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March 26, 2004
Don't believe the street hype
Today's Wall Street Journal features a textbook quote from a Wall Street analyst who's trying to lead Costco to the Street's slaughterhouse:
"From the perspective of investors, Costco's benefits are overly generous," says Bill Dreher, retailing analyst with Deutsche Bank Securities, Inc. "Public companies need to care for shareholders first. Costco runs its business like it is a private company."
What's Dreher's dread? Costco takes care of its employees, as evidenced by this chart:
Myopians like Dreher care only for short-term gains. They say, "Bump up that stock price now, Costco, or I'll downgrade you and make a fortune on the downturn!" An analyst, investor, board member, consultant or author who bangs the drum for "shareholder value" would rather roast puppies on an open flame than focus on creating customer value first. The root of strong customer relationships is strong relationships employees have with the company.
A shortsighted focus on quarterly results and "keeping up with Walmart" kills companies. If Costco were to do everything what Ponzi-scheme-minded Wall Street wanted, it would alienate employees. Unhappy employees alienate customers, who are more likely to fire the company.
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Very good observation. Costco doesn't need to take care of their shareholders first - they need to take care of their CUSTOMERS first. And the customers will take care of the shareholders...
One way to take care of the customers, as you observe, is to take good care of the employees. Imagine all the cost savings to the shareholders in that lower turnover -- reduced paperwork, reduced training expense, better quality of service...
-B-
The cost of turnover cannot be understated, and there are several web-based calculators for determining it.
The calculator at InsightLink (http://www.insightlink.com/employee_turnover_costs.cfm) estimates that at Costco's current size (about 100,000 employees), its cost of turnover is roughly $272 million. If Costco were to follow the dumb analyst's advice and start cutting benefits, its turnover rate would rise, thereby increasing turnover costs. If Costco matched Wal-Mart's turnover rate of 50%, Costco's employee turnover costs would be an amazing $568 million! Turnover costs go straight to the bottom line.
Excellent points, Ben. The arrogance and narrow-mindedness of this sort of "analysis" is appalling.
