An Analysis of Costco’s Organizational Culture and Human Resource Management

Organizational culture at Costco and its Human Resource Management: An Analysis

Costco’s phenomenal success has come from doing things in its own unique way. Even with a lot of competition in the retail industry, the brand has preserved its edge by building a unique culture. Culture is at the root of everything. The most successful organizations of the 21st century have the greatest cultures too.  Costco has also created a distinct culture and that has led to higher productivity and better performance from the employees.  A focus on employee excellence has resulted in two things.

First of all it has led to higher satisfaction and happiness for the employees and second, it has led to better performance and higher productivity. Happier employees are always more focused and deliver with dedication. If Costco has been able to sustain its low prices and customer centered strategy then somewhere its organizational culture has played a very important role in it. Costco leaders themselves attribute its financial success and growth to the organizational culture and the important role that employees play in the execution of its strategy.

As the largest warehouse chain in the world, Costco has an excellent customer base. However, it is not just because of the low prices that it makes available to its customers. There is a very important role of customer satisfaction in attracting and retaining customers.  Costco is the third largest retailer in the world and had sales of $116 Billion in 2016. It also features in Glassdoor’s list of best employers of 2017.  The reason is the level of employee satisfaction that Costco creates. It pays its employees better than other retailers. In 2016, it raised its base wages further.  It raised the least wages from $11.5 an hour to $13 an hour. The average wages at Costco have also grown and the best paid workers make more than $22.50. In 2016, it employed 205,000 people out of which 117,000 were full time workers and 88,000 were part time workers.  However, it is not just about paying higher wages than the competitors but Costco has focused on other things too. It provides its employees with better health benefits and other benefits too.  All of this is done to keep the employees happy.

Costco Human Resource Management and Organizational culture

 Important highlights of Costco’s organizational culture:

  • Focus on employee satisfaction
  • Focus on internal collaboration
  • Focus on employee training and growth
  • Low pressure related to productivity and performance
  • A learning environment that provides best opportunities of learning and growth.
  • Focus on customer service and customer satisfaction.

The company’s focus on employee satisfaction has paid in the long run. Not just are its employees highly satisfied but they are more productive and highly dedicated too. Costco strengthened its promise further by raising the wages in 2016.  Focus is on collaboration and not pushing employees to deliver more than they can. This was known to be the norm at Walmart where employees were made to work much more than they were paid for. Continued assault from various groups has made Walmart make changes and it has also increased the minimum wages for its employees. However, still in terms of having an employee oriented culture, Walmart is behind Costco.

Despite the pressure from other retail and e-retail brands, it has not deviated from its norm and sustained its culture with employees and customers at the center. Employees do not feel any pressure related to performance and are given ample space to work and grow. They can learn from each other and serve their customers happily and without any pressure. It is also why the customer retention rates at Costco are higher. The employees are promoted from within and due to the opportunities of growth they last long at the organization. The senior officials at Costco even claim that people will bang their doors down to work at Costco. This is also why the competitors are generally unable to steal Costco’s workers. It is not difficult to come across people at Costco who have been working there for more than ten years.

It is not true about only the full time workers but also the part time workers. Even the part time employees are provided generous benefits like full health and dental insurance as well as a 401(k) with stock options after a year.  These employees also get liberal vacation and family leave time. However, the best thing in its culture is the level of trust between the employees and the employer. Instead of treating employees as just employees, it treats them as the members of the same family and as partners. The management trusts them and lets them hold greater and better responsibilities than its competitors. This works as a major motivator for employees. A culture of trust is absolutely essential for a business that wants to succeed and grow popular as an accountable and ethical brand. In this regard, Costco has done a great job. When you rely upon your employees and assign them responsibility and authority to make responsible decisions, it works to boost employee morale. Among the employees that have worked for at least an year at Costco, the turnover rate is as low as 5%.  There are great benefits that come from a low turnover rate. Companies with a higher turnover rate are always dealing with various types of HR related problems. They spend more on hiring and retention and earn less from their expenses. On the other hand, Costco has to spend less on hiring and retention which already saves it millions. This can be an inspiration for the other companies. Costco’s stock has also grown at a better rate than its competitors.

Deeper inside, the picture is even better for the Costco employees. The company takes care of their mental, physical, emotional and spiritual needs. What happens generally in the case of retail brands is that work pressure is higher on employees and maintaining work-life balance is difficult. Several times employees have to work a lot and career growth can be difficult. The workers have very little to no participation in management and important decisions.  Little is done to motivate the workforce and employees grow affected by stress and low morale. The result is high turnover rate and low employee productivity. The level of trust in such environments between the employer and the employee also remains low.  Costco never lets these problems arise at its workplace and the result is a happier workplace where employees are more satisfied . This has led to positive reputation in the community and in turn higher customer loyalty. In this way, Costco has proved that being loyal to your employees is more important than demanding loyalty and service of them.

The most critical focus of Costco is evident. It has created a system that has exclusive focus on creating value for the customers. The focus of the system is to create value for customers and other important stakeholders. This system is designed to benefit the customers mainly. It is why there is as much focus on customer service and low prices at Costco.  The biggest challenge before Costco is that the quality is what it claims to be. Whether it is in terms of the products and prices or in terms of customer service, the focus is always on creating the best quality. The way Costco workers treat customers is an example in itself.  The culture of Costco was founded on ethics, accountability, respect and trust.  It has brought Costco to the distinguished position of one of the most admired employers. The most important role in the making of this culture has been played by Jim Sinegal, cofounder of Costco. He also remained its CEO from 1983 to 2012. The foundation he laid has brought Costco to a position where it has to spend nothing to very little on marketing and winning customer loyalty. In this way, Costco has managed its human capital and organizational culture very well. The result of this extraordinary focus is increased efficiency and productivity as well as low HR related costs.

Sinegal has played a central and instrumental role in making and maintaining a valuable culture at Costco. For him retail was a people’s business and therefore it was important to get  the people part of the story right. It is the most valuable and important part of the equation and getting it right meant having solved the most important part of the puzzle. How happy your people are would decide how happy your business is. Therefore, Sinegal’s focus was on winning people’s dedication by keeping them happy and satisfied. At Costco, they hire good  people and thereafter train and pay them well. Apart from it, the opportunities of advancement are also better at Costco. In return what Costco gets is higher dedication and productivity from its employees. Zeynep Ton and Sarah Kalloch have highlighted these factors in their article for HBR on the successful cultures of four retailers.  Sinegal had noted two important pillars of Costco’s culture – set high standards for your employees and then encourage them to take ownership of  their work. You have to offer them challenges but then you must also empower them to take ownership of their work and feel proud of it.  In retail, companies are always tempted to cut down on labor costs and if you pay less you get less. You cannot expect the loyalty and dedication that comes when you pay them satisfactorily.  At Costco labor expenses are 70% of  the budget. However, all this investment is at last worth it because it all translates into sales and profits.

Sources:

http://fortune.com/costco-wholesale-shopping/

https://www.worldlifestyle.com/health-fitness/why-costco-is-the-way-of-the-future-in-healthy-work-cultures

http://www.huffingtonpost.in/entry/costco-minimum-wage-increase-wage_us_56d87da5e4b0ffe6f8e86e00

https://hbr.org/2017/01/how-4-retailers-became-best-places-to-work

Abhijeet Pratap

I am Abhijeet Pratap, editor of notesmatic. I am an MBA with marketing (major). Apart from writing on various topics in business management, marketing and English literature, I like to read and write about technology.