08.25.2005
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Subscribe »Costco Vs. Wal-mart: Getting Beyond Utility
Costco is the company that stock analysts love to hate. In a recent NY Times article, Bill Dreher, an analyst for Deutsche Bank, complained that at Costco "it's better to be an employee or a customer than a shareholder." But even that isn't true. The same article points out that "Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19."
"According to Mr. Dreher Costco's share price was so high because so many people love the company," says the Times reporter. "It's a cult stock," he sneers.
Yikes. That's a bad thing?!
Your store should be so lucky to be a cult for its customers. It's at the heart of what we mean by a 'cult'-ural brand that we think businesses need to 'cult'-ivate in their markets. Customers, employees, and even stockholder develop an emotional investment in the continued success of a cult company and of its cultural brands. But for Dreher the word "cult" equates with fad. That's the way it looks for people who just don't get it.
Because it's precisely the factors that make a business a cult that will give it staying power in the long run. And in this business environment one of the factors that contributes to the cult status of Costco or Whole Foods is that when you scratch the surface you discover that, SURPRISE - it's possible. It's possible for human beings to run successful companies humanly, and maybe that's something a lot of people care about.
And maybe for that reason it's a business model that has a future. Just maybe. It's an underdog concept. But it's an idea that human beings, not analysts like Dreher can engage with. It's a narrative in which a human being whom we can identify with is successfully taking on the system on his terms, and he's winning. This narrative that has grown up around Costco gives it ballast and staying power. And although it's a word that a down-to-earth guy like Costco CEO, Jim Sinegal, would probably not use, it's what gives Costco it's mystique, and mystique is the X-factor that gives it the cult following that Dreher dismisses.
The main impression you get about a guy like Sinegal is that the guy is a mensch. He's tough. He's shrewd. He understands the marketplace. He cares about his employees and his customers. And he does it his way. According to Sinegal, "The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8?' We understand that our members don't come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values."
But when you're talking about a cultural brand it isn't just the price and the convenience - the utility - that keeps people coming back. In my part of town, the Costco is not convenient - Sam's is a lot closer--but I gave up my Sam's membership for a Costco membership because of the X-factor, the soul factor, that intrigues me about Costco. And Sinegal understands that dimension of his business very well.
He shows he understands it when he talks about his love of the "treasure hunt": "occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces - scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise." He understands that's it's not just about the stuff at the best price. It's about the experience; it's about the surprise. It's about staying interesting and fresh while at the same time offering the staples that people need.
And he understands loyalty. Now there's an interesting word, and it makes no sense in Dreher's world where everything is about rational calculation. Loyalty is a soul value. And it only makes sense in a culture that understands the logic of soul, not just the logic of efficient markets.
In my past communications classes, most of my academically trained students came into my class with the assumption that persuasion equates with intellectual argumentation. This was the first idea I would attempt to disabuse them of. It's one thing to get intellectual assent, and it's quite another to get action. And you don't get action unless there's motivation, and motivation is best inspired by engagement. In order for people to feel motivated, they need to feel engaged, connected, involved in a larger narrative.
Loyalty is something people feel only when they are engaged. And that emotional bond enables a relationship to weather some pretty rough storms. What engages people's loyalty is a sense that they are relating not to a corporate machine with all of its slick propaganda, but to something that is humanly interesting, that has a story, that involves surprises and humor, that is likeable, authentic, and has a shared sense of shared values and shared mission. These are all factors that contribute to the Costco mystique.
On the other hand, Wal-Mart has zero mystique. It has adopted a model toward its customers, employees and investors that is based on pure rational calculation driven by the logic of market efficiency. They have been ruthless in running their business according to this logic, and they've been remarkably successful in doing so. The only thing is that if you live by the market, you die by the market. At some point customers, employees and investors might in their own ruthlessly calculating way decide that their involvement with Wal-Mart doesn't serve their interests anymore.
Costco has to live within the real world shaped by market forces, too. But guys like Sinegal are thinking for the long run. "We want to build a company that will still be here 50 and 60 years from now," he says. And if I were a betting man, that's where I'd put my money. Because Costo has the X-factor, and it may not be the elixir promising immortality, but it's refreshing to the soul. And where there's soul, there's life. And generally speaking, when given the option, people choose life.
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