CORPORATE CASE STUDY: CSR or PR? Costco insists that it's simply giving back

Corporate social responsibility is a key philosophical element at Costco, and its consistent increases in sales, members, and locations prove companies that give back get back.

Corporate social responsibility is a key philosophical element at Costco, and its consistent increases in sales, members, and locations prove companies that give back get back.

Corporate Social Responsibility is more than a figure of speech at Costco Wholesale. It is the company's mantra from the top down, the idea being that the more it gives to the local communities it serves, the more the people in those communities will either sign up for or renew their existing memberships, and continue to shop at Costco. The philosophy has helped the 20-year-old company capture a 50% share of the $70 billion US wholesale-club market, according to a recent BusinessWeek article that named founder Jim Sinegal one of the year's best managers. Art Jackson, the company's VP for general administration, which includes community relations, explains it this way: "Costco truly believes in the concept of giving back in terms of human and financial resources, and participating as a corporate citizen in the activities that support the communities. We do it because we believe that is our obligation. We don't do it to gain market share. "In most of the communities where we have a warehouse, for example, we run a campaign with our members to raise funds for their local children's hospital," he adds. Employees play key part in CSR efforts Jackson, a former VP of government affairs and employee relations at Bon Marche, says, "We also believe in helping our employees understand the importance of their personal obligation, and that has resulted in their substantial participation in the United Way. The company has matched their contribution." Because of the downward-spiraling economy, Jackson says, "We're getting more requests for aid from various social agencies. But we recognize our limitations, so we focus efforts on children, education, and social services." Adds senior marketing VP Ginnie Roeglin, "We contribute to children's hospitals, organizations such as Communities in Schools, and Costco scholarship programs. We are focused on community relations." Overall, Costco is committed to setting aside 1% of its pretax profit for philanthropic activities that also include sports academics, reading programs, and employee volunteerism in many community programs. Yet Roeglin doesn't see that as PR. But an 86% membership-renewal rate speaks for itself, and several million new members sign up each year. And it's helping the company try new things. Last December, the company launched Costco Home, an experimental, 102,000-square-foot furniture store in Kirkland, WA that attracted more than 20,000 cardholders in four days, not counting other visitors they brought along with them as guests. (Costco has some 38 million cardholders worldwide, including 1 million in the Puget Sound area.) Doug Schutt, the SVP in charge of the unit (as well as other departments, including e-commerce), says Costco Home contains about $7 million worth of stock, and customers can haul it home the same day if they wish. "We don't advertise," Schutt points out. "But we leverage it with handouts at our other warehouses, and we have stuffed our renewal notices to our area members in their American Express statements." If the store catches on, another one will probably open somewhere on the West Coast. (Costco plans to give it until about September before deciding conclusively.) Meanwhile, e-commerce on the profitable, four-year-old, which offers merchandise not typically found in a regular Costco, continues to outpace the online industry, Schutt adds. That part of the business "will approach a quarter-billion dollars this year," he says, "up a whopping 80% over last year." During fiscal 2002, in fact, warehouse sales totaled $38 billion. That's 11% over the previous year, and net income reached $700 million - up 16%, the annual report shows. All without advertising or traditional publicity or PR, say company executives, except when opening a new warehouse. In those cases, a news release and press kit - really just an announcement - are the extent of their efforts. Focus on membership The company's marketing activities are primarily focused on membership acquisition. It attracts new members through targeted direct-mail programs and partnerships with large employers and organizations, such as American Express. "Costco Wholesale is committed to delivering top-quality, brand-name merchandise to our members at the lowest-possible price," says Roeglin. "We operate on very low margins, and must keep our operating costs as low as possible. We do this by eliminating many of the costs of traditional retailing, including expensive buildings, fixtures, and large sales staffs." And, despite a dragging economy, its members keep buying everything from pharmaceuticals and eyeglasses, to gasoline and wine. (Costco is the country's largest wine retailer.) Last year, for example, they bought some 17 million rotisserie chickens, 60,000 carats of diamonds, and, during Thanksgiving, 1.2 million pies. Last year, Costco launched 29 new warehouses, nearly two-thirds of them in new markets. It also opened three more in England. This year, the target is 26 to 28 more, including additional ones in the UK, Canada, and Mexico, bringing the total up to 413 now open worldwide. In 2004, says Roeglin, the company expects to open "as many as 35." In addition, it already has 100,000 employees, and "all our management personnel," Sinegal emphasizes, "have participated in ethics and leadership training." In his January report to stockholders, Sinegal said, "We believe Costco ended fiscal 2002 in its strongest position ever. To this end, our planned opening schedule of about 30 new warehouses in fiscal 2003 will be geared more toward opening 'existing market' units than 'new market' units, where higher first-year sales should help better leverage expense levels at these locations." Nevertheless, BusinessWeek recently recommended a "sell" on Costco stock. True, Costco shares have been soft during the depressed economy, with investors dropping the price down some 30% in the past year. And the Issaquah, WA-based company plans to cut back slightly on its overall store growth this year - though not in its home base, where it plans to beef up its presence by adding to the 12 warehouses already there. At a recent University of Washington Business School breakfast, chairman Jeff Brotman designated the likely sites, including North Seattle and nearby suburbs. Altogether, the company plans to open 28 to 30 new outlets in North America, and says it will do so more efficiently than before, shaving about $100 million from its cost estimate to build them. Bullish outlook despite down economy Dan Geiman, an equity analyst with McAdams Wright Ragen, who has followed Costco for two years, is bullish on the company. "Costco has a very good management team, and I like their focus on limiting their margins," says Geiman. "Their reliance on word-of-mouth advertising is a winning strategy, a competitively good philosophy. They're still performing better than most of the other retailers out there. I have a 'buy' on its stock." As for BusinessWeek's negative recommendation, Geiman says the quoted analyst was "brand new, and covering the issue for only a few months." The magazine had been positive on Costco just a few issues earlier, Geiman claims. "They should do better in the next few months than they did recently. They'll probably post [same-store sales] in the 3%-5% range. And they'll report better earnings than expected, although gross sales aren't going to be as good as they were during the last couple of years. And if their earnings rise, you'll see the stock rebound. "So they'll be all right in the long term," continues Geiman, "although one nagging concern for the entire industry may be saturation. But compared with other retailers, they're performing quite well in a tough economy." At Costco, it seems as if giving back gets back. ----- PR contacts EVP and CFO Richard Galanti SVP, marketing, member services, publishing Ginnie Roeglin SVP, Costco Home, e-commerce, business delivery and special-order kiosks Doug Schutt VP for general administration (including community relations) Art Jackson

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