Amazon, Costco, and CarMax: Why Happy Customers Mean Wealthy Shareholders
We live in a very dynamic and competitive world, and the retail industry is especially tough lately. Customers have plenty of options to choose from, so companies need to be on the top their game if they are going to grow and thrive in such a challenging environment. Amazon.com, Costco, and CarMax know how to make customers happy and create value for shareholders at the same time.
Amazon is all about the customer
Amazon is well known as a relentless innovator and a remarkably aggressive competitor. However, the company is not focused on innovation or competition per se: Amazon is all about the customer, and it has become one of the most innovative and efficient competitors in the world as a natural consequence of its deep customer focus.
In founder and CEO Jeff Bezos' words: "When [competitors are] in the shower in the morning, they're thinking about how they're going to get ahead of one of their top competitors. Here in the shower, we're thinking about how we are going to invent something on behalf of a customer."
Amazon ranks consistently near the top when it comes to surveys and studies measuring customer satisfaction, not only among online retailers but also in comparison to most other big and popular retail companies.
Amazon's low prices and investments in areas like infrastructure, digital content, and technology are hurting profit margins. On the other hand, the company continues delivering spectacular growth for a business of its size: Net sales increased 24% to $17.09 billion in the third quarter of 2013, compared with $13.81 billion in the same quarter of the previous year.
Investors are aligning with Jeff Bezos and his strategy of putting long-term growth opportunities ahead of short-term profit margins. The stock has delivered amazing gains for investors over time, even if the company lost money on a GAAP basis during the last quarter.
Low prices and high customer loyalty at Costco
Costco benefits from a remarkably loyal customer base: Renewal rates are consistently above the 85% level, and the last quarter was as strong as ever, with global renewal rates near 87% and big markets like the U.S. and Canada seeing renewal rates above 90%.
The company has a smart and fairly unique business model; Costco makes most of its profits from membership fees as opposed to gains on merchandise sales. This allows the company to sell its products at cost and reward its loyal customers with remarkably low prices. The company also chooses cost efficiencies over product variety when making inventory decisions, another source of pricing advantages for Costco versus the competition.
Even if the company strives to keep costs as low as possible in different areas, management understands the importance of paying a decent salary when it comes to attracting and retaining high-quality employees. According to Bloomberg Buisnessweek, Costco pays its hourly workers an average of $20.89 an hour versus an average wage of $12.67 an hour for full-time Wal-Mart employees.
Lower employee turnover, higher productivity, and better service can make both customers and investors very happy in the long term. Costco has produced substantial gains for shareholders in a tough economic environment for mass merchants.
The way car buying should be
CarMax's slogan "The way car buying should be" says a lot about the company and its differentiated focus on customers. As opposed to the typical high-pressure sales tactics and obscure sales terms used by most competitors, CarMax follows a customer-friendly and transparent approach to the business, which resonates remarkably well among customers.
People in the sales team work on fixed commissions, so they make the same amount of money regardless of which car the customer buys. This means that sales employees can focus their time and energy on finding the best vehicle for each customer instead of pushing those cars that generate higher margins for the company.
CarMax has a no-haggle pricing policy, which makes the negotiation process much simpler and more comfortable. The process is also more transparent than at competing companies. The price of the car the customer is buying does not change depending on factors like vehicle trade-ins, and customers get to see the same information as the sales associate on a computer screen.
This is doing wonders for the company in terms of customer satisfaction: 93% of customers say they would recommend the company to a friend, and that figure has been consistently increasing over the last few years. Not surprisingly, CarMax is gaining market share versus competitors, and the stock has outperformed the S&P 500 index by a wide margin in the last five years.
Renowned asset manager Peter Lynch popularized the phrase "buy what you know" to express that the best investment ideas often come from observations in our day-to-day life as consumers. Companies that can make consumers happy can usually make investors wealthy too; that's why Amazon, Costco, and CarMax are solid long-term holdings to consider.
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The article Amazon, Costco, and CarMax: Why Happy Customers Mean Wealthy Shareholders originally appeared on Fool.com.Fool contributor Andrés Cardenal owns shares of Amazon. The Motley Fool recommends Amazon.com, CarMax, and Costco Wholesale. The Motley Fool owns shares of Amazon.com, CarMax, and 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.
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