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July 19, 2007
Are good employee relations good for business?
Interesting story in the New York Times the other day about Costco -- How Costco Became the Anti-Wal-Mart. One theme of the piece was especially telling:
But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Mr. Sinegal is overly generous not only to Costco's customers but to its workers as well.
Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."
. . .
"They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.
. . .
Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.
"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."
Sounds like the typical short-termism of Wall Street. On the other hand, it is not clear that the actual investors are paying any attention to what the bean-counter analysts are saying:
IF shareholders mind Mr. Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19. Mr. Dreher said Costco's share price was so high because so many people love the company. "It's a cult stock," he said.
A "cult stock" or a good example of long-run value creation? (Of course, some analysts may think that long run value creation is some form of weird cult -- a secret society headed by Warren Buffet.)
When will Wall Street analysts learn that good employee and customer relations are the foundation of a good payoff for stockholders? Maybe because good employee and customer relations are intangible assets that they can't crank into their models. I would have thought that the Circuit City example would have pointed this out. Guess not.
Posted by Ken Jarboe at July 19, 2007 10:44 AM
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