Thoughts on a culture of trust from our new book in progress, Firms of Endearment (edited):
Costco is another FoE with a high customer trust score. However, CEO Jim Senigal doesn’t spend much time thinking about building trust with customers. He’s more devoted to maintaining consistency with Costco’s core values:
1. Obey the law
2. Take care of our customers
3. Take care of our employees
4. Respect our suppliers
5. Reward our shareholders
Senigal’s passion for taking care of customers begins with holding the markup of any branded product to 14 percent and to 15 percent on private label products.
Not long ago Costco own brand of 35mm film began flying out the doors because its was so much cheaper than Kodak film. The supplier kept lowering the wholesale price because of the increasing volume. This put Costco in the position of exceeding its gross margin commitment. Some in management feared that lowering the price might erode brand equity. Dealing with the problem cleverly, Costco lowered the price, but added more rolls to keep profit margins in line with its commitment.
Much like L. L. Bean, Costco customers have blanket permission for returns: no receipts; no questions; no time limits, except for computers, which have a six months’ grace period. Costco trusts customers; customers trust Costco. So where’s the news in this? Trust is always strongest in relationships where it runs in both directions. Countless companies want customers to trust them, but do not reciprocate. But FoEs like Costco and L. L. Bean understand the payoff from nurturing and trusting customers. Yes, occasionally a customer will abuse the system, but FoEs won’t compromise benefits that flow to the many because an occasional miscreant pops into the picture. After all, the orchardist does not cut down the apple tree when a few bad ones show up in the branches.
Costco has a culture of trust. Its disposition to trust customers extends to all stakeholders, starting with employees. Jim Senigal sets an example that makes it clear to employees that Costco executives aren’t into taking advantage of employees, customers, suppliers and others for personal gain. To demonstrate this, Senigal’s compensation is pocket change in comparison with the pay of most CEOs of major corporations. The average compensation (not including stock options) for CEOs in the top 50 companies in revenues in 2004 was $10.7 million. Though Costco ranks 29th in revenues, Senigal’s total income in 2004 was $550,000: $350,000 in salary and a $200,000 bonus.
Despite his paltry income relative to his peers, Senegal humbly brags, "We pay much better than Wal-Mart. That's not altruism. It's good business." A full-time clerk or warehouse worker earns more than $41,000 a year, plus a health-care package that far surpasses Wal-Mart’s health coverage. Wal-Mart employees get less than half what Costco workers earn. The irony – or call it counterintuitive truth – is that Costco's labor costs are only about half of Wal-Mart's. Because Costco workers feel valued, they are significantly more productive. Moreover Wal-Mart’s high employee turnover necessitates the hiring and training of more than 600,000 new workers each year. This is a huge cost that Costco doesn’t have. It’s annual turnover is just 6%.
Thus, enumerated bulleted “how to statements” on building trust, such as contained in David Maister’s book The Trusted Advisor (see yesterday’s post), ring as hollow words, for even a con artists follow those steps. Enduring trust flows not from tactical actions but from strategic principles embedded in a culture of trust.