A few years ago, in stray thoughts I constructed a grand theory explaining how our society was descending into cannibalism.

Let’s start with Costco and Starbucks, two companies that take very good care of their employees. I believe the starting hourly pay at a Costco is $10 and healthcare resulting in most employees earning a living wage. Starbucks gives all, even part-time, “partners” (employees) healthcare. The companies are known for creating positive, healthy, supportive work environments. The companies are united by a belief that sharing in the entity’s financial success with employees is both the right thing to do and good business in the long-term.

Let’s say that your neighbor works for Costco. You like him and your kids play together co-mingling in your yards. A typical Saturday is where you stretch out your porch, keep an eye on the kids while checking the price of your Costco stock in the WSJ. You’re quite happy w/your stock’s rapid ascent as in the past few years Costco has rapidly opened new stores and growing same store sales. As a savvy investor, you know that this is tough to keep up forever. Eventually Costco will saturate most of the prime areas to open new stores and will have optimized existing store sales pretty well. As a shareholder though, you want stock appreciation!  When growth slows, the priority becomes improving profit margin. As you study the financials you notice that Costco pays way more in employee salary and benefits then competitors (like, say, Wal*Mart). This realization translates into a natural way to drive  up the stock price by decreasing these employee benefit costs. As a publicly held company, the pressure mounts to cut benefits so the stock can go higher. Benefits are slowly reduced, salaries gradually decrease. But wait: You just wanted your retirement account to go up– not for someone to have to work two jobs! There it is: Cannibalism, baby. Cannibalism.

But that’s how “the market” works. The beauty of markets are their ruthless efficiency. If you ran a private company, you decide how you want to treat your employees. For companies like Costco and Starbucks, happy, caring and motivated employees are core parts of who they are as companies. Imagine how disrupted the “third-place” that Starbucks is would be by surly, angry employees. As long as your business is doing well and growing, you hold “the market” at bay. They let you do what you deem best. Once growth disappoints though, you lose control to those who know better.

Both Costco and Starbucks are still growing and doing well. But once they get into Microsoft-territory, as a firm who’s growth days are seemingly behind it? Look out.

What’s interesting to me is that “the market”, this blind force that creates efficiency is really just you and me. And in this case, it can turn neighbor’s interest against neighbors.

Oh, and to be clear: I’m a free-market kind of guy (mostly), and so I’m not bashing “the market”– just pointing out this realization that we don’t often talk about.

3/30/13 – Couldn’t I have come up with a more clever title?

2 Responses

  1. What you say is true. It is a huge challenge today for successful companies – those not in the early rapid expansion stage, but in the mature stage – to keep increasing return. It can become a diminishing return and often things like benefits or bonuses are the first to see the strain.

    How long can a mature successful company expect to increase return and improve year over year results?

    Will it not become a diminishing return?

    The only ways to succeed are to gain more market share, find a new market or find a new product or service. Technology and efficiency will only go so far, and your competitor likely is doing the same.

    Can superior customer service win out? Only if it is well above the competition and there is still an expectation from the consumer of competitive prices and from the shareholder of increased returns.

    Yup – you can end up eating yourself. Hey – wasn't that a Stephen King story?

  2. I've worked for Costco fpr 9 years. You're right, they do pay me a living wage and the benefits are pretty good. My big worry is not that the corporate maturing process will change my working conditions. My big worry is that when the current crop of leaders passes on to the sparsely populated valhalla for good corporate blokes, they will be succeeded by a bunch of bean counters with nothing on their minds past the next quarterly earnings report. By the way, what's this about cannibals being the next big thing? Maybe we'll start carrying them at Costco in a 3 pack for $14.99. We'll line them up right next to the coffin kiosk.

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