Costco Wholesale Corporation (COST) Earnings Call Transcript & Summary

A big thank you to everyone for taking time out of your busy schedules to join us here today. Thinking about retailers that could have been adversely impacted by the pandemic, Costco certainly fits into this category. Their business model relies heavily on getting members into the warehouse to fill up their big shopping carts and make those bulk impulse purchases. And the vast majority of their revenues come from brick-and-mortar purchases. Well, we all know what a challenge it was over this last year doing physical store shopping. Also, supply chain disruptions throughout last year left empty spaces on shelves for some essential goods and services. Well, these factors could have had a real negative impact on their member experience. However, Costco rose above to earn the #1 spot on our most recent retail study, ahead of the mighty Amazon, which obviously has a very different business model than Costco and benefited greatly, quite frankly, from the rapidly changing customer environment over the last year. By the way, this was only the second time in 2 decades we've been doing these studies where Amazon was a participant and they weren't #1. Now looking at 4 key elements of the retailer experience. This is part of our study. Digital experience, merchandise, service and price. We can see that Costco was top 5 in terms of customer experience in each of these categories. And they took the top spot for service. And in terms of outcomes for retailers, Costco was ranked #1 in brand trust and also recommendation intent by their consumers. So this is a really good time to introduce our very special guest today. I'm really excited to have with us today, Jamie Abernathy. She's Director of Staff Development for Costco. She started with the company 35 years ago as a warehouse stocker for the Candy Department in the Minneapolis location. So Jamie has lived firsthand how they've translated their mission and values at the very beginning to success today as the fifth largest retailer in the world. And by the way, in the midst of a very challenging retail landscape. So with that, Jamie, so glad to have you here with us.

Thank you so much. It's an honor to be here.

So candy stocker, that sounds like a really fun and interesting first job.

Well, it was challenging, for sure, because it was way back in the day before we had everything palletized and made it easy just to fly the whole pallet into the run. So yes, it was challenging, and I had to step it up.

Well, it sounds like an amazing run for you there at Costco and an amazing run for the retailer now being the fifth largest retailer in the world. So that's amazing.

So let me kick things off. Everyone knows the Costco brand, Jamie. And some people are probably aware of the reputation for how you treat your employees, how well you treat them. Can you talk a little bit about the culture of Costco and how that translates to a better customer experience?

Yes. I'm so passionate about this. Our code of ethics runs deep in our culture, and it's something that's not just written on the wall. It's something that we live out every single day. The code of ethics has 5 points. It's obey the law is number one. Number two is take care of our members. Number three is take care our own employees. Number four is respect our vendors. And then finally, if we do all four of those, we should be rewarding our shareholders. So this is something that we teach from the very first day that somebody is employed with Costco. We review that code of ethics, and we give them examples. And then that's part of our decision-making every single day in everything we do.

Yes. Well, that's -- you said something interesting. It's not just a poster on the wall. It's something you embody it and live every single day. And that, no surprise, translates to member experience and translates to financial success for the organization. So let me, I guess, start to dig a little bit deeper relative to the pandemic. You guys performed amazingly well in our study. Maybe talk a little bit about how the pandemic changed the way your teams work. Maybe from a supply chain perspective. I know your work from home, had to really rally and shipped very quickly. Maybe talk about the pandemic and the impact on your staff.

Yes. Well, we've always tried very hard to be nimble in our business. But the word pivot has become a very popular word in the last year because we had to really change so many things. Starting with the working from home, this is not something that we've ever wanted to do. It's not part of our culture. Our culture is very inclusive, and we like to be present with each other. So working from home to, say, from the member service center perspective, our call centers, was never an option. So when the pandemic hit, while so many call centers were already working from home, it's something that Costco have to figure out very, very quickly. So within 2 weeks, we had to come up with a strategy to get all of our corporate campus employees as well as our member service centers working from home. So that was extremely challenging. We basically sent about 600 people from our member service centers to work from home within 2 weeks. And then, of course, we couldn't do that for the warehouses. They have to be present. So for the warehouse employees, we mandated masks. And of course, that was not always a popular opinion for our members, but we felt it was extremely important that we wanted to protect not only our employees, but also our members. So we made that a mandatory policy to be wearing a mask when you're in the building. In regards to pivoting our supply chain, that was huge, because we did see a decrease for quite a time in our warehouse traffic. However, the increase on costco.com was phenomenal. And obviously, we hadn't prepared for that. Nobody knew this was coming. So we quickly had to change a lot of our processes. We have to work closely with our vendors to keep the supply chain going that we needed. This is where I go back to our code of ethics, having good relationships and trusting relationships with our vendors truly showed how that can pay off because while vendors were also struggling with production because of our relationship with these vendors, they really stepped up to the plate for us. and they provided. But we had this shift within years. One of the major transformations we made is we have business delivery locations around the U.S., and those are walk-in brick-and-mortar locations to serve business owners. We actually transitioned many of those locations into fulfillment centers because so many people were ordering online, and we wanted to get them shipping their products quicker. So that was a big game changer for us as well. So those are a couple of examples of how we had to make some major shifts in our process and procedures to accommodate for the pandemic that nobody saw coming.

