Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Costco Built Its Culture Of Ownership
Transcript
- Lucas: Most people think about Costco as a place to buy bulk paper towels or rotisserie chickens at prices that defy basic economic logic. But if you look under the hood at their quarterly reports from October twenty-sixth through the end of the third quarter in twenty twenty-six, the real story isn't in the merchandise margins. It is in the payroll line item, specifically how they treat their human capital as an investment asset rather than a variable expense. Luna: Right, because usually in retail, you try to squeeze every possible hour out of your workforce to keep those costs down. So how does paying more actually help them sell more? Lucas: It comes down to retention and institutional knowledge. When you pay your warehouse associates thirty percent above the industry average, you stop losing trained employees to competitors who are desperate for bodies. That means your staff knows exactly where every pallet is, how to handle returns without friction, and how to upsell members subtly. This reduces the time spent on training new hires, which is notoriously expensive in retail. Luna: So the cost of higher wages is offset by the savings in recruitment and training, plus the productivity boost from experienced workers. That makes sense mathematically. Lucas: Exactly. Let us look at the numbers for a moment. The national average turnover rate in big box retail hovers around forty to fifty percent annually. At Costco, it stays consistently below ten percent. Think about what that does to your operational rhythm. You do not have a rotating door of temporary staff every single quarter. Your team builds muscle memory for the seasonal rushes, whether it is back to school or holiday shopping. Luna: But doesn't that wage premium eat into their thin operating margins? I know they operate on razor-thin margins compared to other retailers. Lucas: They do, but only superficially. Because their turnover is so low, their per-unit labor cost actually ends up being competitive with, or sometimes lower than, peers who pay less but turn over constantly. Plus, there is a direct correlation between employee satisfaction and customer experience. Happy employees create happy customers, and happy members renew their memberships. Luna: Which brings us back to the membership model. The product is the member, right? So investing in the staff is really just investing in the renewal rate. Lucas: Precisely. And here is the concrete detail most executives miss: Costco requires all full-time employees to be eligible for health insurance within thirty days. In an industry where benefits are often delayed or restricted to part-timers, this signals a level of commitment that filters out job-hoppers. You attract people who want a career, not just a gig. Luna: That changes the demographic of your applicant pool completely. You get people looking for stability, which aligns perfectly with the type of member they serve. Lucas: It does. And let us talk about the financial mechanism that makes this sustainable. Costco does not rely on markups to drive profit. They cap markups at fourteen percent for branded goods and fifteen percent for private label Kirkland Signature items. This forces the entire organization to focus on volume and efficiency. If your staff is inefficient, the whole system creaks because you cannot raise prices to cover the waste. Luna: So the high wages act as a discipline tool. If you are paying people well, you expect them to keep the store running like a well-oiled machine. There is no slack allowed. Lucas: That is a great way to put it. It creates a culture of ownership. Employees feel valued, so they protect the company’s reputation. They will go out of their way to ensure a member gets what they need, knowing that their job security depends on that member returning next year. It is a virtuous cycle that is very hard for competitors to break. Luna: I remember reading about how some regional retailers tried to copy the bulk model but failed because they couldn't replicate the culture. They lowered prices but kept the low-wage, high-turnover structure. Did that work? Lucas: It was a disaster. Without the retained institutional knowledge, those stores became chaotic. Inventory got misplaced, checkout lines dragged on, and the customer experience deteriorated. Members stopped coming. It proved that you cannot decouple the pricing strategy from the labor strategy. They are two sides of the same coin. Luna: So the lesson is that you can't just copy the shelf layout. You have to copy the underlying incentive structure that keeps the lights on and the shelves stocked efficiently. Lucas: Spot on. Now, before we dig deeper into how this affects supply chain negotiations, I want to pause for a quick note on support. If these conversations have moved your work forward in some small way, honestly, if today was worth a coffee to you, that is the link — buy me a coffee dot com slash fexingo. That is F. E. X. I. N. G. O. Luna: Yeah, it really helps keep the research deep and the ads away. Thanks for keeping the signal strong. Lucas: Back to the supply chain angle. Because Costco pays its workers well, they also have leverage with suppliers. They can demand better terms because they offer a stable, predictable sales channel. Suppliers know that when they ship to Costco, the product moves fast and reliably because the warehouse staff is skilled and attentive. Luna: That is interesting. So the labor strategy actually improves their bargaining power upstream. It is not just an internal cost issue. Lucas: Correct. It creates a trust relationship with vendors. Vendors are willing to invest in joint inventory management systems because they know the