision to buy. In a distant second with 14% of the votes, was the friendliness of the staff -- proving that friendliness will only take you so far. Perhaps the biggest surprise of all was that less than 3% of respondents chimed in with the product, not service at all, being the deciding factor to their decision to buy.

This survey shows a key point about consumers that is often overlooked: products really don't sell themselves. There will be exceptions to the rule, like when Applespeaks about a new product, but, it's readily apparent that service still matters.

Also, consumers seem not to like to shop at companies that have highly paid executives. The survey went on to list the top 10 worst and best customer service companies, and the difference in pay between the two groups was appalling. CEOs in the worst bracket earned an average of $14.9 million in compensation whereas CEOs in the good customer service bracket earned just a tad over $3 million. With your typical shopper being a middle-class worker, and with the U.S. unemployment rate still historically high, presenting an image of affluence is clearly not helping win over consumers.

Alienating your customer
In a separate survey conducted by Consumer Reports magazine in July 2011, the level of frustration from consumers regarding corporations became increasingly apparent. Some interesting facts that I took away from the article:

  • 1.1 million complaints filed with the Better Business Bureau in 2011, a 10% increase since 2009.

  • 64% of respondents left a store within the past 12 months due to poor service.

  • 71% of respondents felt annoyed when they couldn't reach a human by phone.

These facts are a stark reminder that corporations are walking a fine line between banking a profit and alienating a customer base with poor service.

The worst customer service offenders
By now I'm sure you're just itching for me to name some of the worst offenders. What I tried to do, since there is no true "master report" on customer satisfaction, was combine the user rankings found on website along with the Money/Zogby and Customer Report magazine rankings to find the absolute worst of the worst.

Here are five names that appear on at least two of the three worst offender lists:

  • Bank of America (NYS: BAC)

  • Citigroup (NYS: C)

  • Time Warner (NYS: TWC)

  • Comcast (NYS: CMCSA)

  • Wal-Mart

Citigroup and Bank of America are loathed in part because there's rarely a personal connection developed between a bank and its customers, with many viewing their relationship as a one-way street. Bank of America recently suffered a small exodus of customers when it proposed a $5 monthly fee to use its debit card. The company quickly recanted its decision to charge the fee, but the damage has been done. Likewise, Citigroup lost consumers faith when it doled out $25 billion in bonuses in early 2010 despite the company losing a large sum of money.

Meanwhile, pay TV companies tend to score poorly with consumers because there simply isn't much competition between them and therefore little enticement to get better. According to a report from the American Customers Satisfaction Index, five of the top 19 most-hated companies in America are pay TV companies. For instance, two years ago, Comcast controlled 25% of the entire U.S. cable market in 2009 and was given permission by the U.S. Court of Appeals to grow its market share beyond 30%. Time Warner Cable has faced significant criticism in North Carolina over its competition with community-owned broadband networks, which some consumer groups have said gives the cable operator an unfair advantage.

So I propose the question: Is customer service a worthwhile factor to consider when making an investment? I think clearly the answer is yes. Just have a look at how these five companies have performed over the past 10 years relative to the S&P 500's performance of -5.1%:


Wal-Mart Stores Stock Chart by YCharts

Overall, this was a pretty poor performance from this group, aside from Wal-Mart. Both banking stocks took their shareholders for some wild and unwanted rides over the past decade, while Time Warner shareholders lost nearly 40% of their value.

This is just a very small sampling size of five names that coordinated with some of the worst customer service offenders out there, but I'd bet there would be a relatively similar correlation if we were to expand this study beyond just these five names.

The takeaway
The primary takeaway from this is that poor customer service will be a drag on a stock's performance -- but that doesn't mean a company can't turn over a new leaf. Domino's Pizza (NYS: DPZ) is one such company that reinvented its image and is once again running on all cylinders. Its CEO Patrick Doyle revamped its product line and made the company more transparent, which has done wonders. Still, it bears noting when a company falls out of favor with the public (see Netflix in 2011 for proof of this) -- it could be a tell-tale warning sign to stay away.

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At the time thisarticle was published Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. He strongly believes in karma and treating customer service representatives well. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Bank of America, Citigroup, Wal-Mart, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Wal-Mart, and Netflix, as well as creating a bull call spread position in Apple and a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on the consumers' side.

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