Yes, just amazing to move an operations like yours in that extremely short time frame, thousands of workers within 2 weeks. Again, that's a Herculean task, and you pulled it off. And again, didn't miss a beat as far as member experience went. So let me, I guess, focus a little bit more about the employees in one of your core code of ethics. I don't know if you're able to talk a little bit about -- you immediately and proactively got ahead of making sure the employees were taken care of personally and did some things there. I'd love to hear a little bit more about what you did for them.

Well, we already discussed work-from-home. And thank you for mentioning there were 1,000 employees that we sent home because we also set home everyday from our regional offices and corporate campus. So it was a major task for our IT department. But in addition to that, we had, obviously, employees that were working in the warehouse that didn't have an option to work from home. So we really looked at a couple of different options there for them. Some of them had health risks. And some of them were, quite frankly, panicked with the pandemic and very fearful. And so we offered a personal leave of absence, the ability for them to choose themselves, without a medical reason, if they would prefer to go on a personal leave of absence, we were allowing them to do that. In addition, for those that were still working in a location, we increased their wage, their hourly wage by $2 an hour, because we have also understood that many schools were closed, many daycares were closed. So they were left trying to figure out how do I accommodate for my family if I still have to work in a building and all of these other support areas are still needed, and I still have to take care of my family. What can we do for these employees? So that $2 an hour really helped them to accommodate their family when they needed to go to work. The other thing we did is a lot of people, including myself, canceled vacation time because who wants to take a vacation when all you can do is stay home? So many of our employees, we have a very generous benefits package. Many of them had a lot of vacation planned that they canceled. So If they did not use that vacation, we did not want them to lose it. So we extended all of their vacation time 18 months in order to give them enough time, once the pandemic, we got better control a little bit, they could reschedule their vacations and take a really nice and much-needed getaway to take care of themselves.

Yes. Again, incredible productivity there to make sure that your employees were taken care of. Again, they're the ones taking care of your members as they walk through the warehouse doors, and they call in into your centers there. Staying on the employee theme, how has this changed recruitment? Has any of this changed how you recruit and onboard your associates?

Yes, absolutely. Like I said, work from home was never a thing. We had to look at our virtual hiring and recruiting. Every point of communication with our future employees and recruiting really had to come from a virtual standpoint rather than in person. So we had to look at the way we do our new hire orientation. Doing that virtually, our training, we had no virtual training platform. We've never done work from home, like I said. So we had no platform even that we had used for training virtual classes. And so we had to figure out that. And of course, again, pivoting, we had several different training platforms that we try. It was painful. Some of them worked, some of them didn't. But we had to just do the best we could to figure out the virtual platform. So that's definitely changed the way we're doing things today. The beautiful news is we proved that we could do it, and we could do it very, very well. And so while many call centers have been doing this for a decade, Costco just has only been doing it for the last year. And we fine-tuned it to the point now where we're continuing to use it. We're justifying potentially future change in our member service centers on how we can afford to have some people working from home, what's that going to look like, including our corporate offices. So obviously, we've learned a lot, and we're going to continue to look at that for the future.

Yes. Fantastic. So again, as part of the enablement, I know you've talked a lot about enabling the associate to say yes. And in whatever way possible, you want to be a yes culture with members' needs. And so I'm sure that had to have been a challenge over this past year, but maybe talk a little bit about that enablement to say yes for member satisfaction.

Yes. One of the things that we quote all the time is our Senior Vice President Paul Latham. He always says, find the optimal outcome for the member, whatever that's going to look like. So for our agents, that's something that we train them on. Basically, if the member has a concern, we give them a standard box of policies and procedures and how can we solve the member's issue. But if that's still not working, the agent is trained not to stop there. They need to get assistance from their leadership teams to say what more can we potentially do for this member. So that's a huge part of our culture, is taking care of the member. Our -- is that member satisfied at the time they hang up the call? So that's a pretty critical component of our culture, for sure.

