Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Costco Board Preserved the Warehouse Culture
Transcript
- Lucas: Costco reported its most recent quarterly results last week, and once again, the membership renewal rate came in at just under 93 percent in the US and Canada. That number has basically not budged in over a decade. And it's the single metric the board watches more closely than same-store sales or earnings per share. Luna: Ninety-three percent is extraordinary. The average retailer would kill for that kind of customer loyalty. But what does that have to do with the board? Lucas: Everything. Because that renewal rate is a direct result of a boardroom philosophy that treats employee satisfaction as a strategic asset, not a cost line. And the board has had to defend that philosophy repeatedly against investors who wanted them to squeeze labor to juice margins. Luna: I remember the activist campaign in 2018. Some hedge fund pushed for Costco to cut wages and benefits, arguing that the company was overpaying workers and leaving money on the table. Lucas: Right. And the board essentially told them no. Not in a hostile way — they listened, but they explained that the warehouse model depends on low turnover and high productivity. Costco's annual turnover is around 13 percent. Walmart's is closer to 60 percent. When you retain workers that long, they get faster, they spot problems, they upsell memberships. The board calculated that the long-term payoff from higher wages outweighed the short-term profit pop. Luna: But that's unusual. Most boards cave to activist pressure, especially when the stock dips. How did Costco's board stand firm? Lucas: Part of it is structural. Costco has a dual-class stock structure. The co-founder Jim Sinegal and his family control supervoting shares. So the board isn't vulnerable to a proxy fight. But more importantly, the board members themselves are steeped in the culture. Several directors have been there for decades. They've seen the model work through recessions. In 2008, when other retailers were laying off workers, Costco actually raised wages. Luna: That's the kind of contrarian move that only works if the board is philosophically aligned. Did they face pushback from the CEO at the time? Lucas: Actually, the CEO, Jim Sinegal, was the one pushing for the raise. The board backed him unanimously. But after he stepped down in 2012, the board had a succession challenge. Craig Jelinek, the current CEO, had been trained inside the culture for 25 years. The board didn't look outside. They promoted from within, knowing that an outsider might treat labor costs differently. Luna: So the board engineered a succession that would preserve the formula. That shows a level of intentionality that most companies lack. Lucas: Exactly. And there's a direct link between that succession and the membership renewal rate. If the board had hired a CEO from, say, a traditional retailer who came in and cut labor costs, service quality would have dipped, membership would slip, and the whole flywheel stalls. The board kept that from happening. Luna: It sounds like the board treats culture as an intangible asset, but one with measurable outputs. Renewal rates, turnover, even things like the famous one-fifty hot dog. Lucas: Right. The hot dog combo has been $1.50 since 1985. The board has never seriously discussed raising the price, even though inflation has made it a loss leader. Because the hot dog is a symbol. It signals to the customer that Costco isn't trying to squeeze them. The board understands that if they break that promise, it damages trust. You can't put a dollar value on that, but it shows up in the renewal number. Luna: Honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It helps us keep these deep-dive episodes ad-free and focused on the substance. Lucas: Yeah, a small gesture goes a long way. We don't run sponsors, and listener support is what makes that possible. So if you've gotten something out of this breakdown, consider tossing a few bucks in the virtual jar. Luna: Alright, back to Costco's boardroom. One thing I find fascinating is how they handle capital allocation differently from other retailers. Lucas: Big difference. Most retailers focus on same-store sales growth and expanding gross margins. Costco's board sets targets around membership growth and return on invested capital. They're willing to accept thinner margins if it means more members. In fact, they've deliberately kept merchandise margins at about 11 percent, far lower than competitors. That's a board-level policy. Luna: So the board's strategy is to maximize the number of members, not the profit per transaction. That changes how you evaluate every decision. Lucas: Exactly. When the board considers opening a new warehouse, they're not asking 'Will this store be profitable in year one?' They ask 'Will this store add at least 50,000 new members within three years?' Because once you have that installed base, the membership fees drop straight to profit. Last year, Costco's membership fee revenue was about $4.5 billion, and most of that flows to the bottom line. Luna: That's a nice stream of high-margin income. It insulates them from the volatility of product sales. Lucas: And the board protects that model. When analysts suggest raising membership fees more frequently, the board resists. They've raised fees only twice in the last decade. They'd rather grow the base than squeeze existing members. It's a patient capital mindset. Luna: But patience is rare in public markets. Costco's board has a unique ability to block short-termism. Is that solely because of the dual-class stock? Lucas: That's a big factor, but not the only one. The board itself is composed mostly of insiders or long-tenured directors. Out of the ten current board members, eight have been there more than 10 years. Diversity of thought still exists, but it's diversity within a shared belief system. Compare that to a typical board where members rotate every 5-7 years. Luna: Does that insularity ever backfire? Could the board miss a disruptive threat because they're too culturally entrenched? Lucas: It's a real risk. But so far, the board has shown it can adapt. Consider e-commerce: Costco was late to online grocery, but the board authorized a multiyear digital investment. They didn't panic and change the model. They integrated e-commerce into the warehouse experience — buy online, pick up in club. Same core philosophy, new channel. Luna: So the board is willing to invest, but on their own terms. That's a governance style that works as long as the model remains effective. Lucas: And so far, it has. The stock is up about 400 percent over the last decade. The board's track record is hard to argue with. But the real test might be the next recession. Costco has never gone through a severe downturn with this level of wage commitment. If margins get squeezed, will the board hold the line? Based on their history, I'd bet yes. Luna: It's a fascinating case study in how a board can actively preserve a culture that others see as inefficient. The key takeaway for me is that the board treated employee wages not as a cost to minimize but as an investment in customer loyalty. Lucas: And they had the governance structure and the long-term conviction to follow through. That's rare, and it's worth studying for any company that wants to build a durable competitive advantage. Luna: Next episode, we are going to look at a board that made the opposite bet — choosing to slash wages and outsource labor, and how that played out over a decade. Lucas: Should be a good contrast. Thanks for listening.