Retailing is a brutal business. Competition is fierce, margins are disappearingly thin, and consumers can be so fickle. To succeed at this game, you need sharp elbows and a ruthless business attitude.


Not so fast. The Wal-Mart (NYSE:WMT) school of business works for some retailers, but it's not mandatory policy. Sam's Club competitor Costco (NASDAQ:COST) has proven as much, with stellar results over the years on the back of downright humane business principles.

You rarely see Costco management discussing goals for the next month or quarter, or even the next year. The foundation of this business is simple, according to CEO Jim Sinegal: "We have to take care of our customers, take care of our people. And if we do those things, we think that we'll reward our shareholders."

That philosophy has given the average Costco employee a 40% higher salary than a compatriot at Wal-Mart would make -- 52% above the industry average. It's not surprising, once you add in the great health-care benefits, that employee turnover is the lowest in the business. Only 5% of Costco's employees leave every year. Compare that to the industry average of 59%, and you get the picture.

Recruiting and training replacements for defectors is expensive and leads to inefficient customer service. Would you rather have your checkout line handled by a 15-year veteran, or a two-year veteran showing a brand-new worker how it's done? As a result, the higher wages and better benefits end up saving Costco money.

Sinegal leads by example. He's constantly touring the stores, where he's treated like a rock star. His salary is 12 times the average floor worker's rather than the millions paid to typical CEOs, and when he's at his desk, he answers his own phone rather than shielding himself behind secretaries and press handlers. "If a customer's calling and they have a gripe, don't you think they kind of enjoy the fact that I picked up the phone and talked to them?" he told 20/20 last summer. His employment contract, all of one page long, allows the board to fire him for cause, with no golden parachute.

The company has no PR department, and spends $0 on advertising. That's right -- zero. Word of mouth is the only marketing the company uses. And while Wal-Mart stocks 100,000 items or more per store, a Costco outlet has only 4,000 on its shelves -- but those 4,000 items are all top-of-the-line. This simplicity cuts down on corporate costs, and attracts a clientele making an average of $74,000 a year.

"Wall Street is in the business of making money between now and next Tuesday," says Sinegal. "We're in the business of building an organization, an institution that we hope will be here 50 years from now. And paying good wages and keeping your people working with you is very good business." I agree wholeheartedly. Wal-Mart, Target (NYSE:TGT), and even BJ's (NYSE:BJ) might be fine investments, but for the really long haul, I'm betting on Costco.

So will Costco soar to new heights in 2007? I think it will, though that sort of shortsighted prognostication might not sit well with Mr. Sinegal. In the end, time will tell, but if you agree with my assessment, let us know in our brand-new Motley Fool CAPS investment-intelligence community. Just rate Costco "outperform," and fill out your virtual portfolio with a few more of your best -- or worst -- ideas. Make your mark today, and don't forget that you can add your own thoughts on any stock along with your rating. Based on your thoughts, we will declare the best retail stock of 2007 early next week.

Go back to the beginning to see what other retail stocks are in the running for our CAPS contest.

Costco is a Motley Fool Stock Advisor recommendation, and Wal-Mart is a Motley Fool Inside Value pick. You can take either newsletter for a spin for 30 days, no strings attached.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always a good idea.