Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Costco Cultivates a Retail Army with Double the Industry Wage
Transcript
- Lucas: There is a moment in the mid-1980s when a young Costco co-founder named Jim Sinegal is sitting in a conference room with his board, and someone asks him why on earth he's paying warehouse forklift drivers ten dollars an hour when every other retailer in Seattle is paying five. Luna: That's double the market rate. In the eighties, that was real money. Lucas: It was real money, and the pushback was intense. Sinegal later said the board member told him, 'You're going to bankrupt us with labor costs.' And Sinegal's response — this is the line that has become legendary inside the company — was, 'You think I'm stupid? I know what I'm doing.' Luna: That's pretty combative for a board meeting. Lucas: It is. But he had a data point in his head that came from his previous career at FedMart, another warehouse club. He had watched what happens when you pay retail wages: high turnover, low morale, and hidden costs in training and errors that eat your margins. He believed that paying more upfront would actually lower his total cost structure. Luna: And of course, we now know he was right. But I think a lot of people don't realize how stark the numbers still are. Costco's voluntary turnover today is under 10 percent. The retail industry average is around 60 percent. Lucas: Yeah, sixty percent. And if you look at their latest 10-K, filed for fiscal 2025, Costco's average hourly wage for its U.S. warehouse workers just passed $30 an hour. That's roughly double what Walmart pays its average associate, and more than double what Amazon Fresh was paying in early 2026. Luna: And yet Costco's operating margin is consistently around 3.5 percent. Which is actually higher than Walmart's roughly 4 percent on a good day? No, wait, Walmart's operating margin is closer to 4.5 percent. So Costco is paying more and still earning similar margins. Lucas: That's the puzzle that people outside the business don't always understand. How can you pay more and still be profitable? And the answer is: productivity. Costco generates roughly $1,900 in sales per square foot per year. Walmart Supercenter is around $500. Target is a little over $300. Costco's numbers are off the charts because each employee is more productive, stays longer, knows the operation, and makes fewer mistakes. Luna: Also, they don't spend money on marketing. No ads, no PR agency. Their membership model locks in revenue before the first item is sold. Lucas: Right. Membership fees — currently $60 for the basic Gold Star and $120 for Executive — accounted for $4.6 billion of Costco's $254 billion in revenue in fiscal 2025. That membership income flows almost entirely to the bottom line. It's a beautiful business structure: you collect money before you sell anything, and your customers are literally paying you for the privilege of shopping. Luna: And that's directly tied to the wage strategy. Sinegal understood that if you pay well, you attract better employees who provide better service, which makes the membership more valuable, which makes people renew. The renewal rate is over 90 percent in North America. Lucas: It's a virtuous cycle that most retailers can't replicate because they're trapped in a low-wage, high-turnover equilibrium. If you're Walmart and you try to suddenly double wages, your margin collapses before you see the productivity gains. But Costco built this from day one. Sinegal started with the right assumption, and the whole company is structured around it. Luna: And here's where things get interesting in 2026. Costco now has a new CEO, Ron Vachris, who took over in January 2024. He's a warehouse guy — started as a forklift driver in 1982, worked his way up. He's the first CEO who actually came from the warehouse floor. How is he handling the current labor market, especially with California's minimum wage hitting $20 an hour last year? Lucas: That's the sixty-billion-dollar question. California is Costco's biggest market by store count. And with the minimum wage at $20, the spread between what Costco pays and what competitors pay has narrowed. In some markets, In-N-Out Burger is now paying $22 an hour for entry-level. So Costco's premium is shrinking. Luna: But they still have the retention advantage. If you're a Costco employee earning $30 an hour after a few years, with good health benefits and a 401 match, you're not leaving for a $22-an-hour job at In-N-Out. Lucas: Exactly. And Vachris has been pretty clear in his public remarks that he sees the wage premium as a strategic asset, not a cost to minimize. At the annual meeting in January 2026, he said something like, 'We don't compete on price of labor, we compete on value of labor.' That's pure Sinegal. Luna: But there is pressure. Activist investors have been circling Costco for years, arguing that the company could boost margins by pulling back on wages and benefits. In 2023, a hedge fund called Bluebell Capital Partners took a small stake and publicly urged Costco to 'professionalize' its labor costs. Lucas: Yeah, Bluebell was pushing for Costco to adopt a more traditional retail labor model — more part-time workers, fewer benefits, lower starting wages. And the board basically told them to pound sand. But the question is whether that pressure will grow if Costco's same-store sales growth softens. In the most recent quarter, ended May 2026, U.S. same-store sales were up 4.2 percent year-over-year, which is fine but not spectacular. If that number dips to 2 percent, you might see more activist activity. Luna: I want to go back to something you mentioned about Sinegal's original insight. He had that experience at FedMart where he saw the hidden costs of turnover. Can you put a number on what turnover actually costs a retailer? Lucas: Sure. The retail industry generally estimates that replacing an hourly employee costs between $2,000 and $4,000 when you factor in recruiting, training, lost productivity, and the errors that new hires make. For Costco, with roughly 220,000 U.S. employees and turnover below 10 percent, they're replacing maybe 22,000 people a year. At