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In his 2014 State of the Union address, President Obama took the time to praise one big U.S. corporation: Costco Wholesale (COST 0.17%). Obama declared, "Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover. We should too."
Costco has a remarkable commitment to treating its employees well, especially in comparison to its main competitors. Yet the company simultaneously manages to reward its customers with the lowest prices in the retail industry and deliver steady stock price appreciation for its investors. Let's take a look at how Costco is doing for all of its stakeholders.
A long-term investor's dream
Costco has one of the lowest profit margins among major U.S. corporations. In its 2013 fiscal year, Costco posted a pretax margin of 3% and an after-tax margin of 1.9%. However, Costco has a very efficient business model that allows it to consistently generate a strong return on invested capital.
Costco is also growing much faster than other big-box retailers. Consumers continue to flock to its stores to take advantage of its industry-leading prices, and the company has significant global growth opportunities. As a result, Costco shares have more than tripled in the last 10 years.
Costco 10 Year Stock Chart, data by YCharts
As long as Costco continues to deliver steady high single-digit revenue growth each year, the stock could triple again in the next decade, even with profit margins remaining at recent levels. Thus, investors can be very satisfied with Costco's performance.
The best employer in retail
Costco is also the undisputed wage leader among big-box retailers. One of the main reasons why Costco got a favorable mention from President Obama is the company's average wage of nearly $21. That's more than double the average wage for the retail sector.
Aside from paying high wages, Costco also has great benefits. Approximately 88% of Costco employees have company-sponsored health insurance, and employees pay less than 10% of the total cost of their health plans in premiums.
Costco's stellar ratings on job site Glassdoor are a testament to its strong employee relations. It receives an average of 3.9 stars (out of 5) among Glassdoor's more than 1,000 employee reviews, and CEO Craig Jelinek receives a 92% approval rating. Employees praise the pay and benefits, and many also appreciate the opportunities for career advancement at Costco.
Delivering great deals for (well-to-do) consumers
Costco customers love the warehouse chain almost as much as employees. Costco has a policy of keeping markups very low: 14%-15% at most. Indeed, the 2013 fiscal year, Costco's gross margin -- which approximates the "average" markup -- was just 10.6%.
Costco generally has the lowest prices of any retailer. Photo: The Motley Fool
Costco thus gives its customers access to prices not much higher than wholesale cost. There's one caveat, though: Because Costco sells items in bulk, some people end up overbuying and thus spending too much. This is a particularly big problem with perishable foods, as you can end up throwing away your savings (literally) when the extra food spoils.
Costco's customer satisfaction shines through in its sky-high membership renewal rate. In the U.S. and Canada (Costco's largest and most mature markets), about 90% of Costco members renew each year. When Costco raised its membership fee from $50 to $55 in late 2011, most members were happy to pay extra.
While Costco saves lots of money for its customers, it's important to recognize that Costco is an exclusive club. Many U.S. consumers cannot afford to pay $55/year for the privilege to shop there. Indeed, the average household income among Costco customers may be as high as $96,000 -- almost double the U.S. median household income.
Costco and the world
Wal-Mart is the only retailer that produces more solar power than Costco. Photo: The Motley Fool
Costco also strives to do right by the rest of the world through its business practices. As of 2013, it had the second-largest solar power generation capacity among U.S. companies, trailing only its much-larger rival Wal-Mart. Costco has also implemented sustainable fishing practices in recent years. It stopped selling a number of "at-risk" fish species.
This isn't to say Costco is perfect. Like any megacorporation, Costco has had its fair share of dustups with activists and government regulators. Most recently, the company was fined for failing to promptly repair leaks in refrigeration units, thereby allowing harmful greenhouse gases to escape.
One of the best companies in America
Let's consider Costco's combined record across all stakeholders. For investors, Costco delivers a high return on invested capital despite its low margin profile. This allows it to consistently post market-beating stock performance.
Costco manages to be a top performer for investors despite paying industry-leading wages and offering better employee benefits than competitors. It also takes care of customers by keeping markups extremely low. Lastly, Costco does its part to care for the environment, through projects like its investment in clean solar energy.
Based on this track record, it's clear that Costco is one of the best companies in America. Despite the occasional misstep, Costco does a remarkable job of balancing the interests of shareholders, employees, customers, and the larger world, thereby rewarding all stakeholders.
