Why does Costco prefer to pay higher wages rather than maximize profits?

Outsourcing/Joint Business Translation Center

Company Culture, Is It Really Useful?

Today, many companies have their own culture manuals, printed beautifully and placed in the most prominent locations. But are those words merely decorations, or do they truly flow in the blood of every employee? For a company, what does culture really mean?

In this regard, Costco CEO Ron Vachris shared his profound insights. Ron joined the company in 1982, rising from forklift driver to the company’s leader.

During a guest lecture at Seattle University, he combined his nearly 40 years of experience to systematically explain how Costco understands corporate culture and how culture influences employee management, supplier collaboration, product development, and community responsibility.

In this speech, he shared many real cases: why Costco prefers to increase employee wages rather than use better financial figures to boost profits; why, during the pandemic, even with severe inventory backlog, they still adhered to their commitments to suppliers; why, when products have defects, they proactively offer full refunds to all members.

These seemingly “clumsy” practices are backed by a very clear business culture—always doing the right thing.

Below is the full speech (translated by the Joint Business Translation Center):

Costco CEO Ron Vachris

01

Why Talk About Corporate Culture?

Let’s start with the most basic question: What is culture? Culture is a collection of shared values, behavioral norms, and ways of handling things among a group of people. Today, I want to discuss culture from a practical business perspective—how we understand it and what it truly means to us.

When employees first join the company, it’s the best opportunity to convey “what matters most.” So we always ask: As a Costco employee, what is the most important thing to you? And that answer is embedded in our culture. Culture must be communicated from the first day of employment and carried through until retirement, resignation, or the next chapter in life.

The host mentioned earlier that I am fortunate to be the third CEO of this great company. Our founder, Jim Sinegal, is also here tonight. He founded Costco and served as CEO for over 20 years, from 1982 to 2012. Afterward, Craig Jelinek took over, and about 13 months ago, Craig handed the baton to me.

You can imagine, having worked with these two for a total of 33 years, I received many valuable and substantial pieces of advice. But honestly, as I advanced in my career, those suggestions became simpler and more focused on one core principle. I remember before the company announced my appointment as president, Jim told me: “Culture is not one of many priorities; it is the only priority.”

I guess many of you are thinking: Costco’s corporate culture must be backed by a comprehensive, detailed system, right? Indeed, there is such a slide, with only one sentence: We always do the right thing!

This sentence is not arrogance but a solemn commitment to all stakeholders. We are not claiming Costco will never make mistakes—that’s unrealistic. With over 320,000 employees, no one can be flawless at all times. The true meaning is: when we make mistakes, how do we face them? We look back and correct them. That’s our promise, not self-praise.

Why has this culture, established 42 years ago, remained solid and fresh? In my view, the answer is simple: it’s clear, concise, and to the point—no explanation needed. Our corporate culture does not include logic like: “Do the right thing, but if it costs more than $100,000, then forget it”; nor “Treat employees well, but do they really need such high pay?” Those are not part of our culture.

At its core, our culture is: do the right thing, and all other issues will naturally find their answers under this premise.

So why is corporate culture so important to Costco? Why is it our top priority and core driving force? Because it defines our company’s temperament and shapes every employee’s demeanor.

Our culture protects our members, our employees, our suppliers, and also safeguards our shareholders. As I mentioned earlier, this is a solemn promise to all stakeholders. It provides clear and firm guidance across all aspects of our business.

But the most fundamental point is: the power of culture depends on how we practice it. Only by truly integrating this culture into daily actions can it become the deep foundation supporting the company’s sustained growth and global expansion.

Of course, our core business is not “selling culture” but “selling products.” Our mission and corporate culture are interconnected and mutually reinforcing: “Continuously providing members with high-quality products and services at the most competitive prices.”

Quality has always been our primary principle at the product level. It is our goal, our mission, and the meaning behind every Costco employee’s daily work. Whether you are in finance, IT, or frontline cashier, every effort directly impacts our business results and our shared future.

02

Employees Are Our Most Core Competitive Advantage

Next, let’s delve into the relationship between culture and people.

As I mentioned earlier, we have 321,000 employees worldwide. I can say without hesitation that, over the years, I have believed that our employees are our most vital competitive advantage in the retail industry. Whether they are buyers or forklift operators in warehouses, Costco has the best team in the industry. That’s the fundamental reason why we stand out.

95% of our employees are eligible for benefits, and 97% are actually enrolled. The remaining 3% mostly have spouses working at the company, so they don’t need to double-dip. From another perspective, our actual coverage rate is nearly 99%.

