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June 09, 2013 5:28 PM The secret of Costco’s success revealed! (hint: no MBAs need apply)

By Kathleen Geier

Recently, there’s been a round of news stories focusing on various problems with the nation’s largest retailer, and one of its worst employers, Walmart. These problems range from national and international labor issues, to poor customer service, low-quality produce, empty shelves, and declining sales.

At the same time, Costco, the nation’s second largest retailer which famously pays its workers good wages and benefits, has been getting some of the best press in its 30-year history. Unlike much of the rest of the retail sector, Costco keeps posting strong sales — according to the most recent quarterly report, sales are up 8% and earnings are up 19% compared to this quarter last year. Costco has also won praise as a socially responsible investment.

I’ve written about Costco before. I’m a fan of the store as a consumer, and I also like it as a model of capitalism. A retailer that delivers high-quality products at rock-bottom prices, and is philosophically and practically committed to treating its workers well in the bargain — what more can you ask for? Its smashing success proves that the low-road, Walmart way of worker exploitation and selling cheap crap is not the only way to have capitalism in our society. We do have a choice.

This week, I’m writing about Costco again because of this wonderful article about the company, on the cover of Bloomberg Businessweek. There’s tons of fascinating info packed inside, even stuff that I, who consider myself to be something of a Costco nerd, didn’t know. This hilarious anecdote, about Costco co-founder Sol Price, by itself made it well worth reading the entire bloody thing:

Price was a liberal Jewish attorney from New York who embraced organized labor. According to Ralph Nader, who met him during Nader’s 1996 presidential run, Price often told a joke about meeting some discount retail executives who reverentially told him, “Sol, you are the father of everything we have inherited.” To which Price replied: “I really wish I had worn a condom.”

In my earlier piece, I mentioned some of the business strategies that have made Costco a success, investing in their employees being the most fundamental one. But the Businessweek article mentions a few other company policies I did not know about. Most fascinating of all, there is this:

[Snip] … Costco does not hire business school graduates—thanks to another idiosyncrasy meant to preserve its distinct company culture. It cultivates employees who work the floor in its warehouses and sponsors them through graduate school. Seventy percent of its warehouse managers started at the company by pushing carts and ringing cash registers.

Those sentences speak volumes. They tell you that Costco is a company that values its own hard-won experience over trendy B-school subjects like management theory and Econ 101 abstractions. They’ve found a formula that works and they’re not going to mess with it. I’ve long found the typical B-school curriculum to be problematic. On the one hand, you have management “theory,” which frequently is not well-supported by rigorous research, and might be characterized as more theological than anything else — Tom Frank has often been insightful about the ideological function served by this kind of business literature.

Then, on the other hand, you have B-school economics. One of the great sins about economics as a university subject is that, particularly at the introductory and intermediate levels where people are most likely to study it, the econ that gets taught tends to be almost entirely theoretical, not empirical. Few economists understand how businesses work, because few of them have actually bothered to ask businesspeople how they make business decisions. Instead, they make assumptions. But even assumptions that seem highly plausible in theory can turn out to be wildly off-base in fact.

Here’s a wonderful example of empirical economics in action. A number of years ago, a Yale economist named Truman Bewley wrote a terrific book called Why Wages Don’t Fall During a Recession. Bewley had noticed that, of course, during recessions, employers tend to lay off workers. But it might seem equally logical to cut wages instead — thus the book’s title. Economist Barbara Bergmann wrote about the book (she’s quoted here):

The most intensive interaction with business people so far seems to have been carried out as a solo venture by Truman Bewley who interviewed about 300 business managers, asking why they don’t lower wages in a depression. The failure to do so, which may (or may not) be an important reason for the failure of unemployment to dissipate rapidly, has long been a subject of speculation among economists. Bewley’s book lists no less than 25 published theories that economists had invented to explain the phenomenon, 24 of which were wrong. Bewley was the first who dared to go out and ask those making the decisions what they did and why. They told him that to lower wages would create severe morale problems, and so would interfere with the operations of their firm.

You would think that a book that was so ground-breaking and so crucial for public policy would have created a revolution in the field of economics. Sadly, you would be wrong. Here’s Bergmann again:

While observation-less theorizing is still the most common way economists think to advance the science, the new interest being shown to behavioral and experimental methods at places like Princeton and Harvard is an encouraging sign. But actual observation of business behavior has barely started. Whether it will flourish depends on whether an ever increasing corps of economists willing and able to do the work of observation gets trained and then finds jobs.
A few years ago I had occasion to ask Truman Bewley whether he was training students at Yale to carry on research like that he did on wages. His answer, I am sorry to report, was, “No, that would ruin their careers.”

Getting back to Costco: the abstract theorizing that MBA students learn in microeconomics courses often has little relevance to practical business situations. The simplified textbook models teach the lesson that policies like unions and the minimum wage are inefficient and wrong — that message comes through loud and clear. Economics as it’s taught in most American colleges today more or less encourages poor labor practices.

No wonder why Costco prefers its own cart-pushers to fancy MBA bean counters. Costco’s business model relies on investing in its workers. It’s one you won’t find in a standard MBA textbook, and yet it is paying off in spades for Costco stockholders, employees, and customers alike. Maybe they know something that the management consultant class doesn’t. And maybe it’s about time the rest of corporate America start paying attention.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

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