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.