receiving dock is staffed by people who understand quality control. This reduces spoilage and shrinkage, which directly protects margins. Luna: So it is a holistic ecosystem. Better pay leads to better staff, which leads to better operations, which leads to better supplier relations, which keeps prices low. Lucas: You nailed it. And here is a specific example from the recent earnings call. They highlighted that their operating expenses grew slower than sales revenue for three consecutive quarters. That is the result of this compounding efficiency. Every dollar invested in wages yields more than a dollar in saved inefficiencies. Luna: That kind of margin expansion is rare in retail. Usually, wage growth eats into profits immediately. How do they avoid that trap? Lucas: By treating wage increases as productivity drivers, not just compliance costs. They automate where possible, but they never automate the human interaction that matters. For instance, they still use cashiers who are empowered to make judgment calls on returns or price checks. That flexibility prevents bottlenecks that slow down the entire store. Luna: Empowerment is key. If a cashier has to call a manager for every decision, the line stops. Giving them authority speeds things up. Lucas: Exactly. And that authority comes with responsibility, which reinforces the ownership culture. These employees are not just following scripts; they are solving problems in real time. This reduces the need for middle management layers, which further lowers overhead. Luna: So the organizational structure is flatter because the frontline staff is trusted and capable. That reduces communication lag and errors. Lucas: Yes. And let us look at the long-term impact on brand equity. When you have a loyal workforce, that loyalty translates to brand advocacy. Employees become genuine fans of the company, which shows in their demeanor. Customers pick up on that energy. It is subtle, but it builds a moat that competitors cannot breach with just a price cut. Luna: It is emotional intelligence as a business strategy. You are banking on human connection to drive repeat visits. Lucas: Precisely. And in an era where digital fatigue is setting in, that physical, human touchpoint becomes more valuable. People go to Costco not just for the goods, but for the experience of being treated with respect. That is a powerful differentiator. Luna: It shifts the value proposition from purely transactional to relational. That is much harder to disrupt. Lucas: Absolutely. Now, consider the recruitment marketing angle. Because they are known for good pay and benefits, they receive massive volumes of applications. This allows them to be extremely selective. They can hire the top talent, not just whoever showed up first. This raises the overall competency floor across the entire organization. Luna: So the high wages act as a filter for quality. You get the best applicants because the compensation package signals seriousness and stability. Lucas: Right. And once they are in, the promotion from within policy ensures that leaders understand the front line. Most of their district managers started as stockers or cashiers. This means leadership is grounded in reality, not ivory tower metrics. They know what the daily challenges are because they lived them. Luna: That eliminates a lot of disconnect between strategy and execution. Leaders who haven't worked the floor often propose initiatives that fail in practice. Lucas: Exactly. And because they promote internally, they retain institutional knowledge at the managerial level too. Decisions are made based on historical context, not just current data. This leads to more consistent and reliable business outcomes over time. Luna: It sounds like a flywheel effect. Every element reinforces the others. High pay, low turnover, high competence, strong leadership, efficient operations, low prices, happy members. Lucas: It is a beautifully integrated system. The danger for any competitor is trying to steal one piece without adopting the whole. You cannot just raise wages and expect the rest to fall into place. You need the cultural infrastructure to support it. Luna: Which means it is a long game. It takes years to build that culture and trust. Short-term cost-cutting destroys it instantly. Lucas: True. And that is why so many attempts to copy Costco fail. Executives want the results without the discipline. They see the low prices and assume it is just a supply chain trick, missing the human engine driving it all. Luna: It is a reminder that business strategy is ultimately people strategy. If you get the people part right, the numbers tend to follow. Lucas: Exactly. And as we move into the fourth quarter of twenty twenty six, watch how they handle the holiday rush. Their ability to maintain service levels during peak stress is the ultimate test of this model. If they hold steady while others falter, it proves the durability of their approach. Luna: I will be watching for that. It is fascinating to see how a simple decision on wages ripples through every part of the business. Lucas: It really is. The next time you walk into a warehouse club, take a look at the faces behind the counters. You might just see the reason why their margins are thicker than you think. Luna: Or maybe just why you keep coming back for more than just the chicken. Lucas: Probably both. What do you think is the biggest hurdle for a traditional retailer trying to make this shift today? Luna: I would say the willingness to accept lower short-term profits for long-term stability. Most boards pressure for immediate gains, which kills the patience required to build this kind of culture. Lucas: That is the hardest pill to swallow. But for those who can stomach it, the payoff is a moat that lasts decades.