IR case study free essay sample

Analysis of the Shareholder perspective The Costco model of keeping employees and consumers first before shareholders has been always a controversial one. Costco model is similar to the stakeholder theory by Edward Freeman where he proposes that a corporations stakeholders does not constitute entirely of shareholders but also employees, the community, suppliers, consumers, etc. ; anyone who is necessary to the survival of the firml . As the CFO of Costco Richard Galanti puts it From day one, weve run the company with the hilosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, well be able to hire better people, theyll stay longer and be more efficient. But the shareholders feel that the returns which are ploughed back for employee benefits and consumer discounts belong to them rightfully. Costcos kind-hearted philosophy toward its 100,000 cashiers, shelf- stockers and other workers has always draws criticism from the Wall Street. We will write a custom essay sample on IR case study or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The Wall Street analysts and investors contend that Costco actually is too good to mployees, with Costco shareholders suffering as a result. Wal-Mart follows a model which believes in Milton Friedmans The Social Responsibility of Business is to Increase Profits. Wal-Mart believes in profit maximization at the cost of employee welfare. The flipside to this is that the retail giant is riddled with labor issues and a high turnover rate. Sams Club employees spent 8% on insurance (double the national average) and average hourly wages were 10$ compared to 17$ paid by the membership based retail chain Costc03. By Friedmans philosophy Wal-Mart indeed does a good Job in maximizing returns for the shareholder. Now looking at the bigger picture Wal-Mart may be able to save some money through depriving their employees. But studies show that the employee loyalty shown by Costcos employees more than makes up for that difference. Typical benefits for Costcos employees include above average hourly wages, comprehensive health insurance coverage after 6 months and mandated 86% of top position hires from within, although the real percentage ends up being 98%. Also research shows that employees at Costco are much happier than their peers. The employee attrition for Costco is 17% per year, while for Sams Club it is 44% per year which is close to the industry average. The Costco CEO Cascio explains that a conservative estimate of the full cost to replace an hourly employee at Costco or Sams Club is 60% of an employees yearly salary. At Costco, this is a cost of $21 ,216 per employee; at Wal-Mart, this is a cost of $12,617. Calculating the difference, Costco saves almost $368 million each year in employee urnover costs. Still it is not Just turnover that proves the worth of Costcos exceptional employee treatment Costcos employees appear to be more productive than their competitors4. In 2005, while Sams Club generated $37. 1 billion in US Sales, Costco generated $43. 05 billion with 38% fewer employees5. Also because of better relationship with consumers and customers Costco has the lowest inventory shrinkage in the market. Finally the ultimate indicator of shareholder profitability is the share prices of both he retail giants. The above mentioned arguments factor sharply in the share patterns ot botn the companies. From os stock climbed Wal-Marts stock in spite of its cut throat profit maximization model could grow only 146%. Even during the 2009 double dip recession Costco showed a same store sales growth of 7% which is an indicator very strong performance6. Also study shows that the customer loyalty increased during the recession period and this was a major enabling factor for the company to post strong performance. Also looking at Costcos stock price chart over the past 20 years there is a pattern that the stock started to climb about the time when the company started to focus on sourcing sustainable and better quality products for the consumers. Since late 1994, Costco stock has risen from roughly $6. 50 per share to over $80 per share7. These patterns prove that Costco model offers better returns to the shareholder in spite of being consumer and employee centric. Also it reiterates the philosophy that Betterness Is Good Business8.