Yes. And it shows. As a Costco shopper, it definitely shows. Well, let's maybe transition a bit since we're talking about member and member experience. I'd love to hear a little bit about how your voice of customer experience program helped you during this past year, whether it was input from the contact center or input from your digital channels. Maybe talk a little bit about your CX program and how that enabled you over this past year.

Yes. I mean it was pretty exciting. Prior to the pandemic, we were already using the digital feedback tool, and we were using it not only for costco.com, but we also use it in our warehouses. However, in our warehouses, since we've been in business, we have used a very fundamental process for collecting feedback from our members, which was literally a paper pad. So then into warehouses and you've seen the "tell us what you think" kiosk station. There's a pen and a pad of paper. And the members have always been able to just write down their comment and throw it in the box. And then that gets keyed every night by somebody in the warehouse, and then that gets generated to a particular person in that region. So digital feedback was already playing a little bit of a role prior to the pandemic. Members could give their feedback by clicking on a warehouse location online. But when the pandemic happened, this was a game changer for digital feedback because we no longer wanted to have a pen and paper out. We want -- didn't want to put at risk any of our members to use pen and paper that could be spreading more germs. So we took away all of those in all locations. We removed all of the pen and paper. We scaled up a little the box, so they couldn't enter anything in the box. And we changed the messaging on the "tell us what you think" to go to costco.com click on Feedback. So that was really the first time where I think we got to see the full value of the digital feedback from Verint in the warehouses. We had been using our costco.com for several years and definitely saw the value there previously. But the fact that we were able to go digital so quickly, because it was already in place, really, it kind of helped us to educate our members as well on how easy it is to use that feedback length. So that was one of the tools that became very fundamental and was extremely successful for us. But then the other thing was we had to, again, be very proactive with what was going on with supply and demand, with product and delivery. And so listening, using our quality reporting tool and our speech analytics tool for Verint, those were critical pieces because my team also manages our customer service page on costco.com, so really hearing what the trends were and what was driving contacts, how just to mitigate some of those contacts by making sure we could put fresh banners every single day on our customer service stage. And we have top articles so we could really drive what was going to be pinned at the top of those articles. So members potentially when they go to Contact Us, they're going to get their information immediately. Why is there a delay on my product? Well, we were dealing with a lot of vendors and a lot of shipping companies that were in the same challenge of every other business, which is lack of resources. And so we were able to communicate that very quickly, and that was really all because of the [ C channel ] analytics in our volume monitoring tool being able to access that information.

Yes. It's interesting, Jamie. There's so much talk about digital transformation these days, but boy, what a fundamental transformation going from pen and pad, physical writing and putting into the feedback box in the warehouse, to pushing people to the digital channels. And by the way, everyone today has some sort of digital device, whether it's a smartphone or a laptop. And so really, really easy to put that input in. And so as a follow-on to that, I know we talked a little bit earlier about making sure the warehouse managers were able to get that feedback. I got to imagine that greatly expedited them getting more real-time feedback versus having to manually tabulate and update the spreadsheet and that kind of thing.

Yes, it was eye-opening because the other great benefit of the digital feedback is you can utilize the alerts that are e-mail alerts. So that feedback, the very next day or the next hour or every 15 minutes, whatever you want to send up to be, you can go to whatever distro you wanted to go to. So what ended up happening with somebody in the warehouse choosing what they want to key from the paper comment and distribute that to maybe just their own BP. Now, was distributed to people at the corporate offices, our buyers. We just had to set it up one time, and then they were continually getting this daily feedback. That was a very eye-opening. And so I think that, again, this really justified the benefit of digital feedback and then the amount of time savings that we have with people not having to actually key it in at Costco employee. But the members are doing it themselves, and we're getting the verbiage right from the member. So yes, it was very eye opening for our executives.

Yes. Interesting. Yes. Not to say that any of your warehouse managers would intentionally gain the system, but this way, you know it's coming directly from the member and in going straight to your teammates.

Yes, correct.

Yes. I also think, just thinking about one of the keys to success in the last year during the pandemic has been speed to insights and what you talked about relative to pushing content to your associates based on what you were hearing in the digital feedback so that they could be proactive. They wouldn't be taken off guard by a comment or [ a theme ]. That had to be incredibly helpful to be more reactive and more helpful in the moment, having that process of giving them knowledge and knowledge management at their fingertips.