Our employee wages are quite competitive. In the U.S., the average hourly wage for part-time workers is $30 (about RMB 206). Of course, if we lower the hourly wage to $26 (about RMB 179) or $24 (about RMB 165), our financial figures would look better. But the fundamental question is: is that the right thing to do? No, it’s not. The correct approach is to treat employees well to the best of our ability, not to calculate how little we can give.

Because of this, our employee turnover rate is very low—only 8.5%, about one-third of the retail industry average. People want to stay at Costco. A cashier who has worked for 30 years, or a forklift driver for 25 years—these are irreplaceable assets. They are true professionals, and as long as they are willing, we want them to stay.

Our employees are the best brand ambassadors and the face of Costco. As CEO, I rarely interact directly with members—maybe a few times a year. But our employees face 30,000 members daily in the stores. They are the real people engaging with customers and embodying the company’s image. We must treat them well, providing dignified work, fair wages, and comprehensive benefits.

Next, these two points are especially critical for us and make us unique in the retail industry and beyond.

First, we offer career development opportunities, not just a job. This has particular significance for me. When I joined in 1982, I wondered: how far can I go here? The company’s culture made me feel secure and warm—like they truly cared about me. I was thinking then: what kind of platform can this company give me?

Second, we insist on internal promotion. We always promise that 80% of management will be promoted from within. Everyone is included, and everyone has equal opportunity. No matter where you are in the world working for us, opportunities are equal. This is not only a value but also good business practice.

Over the years, we have faced various challenges and proven our resilience. During prosperous times, we perform well; during downturns, people look to save money and naturally turn to Costco—we still perform strongly. During the pandemic, we also delivered a convincing performance.

Our business model is built on solid core values that withstand the test of time. Of course, as times change, adjustments and adaptations are necessary, but the foundation remains stable. As long as we stay true to our roots, Costco’s future remains promising.

03

Promises to Suppliers Must Be Kept

As I repeatedly emphasize, our mission is to continuously provide members with high-quality products and services at the best prices. I want to expand on this point. When a company interested in partnering with Costco comes in, their first question is: who am I really dealing with when selling goods to Costco?

First, we are a high-volume retailer. If you want to become our supplier, you must have the capacity for large-scale production because our operations are very fast and efficient. Our style is: for a single product, we order 1 million units, in two colors and two sizes—then we let production run freely.

We focus on turnover, not profit margin. We want to earn 9 to 10 cents per item, not three or four dimes. Our goal is to increase sales volume and maximize benefits for members, selling quantities that even surprise us.

We are one of the few truly global retailers. From the company’s founding, Jim established a tradition: 12 times a year, we gather all global operations leaders and regional managers for two days of closed-door meetings. Buyers and operations leaders sit together, discussing business—what’s happening in Australia, new trends in Sweden, the situation in Mexico. Honest communication, coordinated efforts. Despite our global footprint, we operate as a unified whole, highly synchronized.

This also means that if a supplier has issues or wants to push new proposals, they only need to come to one place—us—and their products can be distributed worldwide. We are strict but fair. Agreements are commitments. This has been our principle for many years. Let me give a specific example.

During the pandemic, the situation changed daily—many of you have experienced this firsthand. For a time, apparel sales nearly stopped; no one wanted to buy clothes. Clothes were displayed openly on shelves, many thought they were contaminated with the virus and dared not touch them.

At that time, our apparel buyer came to me with a big problem. I asked what was wrong. He said inventory was severely backlogged, selling very slowly, and more stock was on the way. Worse, many apparel suppliers called in panic, canceling orders because other retailers were doing the same.

He said: “But I simply can’t do that. I made commitments to buy $100 million (about RMB 688 million) worth of jeans and $50 million (about RMB 344 million) worth of others.”

In the end, our team held firm and fulfilled every order. We asked suppliers to slow down shipments, delay slightly, because at that time, apparel inventories filled warehouses across the U.S. and everywhere else. Every corner was packed. But we honored every confirmed order.

This incident will be remembered by those suppliers for decades. They will remember that Costco keeps its promises. We didn’t need that stock at the time, and we even had to borrow money to pay for it. But our promise is our promise—we must be true to our words. Ultimately, this reflects our corporate culture in action.

04

The Essence of Developing Private Brands Is Creating Value

Next, let’s talk about Kirkland Signature. It is currently one of the largest private brands globally, with sales exceeding $58 billion (about RMB 399 billion) last year. All started in 1995 with just two products: a bottle of shampoo and a bottle of vitamins.

