Costco's Extraordinary Advantage

Costco (NAS: COST) has a massive advantage over most of its retailing rivals: extreme loyalty from its customers (who renew their memberships at high rates) and employees (who rarely turn over).

In the video below, Costco founder, chairman, and former CEO Jim Sinegal explains that advantage to The Motley Fool's own founder and CEO, Tom Gardner, who interviewed Sinegal recently in a Florida Costco store. (A transcript is provided below; running time: 2:44.)

Tom Gardner: OK, we go to Chris, who asks, "What is the most important key ingredient to keeping your employees happy and content, to make them stay as long as they do as Costco employees?" There's a wonderful book entitled The Loyalty Effect by a Harvard professor named Fred Reichheld, which he went back and calculated difficult and in certain cases with certain stakeholders, but calculated, and did so in a mathematically convincing way to me as a reader, that the companies that have created the most value in the world are the ones that have the longest tenure of employees, of customers, of shareholders, and of the communities' involvement and their involvement in the communities that they work in. So employee turnover would be almost a very valuable statistic for an investor to see, the employee turnover at Costco relative to the larger retailer categories or superstore category that you're in. What is the retention rate of Costco employees versus the competition, if you know those numbers, and why do you think it's higher?

Jim Sinegal: Well I can tell you that our turnover on a worldwide basis is; I may be quoting this accurately. I know for sure in the U.S. and in Canada, it's less than 10%. That includes all of our seasonal help and all the part-time people that we have working for us as well. And once they're with us for a year, that goes below 5%, so...

Gardner: How would the 10% number compare in the category?

Sinegal: Well, it would depend on the type of industry that you're looking at. If you looked at some of the fast-food businesses, they turn their people about 250 times a year. I had heard a number at Wal-Mart that was around 60 or 65%, but I don't know that I'm completely accurate, and I don't know that that's been published. But I can tell you this, most of the people who study that type of thing look at our numbers and...

Gardner: Their jaws drop.

Sinegal: ...and they say that's an extraordinary number. But we have been taking the attitude from the very beginning that we wanted to turn our inventory faster than our people. We want to keep the people with us. Why do people stay? It starts, I think, with a good job with a good pay, but it goes beyond that. It goes to careers. Do they have an opportunity to progress and grow? Is it a company that they're proud of? Everybody wants to be proud of the company that they work for. That's a significant portion to satisfaction and (unclear) and to know that they have confidence in their jobs and that they have security.

There's not going to be an attitude where somebody can come in one day and be angry at them and fire them. We protect our employees. As a matter of fact, if an employee has been with us over two years, in order for that employee to be terminated, it has to go to one of the highest managers in our company for approval. Not that we won't approve it if there's reasons, but we want to know that somebody has really looked carefully at that, and provide that type of security.

Gardner: Because that person has put two years into the organization and deserves more serious consideration.

Sinegal: Exactly.

For more of Tom's conversation with Jim Sinegal:

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