10 Reasons Why Peter Drucker Would Have Thought Costco Is Well-Managed


In the latter half of the twentieth century, Peter Drucker emerged as one of the most influential business thinkers in America. He introduced the concept of management by objectives, consulted for Fortune 100 companies like General Motors, General Electric, and IBM, and coined the term 'knowledge worker' well before the rise of personal computing.

Although he passed away in 2005, Drucker's teachings continue through the Drucker Institute at Claremont Graduate University. Recently, the Motley Fool collaborated with the Institute to identify companies that the late Drucker would have praised due to their top-notch management strategies. Without a doubt, the wholesale retailer Costco would have been high on his list.

Below, we selected ten philosophies from Drucker's 39 books and countless articles that illustrate Costco's brilliant approach to retail management:

1. "There is only one valid definition of business purpose: to create a customer. . . . What the customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him."

With its subscription-oriented business model, Costco strives to provide an unbeatable service, whereas most retailers focus on selling more products. For Costco, an increase in customer satisfaction leads to higher retention rates that ultimately boost the bottom-line. Case in point: Costco's membership fees made up only 2% of total revenue in 2012, but accounted for 77% of operating income. As a result, Costco's first priority is delighting its 'members.'

2. "In turbulent times, an enterprise has to be managed both to withstand sudden blows and to avail itself of sudden unexpected opportunities. This means that in turbulent times the fundamentals have to be managed, and managed well."

Despite a shaky retail environment, Costco has achieved impressive results and consistently outperformed peers like Wal-Mart's Sam's Club. Over the past 10 quarters, Costco's average same-store sales growth beat Sam's and the rest of its club store competitors by 2% and 0.5%, respectively.

3. "Store selling space is the controlling resource of a retail merchant."

Costco has succeeded in spite of constant threats from online retail, a testament to its purchasing strategy, club model, and pricing power. In many cases, Costco is the single largest buyer of products it chooses to carry. By constantly offering a fresh slate of hot products at the lowest prices in its stores, Costco has won deep customer loyalty. It's no surprise then that Costco's membership renewal rate in North America was 90% in 2012.

4. "There is no virtue in a company's getting bigger. The right goal is to become better. Growth, to be sound, should be the result of doing the right things. By itself, growth is vanity and little else."

Costco is opening new stores—and has ample growth opportunities online and internationally—but it is very methodical about how it expands. As former CEO Jim Sinegal states, "We've always been very mindful of not outdistancing the management team...All of the people that are running the Costcos today are people who have been with us 10 and 12 and 15 years prior to becoming a warehouse manager."

5. "Defending yesterday—that is, not innovating—is far more risky than making tomorrow."

Costco has a strong history of innovation, first with its membership-fee structure, its move into gasoline sales and, more recently, its offering of home mortgages and even financial planning. This isn't your grandfather's membership discount store.

6. "Organized abandonment requires putting every product, every service, every process, every market or distribution channel and customer, and every end use on trial for its life on a regular basis."

Costco knows when to stop what isn't working. After experimenting with self-service checkouts, for example, CEO Craig Jelinek decided to abandon the practice, and described his decision as follows: "They are great for low-volume warehouses, but we don't want to be in the low-volume warehouse business." Meanwhile, its competitor Wal-Mart is adding 10 ,000 self-service checkout systems to its stores.

7. "All organizations now say routinely, 'People are our greatest asset.' Yet few practice what they preach, let alone truly believe it."

When it comes to taking care of its employees, Costco walks the walk. Costco's average hourly worker makes $20.89 per hour, not including overtime. When asked why he pays more than competitors and offers health care, CEO Craig Jelinek explains, "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 result is extremely low employee turnover, which a Costco HR representative estimates at only 10% for hourly workers.

8. "I have often advised managers that a 20-to-1 salary ratio is the limit beyond which they cannot go if they don't want resentment and falling morale to hit their companies."

Moderate executive pay is an important ingredient in fostering esprit de corps throughout an organization. The executive-to-worker pay ratio for Costco CEO Craig Jelinek, which stands at 28-to-1, is relatively low compared with his big-company peers.

9. "Survival depends on the ability of [an] institution to develop independent leaders below the top who are capable of taking top command themselves."

At Costco, Jelinek has enjoyed a smooth transition since he took the helm last year from the legendary Jim Sinegal, and the retailer continues to make succession planning a priority. To find the right people, Costco looks within. Instead of scouring top business schools for potential executives, Costco will seek out aspiring team members from its own stores. The company points out that 70 percent of its warehouse managers started at the company by pushing carts and working the checkouts.

Jelinek, who joined Costco's ranks thirty years ago, has seen the company's stock rise 39% since he took over as CEO in January 2012.

10. "You have to produce results in the short term. But you also have to produce results in the long term. And the long term is not simply the adding up of short terms."

Costco has a decidedly long-term orientation. In a recent Foolish interview Jelinek stated Costco's philosophy:

"[T]he bottom line is, if you look at our mission statement, you take care of your customer, your member. You take care of your employees. You take care of your suppliers...Then if you do all those things, you're going to reward the shareholders...If you look at the last 30 years, our stock has grown about 15%-16% a year in value, and we think we've got a pretty fair return for our shareholders."

Not only is Costco's philosophy well defined, but the company ensures employees advance that philosophy on a daily basis. In return, Costco takes care of its employees and members, creating a virtuous cycle. The end-result is a prosperous retail business model Peter Drucker would have greatly admired.

The article 10 Reasons Why Peter Drucker Would Have Thought Costco Is Well-Managed originally appeared on Fool.com.

The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.