This year marks the 30th anniversary of Kirkland. You might ask: we already have well-known brands like Apple, Tide, and Nabisco—why do we need our own brand?

The answer is: it’s a way for us to control quality and protect value for members. Every Kirkland product in Costco is developed by our own buyers—from raw material selection, origin control, formulation refinement, to how to make the product better, every step is personally overseen.

Today, we also reviewed a new line of sushi products and other categories carefully planned by our buyers.

The core question about private brands is always: how can this product be further optimized? Quality is always the top priority, and price must remain competitive. We will continue to pursue innovative packaging, streamline ingredient lists, and ensure full traceability. We know exactly where raw materials come from and through which processes. If problems arise, we can trace back to the source.

This approach often helps us ensure stable global supply. For example, we have arranged for cashew farmers in Africa because we understand future sales volumes. We have long-term relationships with suppliers of avocados from Mexico and cashews from Africa to ensure continuous supply. Behind this is a global network of partnerships supporting us.

After achieving all this, we also ensure that consumers enjoy at least 20% price advantage. That’s why Jim and his team decided in 1995: we need our own brand—something that distinctly differs from other retail brands.

While culture is beautiful and easy to practice when everything is smooth, the real test of culture often occurs when problems arise or things don’t go as planned.

Let me share two examples.

Does anyone here play golf? Many have probably heard the phrase—“He hit the ball so hard it flew off the club.” But once, by mistake, our product had such an issue. I remember clearly that day. The Kirkland golf ball buyer came to my office, followed by his supervisor and the supervisor’s superior. They carried a box of golf balls and said, “We need to talk to you.” I understood immediately—this was not a small matter.

It was about the second-generation Kirkland golf balls. The first generation was very well received, and we wanted to improve and iterate. That’s Kirkland’s consistent approach—always striving for better. But after the first 100,000 balls sold, we found 10,000 had quality issues. The key problem was the adhesive used to fix the ball shell. The issue was here: 10,000 balls could have their shells fall off if hit hard.

I looked at the three of them and asked: “How do you plan to handle this?” What made me truly proud was the buyer’s response.

He said: “My idea is this: the 10,000 defective balls are mixed in with other batches, and we can’t distinguish which ones used the problematic adhesive or where they went. So, I plan to send a letter or email to all members who bought this golf ball, offering a full refund of $24.99 (about RMB 172). I’ll tell them: your purchased balls might have quality issues, or they might not. But here’s a full refund—keep the ball if you want.”

After hearing this, I thought it was a brilliant solution. I said: “This is the best way to handle it.” Honestly, only about 5-6% of members would return the balls. We could quietly let this issue go, even withdraw from the golf ball market without fuss—because if this quality problem were exposed, it could ruin us in that category.

But what happened? It became a legendary story. We received countless emails and calls from members saying: “Who are you? I don’t know if my balls have issues, but you proactively gave me a full refund—who does that?” We did it.

Many members didn’t even realize their balls had problems. But the key is—we knew. We knew there was a defect somewhere. We knew it was wrong. So, we took responsibility and corrected it.

Another story from earlier: once, we sold a redwood swing set that sold very well. To meet demand, suppliers worked tirelessly. During this process, without informing our buyers, the supplier made a decision: two parts couldn’t find redwood, so they used a similar quality wood as a substitute, thinking consumers wouldn’t notice. But our buyers found out.

We confirmed that the product posed no safety risks and that the quality was not materially affected. But the core issue was: what we sold to consumers was not the full product. It was not a complete redwood swing set; some parts weren’t redwood.

The buyer’s solution was the same: send an email to all members who bought it, explaining the situation, and offering two options: return the entire set for a full refund, or keep the product and receive the two replacement parts free of charge, or get a $72 (about RMB 495) refund—the cost difference between redwood and regular wood.

These are real critical moments—true reflections of our corporate culture in action. I must say, I am most proud not of the decisions themselves but of the fact that when talking to those directly facing these issues, they already know what to do—without anyone telling them.

The problem is never “Will most people notice it’s not redwood?” The real issue is: it’s wrong, and we must correct it. That’s the true strength of culture. That’s the expectation all stakeholders have of us—we will do the right thing. That’s why corporate culture is so fundamentally important.

05

Every Store Must Be Rooted in the Community

Next, let’s discuss the community.

We always uphold a promise: in every place we operate, we sincerely give back to the local community and be responsible corporate citizens. What does this mean?

