Costco's Success: Company Culture Plays a Role

Wal-Mart's company culture might be improving, but it's still poor overall. Target's company culture is average and might be weakening. Costco, on the other hand, continues to deliver a top-tier company culture, which leads to strong fiscal results.

Apr 4, 2014 at 6:15PM

Costco

costco.com

Investors look at everything from earnings-per-share results to same-store sales to cash flow expectations, but many investors tend to overlook one of the most important factors of all.

Company culture is imperative to a company's long-term success. If an employee is happy, then he (or she) is likely to produce more. This positive attitude spreads, which leads to the likelihood of increased productivity from other employees.

On the other end of the spectrum, if an employee is unhappy, production will decline. That negative attitude is also likely to be passed on to other workers. In addition to a lack of productivity, this can lead to poor customer service. It's also likely that a company like this will show a high turnover rate, which is often a red flag.

Costco Wholesale (NASDAQ:COST) scores better than Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT) for company culture while outperforming them on the top line and the bottom line over the past five years, and for stock appreciation over the past three years. It's often said that it all starts at the top. This is true, but that leader must implement an attitude that's positive and effective. Costco's CEO, Craig Jelinek, has done this fascinatingly well. We'll get back to Costco soon. First, let's focus on Wal-Mart. One way way to find out how a company is performing in the company culture arena is to visit Glassdoor.com.

Treading water 

According to Glassdoor, employees have given Wal-Mart an overall rating of 2.9 of 5.0, and only 47% of employees would recommend the company to a friend. The most recent reviews have been positive, which might offer some hope, but keep in mind that this is a small sampling. 

Recent anonymous reviews by anonymous employees have mentioned flexible hours, employee discounts, good benefits, a fast-paced atmosphere, and understandable management. As of late, there has only been one recurring negative, which was a lack of advancement opportunities; this was often stemming from favoritism for others due to personal relationships.

Wal-Mart might cater to a different income crowd than Target, but there are still significant overlaps since they're both big-box stores offering discounts. Prior to Target's data breach, Target possessed a stronger reputation among consumers, primarily thanks to friendly employees, clean and organized shelves, bright lighting, and wide aisles. However, when it comes to company culture, Target is average. 

Customers first
Overall, employees have rated Target a 3.2 of 5.0, and 62% of employees would recommend the company to a friend. Recent anonymous employee reviews on Glassdoor haven't been positive. 

One employee stated that she was laid off without being told. Another employee asked to be excused because she was vomiting in the bathroom and didn't want to stand at the register in that state. She was told to tough it out or she would be fired. A third employee explained that if you dedicate your life to Target, you will be rewarded handsomely, but that you will have to sacrifice almost almost all family time. This same reviewer put it plainly: "Target cares more about its guests than its team members. Team members can be replaced. Guests can not." Just like at Wal-Mart, advancement opportunities often favored those who had personal relationships with management.

With Target employees not seeming to be happy, you have to wonder if this could be an indirect result of the data breach. Since the data breach, Target has tried hard to cut costs and please its customers in every way. While cutting costs and doing everything possible for customers can be positives, they can also put more pressure on employees. This, in turn, could lead to increased animosity, less production, and eventual weakening customer service. This isn't a guarantee, just a possibility.

Hitting on all cylinders
Take a look at the aforementioned Costco. First consider that it has delivered top-line growth of 49.55% over the past five years, superior to Wal-Mart and Target, delivering top-line growth of 18.05% and 11.72%, respectively. Costco has also outperformed its peers on the bottom line over the same time frame, delivering net income growth of 76.98% versus 19.56% for Wal-Mart, and decline of 7.69% for Target. In addition to that, over the past three years, Costco has delivered stock appreciation of 73.60%, whereas Wal-Mart and Target have delivered stock appreciation of 56.99% and 29.91%. 

It's not a coincidence that employees have rated Costco at 3.8 of 5.0 overall, and that 82% of employees would recommend the company to a friend. Employees who are paid and treated the best are going to be the most productive. This then increases the odds for fueling top-line growth faster than peers. It's that simple. 

Positives mentioned by Costco employees include a fast-paced environment, great co-workers, growth potential, and excellent benefits. There were very few negatives. One potential negative was physical work, but other employees looked at this as a positive. 

The Foolish bottom line
Wal-Mart might be making strides in the company culture department, which could be the beginning of a positive long-term trend. This would have the potential to lead to increased production and improved customer experiences. Target, on the other hand, appears to be heading in the wrong direction in this regard; this might relate to the company being under a lot of pressure due to the recent data breach. At Costco, all is well. Please do your own research prior to making any investment decisions. And if you're looking to invest what could be the top two investments in retail right now, then continue reading. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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