an average cost of, say, $3,000 each, that's $66 million in annual turnover costs. Now compare that to a retailer with 60 percent turnover: same size workforce, they're replacing 132,000 people, costing them nearly $400 million a year. Luna: That's a massive structural cost advantage. And it's not even counting the intangible benefits of experience — a ten-year Costco employee knows the inventory, knows the members, can handle problems without a manager. Lucas: Right. And there's another dimension: unionization. Costco is one of the least unionized large retailers in America. Partly because employees don't feel the need. When you're paying $30 an hour with good benefits, the union pitch is a harder sell. Compare that to Amazon, which has spent billions fighting union drives. Costco's wage strategy essentially buys labor peace. Luna: And yet, there's a critique that gets leveled at this model: it only works because Costco sells to relatively affluent members. The average Costco shopper has a household income above $100,000. They can afford the membership fee and the bulk purchases. So the high-wage strategy is subsidized by serving higher-income customers. Lucas: That's a fair point. Costco is not a low-income retailer. It's a middle to upper income bulk discounter. But I'd argue that doesn't invalidate the strategy — it just means the strategy is tied to a specific customer demographic. The lesson for other retailers is: if you want to pay higher wages, you need a business model that supports it. Costco's membership model, its limited SKU count — about 3,700 items versus Walmart's 120,000 — and its high inventory turns all create the economics that make $30 an hour possible. Luna: And that limited SKU count is key. Costco buys in massive volumes — a single SKU of, say, a 48-pack of toilet paper — and turns it very fast. That gives them incredible leverage with suppliers, which keeps their gross margins artificially low. In fact, Costco caps its markup on any branded item at 14 percent. On its own Kirkland Signature brand, it's higher, but still disciplined. Lucas: Which brings us back to the wage question. Because if your gross margin is capped at 14 percent on branded goods, you can't absorb inefficiency. You have to run a tight ship. And paying high wages is part of that tightness — it attracts the kind of operator who can keep the ship running lean. Sinegal used to say, 'I'd rather have a motivated employee earning $20 an hour than a disgruntled one earning $10.' Luna: And that philosophy is now being tested in a way Sinegal never faced: the rise of digital commerce. Costco has been slow to build out its e-commerce operation. In fiscal 2025, online sales were only about $10 billion out of that $254 billion total — roughly 4 percent. Compare that to Walmart, where e-commerce is over 15 percent. Lucas: That's a vulnerability. And it's partly a function of their labor model. Costco's warehouse employees are trained to work in a physical warehouse, not to pick and pack online orders. They don't have the automated fulfillment centers that Amazon has. So if e-commerce continues to grow, Costco will have to invest heavily in a separate fulfillment infrastructure, which could pressure margins. Luna: Or they could just keep doing what they've always done: make the in-store experience so compelling that people keep coming. And so far, that's working. Their traffic numbers are still strong. Lucas: Yeah. The average Costco member visits about 22 times per year and spends around $150 per trip. That's a lot of trips. And the company has been experimenting with more fresh food, more prepared meals, and even wine bars in some locations to keep the experience sticky. Luna: You know, one thing I've always wondered: does the high-wage strategy actually attract a different type of employee? Are Costco workers more engaged, more entrepreneurial? Lucas: There's a great study from a few years ago by researchers at the University of Texas that looked at this. They surveyed retail employees at Costco, Walmart, and Target and found that Costco employees reported significantly higher levels of 'discretionary effort' — they went above and beyond their job descriptions. The researchers attributed it partly to pay, but also to the sense of being treated fairly. When you feel your employer is investing in you, you invest back. Luna: That's the 'gift exchange' theory in economics. If you pay above market, employees reciprocate with above-market effort. Lucas: Exactly. And Costco has been proving that theory for forty years. But the real test is whether Vachris can maintain that culture as the company scales internationally. Costco now has over 850 warehouses worldwide, including 260 outside the U.S. In Japan and South Korea, they've been able to replicate the wage strategy because labor markets there are also tight. But in Mexico, where wages are lower, the premium isn't as large, and turnover is higher. Luna: So the model is not universally transferable. It depends on the labor market. Lucas: Right. And that's a challenge for the next decade. But for now, Costco remains the gold standard for how to treat retail workers and still make money. Jim Sinegal stepped down as CEO in 2012, but his philosophy is embedded in the company's DNA. And the numbers keep proving him right. Luna: It's one of those rare cases where the 'nice' thing is also the profitable thing. Most of the time in business, there's a trade-off. Here, it seems like paying more actually creates a competitive advantage that generates more profit. Lucas: It does. And that's the lesson that keeps getting rediscovered by every new generation of managers. You can pay less and manage turnover, or you can pay more and manage productivity. Costco chose the second path, and it's built a retail empire on it. Luna: I wonder if any other retailer will ever fully replicate it. You'd need a CEO willing to take a short-term margin hit for long-term gain, and that's rare in public markets. Lucas: It is rare. But as long as Costco keeps reporting those numbers, the example is there. And maybe, slowly, it changes the conversation about what retail labor should look like.