First, providing the community with reasonably paid jobs with good benefits. Nothing injects vitality into a community more than creating quality employment. When people can support their families, pay bills, and live with dignity, the entire community benefits.

Second, we take seriously the impact of our operations on nearby residents. When opening a new store, do we manage traffic well? Are noise levels acceptable? Do we need to build walls to block light into residents’ homes? Do we prioritize local suppliers? We want every facility to be clean, safe, and a source of pride for the community.

Here, I want to share a habit. For 42 years, whether it was Jim, Craig, or myself, before entering any store, the first thing we do is drive around to the back of the warehouse. We look at the back area. Is it presentable? Are there trash and pests? From one end to the other, it must be tidy.

We also highly value sustainability. Are we doing the right thing for the community and the world? Are we fulfilling our responsibilities as a responsible corporate citizen? Are we caring for the land we occupy?

In charitable donations, we allocate 1% of our pre-tax profit annually to public welfare—focusing on children’s education, healthcare, humanitarian aid, and disaster relief. We concentrate resources in the communities where we operate. This is just the beginning of fulfilling our community responsibilities, not the end.

When you treat a community this way, and conduct your business this way, what happens next? When you want to open a new store there, you will be welcomed. People want you to be part of their community. Because you bring good jobs, care about the place, and participate locally. It’s meaningful for many. As long as we maintain this attitude, every expansion will be welcomed by the community.

I’ve shared stories about our product buyers, and on the community level, there are also moments that make us proud—stories involving our employees. Patrick Callans, our HR director, has witnessed all this.

In recent years, we experienced several devastating fires—first in Maui, then in Los Angeles. I wish I could tell you everything our employees did during those times. No one asked them to do it; no one told them in advance—it’s all from their own hearts.

On the first morning after the Maui fire, our local store manager proactively opened the parking lot to disaster victims. Food was set out, tents were erected, and shelter was provided. At that time, all hotels were full. She did everything she could without waiting for instructions.

We called to check on her, and she said: “This is what I’m doing now…” We asked what she needed, and she said: “More water, this, that—send it over quickly.” Step by step, things moved forward.

In Los Angeles, the response was similar. Our employees immediately thought of helping affected members. Meanwhile, seven employees lost their homes in the fire, and about 70 had to evacuate at some point, unsure if they could return. Our senior vice president in LA responded swiftly, booking seven Airbnb units so these employees could settle in, care for their families, and continue working normally.

These are reflections of our culture. Don’t overthink—just do the right thing first, then come back and figure out how to help further. That’s what truly matters.

06

Staying Consistent in a Changing World

In our daily operations and meetings, “innovation” is a recurring theme. How do we keep pace with the times? Deliver fresh produce within two hours? Sell large items via app? Continuously iterate our product lines? Expand organic food categories? Innovation is endless, but it must always meet genuine member needs.

However, equally important as continuous innovation and growth is staying true to ourselves. Many once-glorious companies decline or disappear because they lose their identity—forget who they are and why they exist.

So we often share this perspective with our team: what has changed is worth celebrating; what remains unchanged is equally vital. What we have never changed is our promise to offer members the highest quality products and services at the best prices.

Costco’s stores carry about 3,800 categories, but we only choose the best. We make judgments for our members. When you walk into Costco, you don’t need to stand in front of 14 different ketchup brands, pondering which offers the best value. There is only one ketchup. We’ve done all the homework for you. Just buy this one—it’s good, and we guarantee it.

We do as much as we can for our employees. They are the backbone of our business. How can we not give back wholeheartedly to those who help us succeed? Compensation, benefits, career development—80% of management is promoted from within.

I’ve shown you that these are not slogans but real actions. This is our stance, our practice. This slide has been with us for many years, and every time you look at it, you see the same words: Always do the right thing.

So, through this brief sharing today, I believe we all understand why Jim said: “Trust me, culture is not a priority; it is the only priority.” This statement connects to every aspect we’ve discussed today: people, community, sustainability, environment, and all our efforts in “doing the right thing.” If I had to describe what culture looks like and where to see it—it’s in all our actions.

But if I were to give culture a more precise definition, I would say: culture is at the core of everything we do. It should permeate every action, every recruitment, every promotion, every expansion, our approach to sustainability, whether Kirkland’s products truly uphold the brand, and how we genuinely involve employees in the company’s growth.

As long as we keep culture at the center and let everything revolve around it, I can tell you—our future is bright. No matter where we go, we will not lose our way.