Yes. Absolutely. I mean we control -- our content team has oversight over our customer service page for the members, but they also have oversight for our agent training and content. So again, going back to the seat analytics and quality, we were able to understand where there were frustrations and how could we better equip our agents in answering those and giving them the right tools and helping them to understand what's really going on in our culture, in our society in the world, so they can address those member concerns quite a bit easier.

Yes, for sure. And I know you've done an amazing job of breaking down silo walls. Every organization has them, especially an organization the size of Costco. But you've done an amazing job of using customer and customer experience and input to help bust down those silo walls.

Yes. I mean that was a game changer for us initially when we started using the digital feedback on costco.com because prior to that, we didn't have a way of capturing fees, not from our members using our website. So yes, that was another game changer and eye opener for our buyers for costco.com as well as utilizing it if we were having error messages or there was an issue on costco.com where something was not processing correctly, we easily capture that data, and we can summarize it very quickly and send that to our IT department and justify change. So yes, that was a -- like I said, that was super beneficial because prior to that, we would just convey the message to IT. Well, here's what we're hearing from the members. Here's the problem. Well, now they could see the members comment themselves. And they could -- again, we could add them to the daily alerts, to the hourly alerts. And they could see that if they wanted to. And there's also a live time mosaic screen in the tool. And so that's what time, what's coming through. So we used it as much as we could. In our culture, we're very well known as if you have a technology, you better get every single thing out of that technology. But we heard this. We don't spend money easily. And so we really did. I mean we grabbed a hold of that, and that was my baby. Super proud of that. I got to lead that whole initiative with the digital feedback. And I think it was -- I pushed it out to as many people as I could and just really broadcasted the benefit of digital feedback at that time.

Yes. There's nothing like true voice of customer to help move the organization or to help make a point. Everyone needs to listen to the customer. And so -- and by the way, everyone in the organization, from IT to marketing to service, you guys are all speaking the same language. You don't have pockets of different customer experience data in metrics. You guys are all centered around a common framework and a common set of metrics. That's really, really helpful.

Yes.

So one of the things we saw in our study was the shift to more flexible fulfillment in order and delivery options and even purchase options for that matter during the pandemic. As an example, we saw in our study that 23% of the consumers that ordered by web or by phone used the curbside option to go pick it up. And a year before that, curbside wasn't even a blip on the radar, right? It sprung up overnight. I'd love to hear a little bit about your fulfillment strategy, the checkout options, whether it's curbside, or I know we've talked about express lanes, but I'd love to hear a little bit more about how your fulfillment strategy has shifted over time.

Yes. Well, the curbside, that was another huge move for us that we had. I don't think prior to that, had any serious thoughts about trying that at the time because warehouse was working well and costco.com is working well. So but this definitely was a time where we had to again look at how we take care of our members. Yes, they could shop on costco.com. But if they need it immediately or they're supporting their business and they need to get it -- get in there, what can we do to make them comfortable doing that? And so we did test it in some locations. We're continuing to test it. But talk about bringing teams together in operations and in the costco.com and warehouse management teams and how do we make this work, they had to work very, very quickly, again, showing an example of how we need to be nimble. That was really easy to do when we were a small company. We're a large company now. It's not so -- we're still doing it because that's just ingrained in who we are. So we also have been testing in some locations, and I frankly don't know how many locations use the express checkout, but we have tested that as well. Again, that's another concept that we really had no interest in doing. We had been testing it before the pandemic. But again, what's going to help our members feel comfortable getting in and out quickly. So much had to change, putting plexiglass up everywhere, making sure that all of the [ stations ] was correct when they were standing in line and counting how many members were coming in the location at one time. And we have lines outside of the warehouse. People would -- didn't have any second guessing of like, "Well, I need to go to Costco." So we would have lines sometimes wrapped around the building. They would be willing to wait to get in. So again, just looking from every angle, what do we need to do to get the members get their merchandise safely to them, however that looks.

Well, Jamie, thank you so much. An amazing journey, an amazing story, and again, amazing results for Costco in our most recent retail study. So I can't thank you enough for spending time with us and everyone listening in today.

Well, it's a privilege and an honor. Thank you for having me.

Well, thank you, everyone. I really appreciate you all participating today, and I hope you all have a great rest of the day. Thanks again.