🎧 28:20 - 34:10 (05:49)

Saul, the founder of FedMart, established four priority principles: provide value to customers, pay good wages, maintain honest business practices, and make money for investors. These principles, while similar to Costco's values, set them apart from competitors. Unlike other retailers, FedMart and Costco do not use loss leaders and prioritize making money on every sale. Additionally, Costco pays its employees significantly higher wages and offers excellent benefits, resulting in low turnover and employee loyalty. This loyalty reduces theft and allows for internal promotions, creating a dedicated workforce. The senior management at Costco, including the CEO, have been with the company for over 25 years. These trade-offs contribute to Costco's success.

David Rosenthal: Saul is running the company during these first few years, he starts to codify some retail management philosophies. And he famously sort of canonizes these as FedMart's four priority order principles. And he teaches every new employee throughout the whole company about this. Number one, first priority, provide best possible value to customers. Number two, second priority, pay good wages to employees and provide good benefits, including health insurance. This is in the 50s. Like this is progressive stuff. Number three, maintain honest business practices. And then number four, the last one, make money for investors. So if you're a Costco nerd out there, and there are probably many Costco investor nerds listening

Ben Gilbert: right now, those all probably sound very familiar to Costco's priority order values. Right. Not the same, but kind of rhymes. Put a pin in it. When it comes to Costco, we'll bring those up

David Rosenthal: and go into each of them in depth. So you might be listening and saying like, yeah, yeah, that sounds good. But I'm thinking about, you know, I don't know, maybe I go to Walmart today or I walk into Target and I see some similar things written on the walls there. Isn't this kind of all the same? If you really mean them, no. There are some very, very clear trade-offs that Sol is going to make with FedMart that Costco makes today that are very different from what their competitors do. Like one, do you sell loss leaders in the store? Loss leaders being when you mark down items below your cost in order to attract people into the store with sales. If you're those other retailers, yeah, of course, this is like a time honored tactic in retailing. Of course, you're going to use this. Sam Walton bragged about it in Made in

Ben Gilbert: America about we could get this, you know, incredible number of, I don't even remember what the thing was, but build a pyramid of them in the parking lot and blow them out to get people to come and participate in the spectacle. Right.

David Rosenthal: If you're Saul and Costco today, you're absolutely not going to do this stuff. No, they won't sell something unless they can make money on it. Because the flip side of doing loss leaders is that you got to make up for it somewhere. You got to mark up other goods in the store to fat margins to make it worth doing the loss leader for you. Basically, it means you're treating your customers like they're stupid.

Ben Gilbert: Totally. That's exactly my read on this too. I feel like David, acquired number one tenant, treat the audience like they're smart. If you're going to ever do loss leaders, you're sort of violating that tenant and saying like, eh, we're going to get one over on our customers. Totally.

David Rosenthal: This is anathema to Saul. He passes that down to Jim Senegal. It's anathema to Jim. Okay, so that's one trade-off. Here's another really big one. What do you pay your employees? So in 2006, Harvard Business Review published a really great piece called The High Cost of Low Wages, where they very directly compare Costco Walmart employee salaries and benefits.

Ben Gilbert: Which, for listeners, if you want those numbers today, Costco's average hourly wage is $26 and Walmart's is $19.50. So huge, huge difference if you are going to go get an equivalent job at one or the other. On top of that, at Costco today, you also are eligible for a 401k with a match and very, very good health care, shockingly good health care, even for hourly workers. So if you're going to go work at one or the other today, you'd be very lucky to go work at Costco. So obviously,

David Rosenthal: the tradeoff of this is for FedMart at the time and straight through to Costco today. This creates meaningfully higher per-employee labor costs for the company.

Ben Gilbert: Yep, totally. But what are the benefits? And this is where we get this beautifully interlinked set of trade-offs that play well together. So what do you get? Well, you get low employee turnover. And when I say low, I mean very low. After the first year, Costco today has only a 7% attrition rate among their workforce. This is wow. This is for hourly labor. Yes. Typical retail is 20%. So it is a meaningfully lower cost to onboard and train new employees. Like you normally have to spend a lot of your money ramping people to get them up to speed. Costco, Price Club, FedMart doesn't have to do any of that because they're really rewarding their employees. Employee loyalty also reinforces the idea that people shouldn't steal. They feel grateful for this job. They're excited to be in it. The shrinkage or the unaccounted for merchandise at Costco today is astonishingly low. It is 0.15% of sales. That's crazy. So merchandise does not walk out the door. Their strong bias also is to promote internally. So if you look at Costco today, 36% of U.S. employees have over 10 years of service.

David Rosenthal: And this is truly unique, I think, about Costco among major American, at least, corporations, and was true at Price Club and FedMart before it. The senior, senior management, this is the same story. I mean, Jim started as a grocery bagger in the 50s at FedMart. Craig Jelinek started his career as an hourly employee at FedMart. This

Ben Gilbert: is how long the tenure is of these people and how linked these stories are. If you look at their executive team at Costco today, basically all of them have been there for over 25 years. The only vice presidents at the company who have not are the digital e-commerce people that they had to bring in to address some issues.

David Rosenthal: Decades ago. It's crazy.

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