Costco capitalism

I came across this blog post by Bryan Lehrer titled “Costco Capitalism” which I think offers an interesting variation on the discussion of companies seeking to do good, or even better, to “be” good.

It poses two questions:

• whether some companies are built on “structurally fair” foundations that make it easier for them to be perceived as “good” or “fair” companies; and
• what exactly does it mean to be an “ethical” company

This extract will give you a flavour of the author’s analysis of the Costco business model

Sustainable Capitalism? – What Costco shows us about the blurry relationship between ethical and fair

Costco shows that … simply providing your customers the feeling that they aren’t getting ripped off, and doing so in a way that matches mainstream views of acceptable externalities, is all that is required for success. If this sounds reductive, it’s because it is. The key to Costco’s success is just how straightforward the alignment of stakeholders within its business model are.

That being said, there are externalities associated with Costco’s business model, even if they aren’t viewed by the mainstream as such. The main thing here is a retail model that promotes rampant consumption, and the fallout from this which includes broad waste and sustainability concerns. Interestingly, because of Costco’s large purchasing power, dominance over its supply chains, and upper-middle class income of its shoppers, it generally has more progressive product standards than other retail brands in comparable price tiers.

Costco Capitalism, Bryan Lehrer

Lehrer argues that the foundation is to provide customers with “the feeling that they aren’t getting ripped off“ thereby building that elusive intangible asset of Trust that many companies routinely include in their statement of corporate values (e.g. “a Trusted Partner”). However, equally important is that the company can do this “in a way that matches mainstream views of acceptable externalities“.

This qualification regarding externalities is the interesting part.

Other companies may have a credible claim to being able to provide a good or service cheaply but the often unasked question is what is the full cost of the good or service; i.e. is the low cost at the company/consumer level based on paying workers a subsistence wage with uncertain working hours, or reliance on an external supply chain with dubious environmental and labour standards. Lehrer notes that Costco could be vulnerable to criticism on a number of fronts (e.g. its business is, at its heart, a mass consumption model) but Costco is protected by virtue of adopting a position which fits community standards. Costco can afford to spend some of its efficiency dividend on progressive product standards but it is not necessarily pushing the boundaries of what might be done because it is also sensitive to what its customers are willing to pay for being good.

This framework (i.e. is our business built on an operating model that is structurally fair) offers a useful perspective when thinking about financial services companies. Initiatives such as the Bankers’ Oath have a contribution to make in addressing the cultural issues in banking but I suspect that there is as much value (potentially more) in exploring the structural features of the industry that create the pressure to cut corners in the pursuit of financial targets.

I don’t expect anyone will change their mind about bankers and banking in general on the basis of this post. I do hope to make the point that there are subtle structural challenges in banking that complicate the capacity to do good. Developing a better understanding of the structural issues is I think essential to crafting a lasting solution to the cultural issues. I don’t have any neat answers but I do feel that the issues covered in Bryan Lehrer’s analysis of Costco offer some insights.

Tony – From the Outside