Let's talk Employee Loyalty and Profit

I was reading the news today about the dock worker strike that started last night. There is clearly something going on out there with employees feeling dissatisfied with working conditions and especially pay disparity. No doubt the fact that post-covid inflation rates coupled with a lack of wages keeping up have a lot to do with this. That said, I also think that corporate cultures have abandoned a smart ethos of taking care of their employees.

Let's take two similar companies: Costco and Amazon. It is well known that Costco treats its employees well. They offer competitive wages and comprehensive benefits for all employees, yes even part time employees. They also offer a lot of career advancement within the organization. Amazon, on the other hand, is clearly struggling with employee relations. There are many reports of demanding work conditions and high productivity quotas. Working in the warehouse sounds like a nightmare. And there are several instances where Amazon workers are looking to unionize to improve conditions.

There are a few facts to look at that are very interesting:

1. Costco's employee turnover rate is 17%, this drops to under 6% for employees who make it past one year. In contrast, Amazon's is 100% in certain facilities and overall is closer to the industry standard of about 60%.
2. Costco's profitability is about 2x what Amazon's profitability is. While Amazon, overall, is a much larger organization. Retail to retail numbers are fairly similar.

To be fair, there may be other considerations in the profit number. Different business models and pricing strategies do have an effect, but the fact is that Costco's profitability numbers are far superior to the rest of the retail industry.

I am reminded of the book, "The Loyalty Effect" by Fred Reichheld. Published in the 1990's, it's lessons seem to be lost to history. But they are profound. Reichheld's research illuminates how loyalty can drive growth and profitability. Loyal employees are more productive, provide better customer service, and contribute to a positive company culture. They become brand ambassadors, attracting both customers and top talent. Which in the end, create stronger profits.

The real point of his book is this. We are obsessed with creating investor value in today's business world. His stance is the best way to do that is that is by starting with taking care of your employees.

The equation is pretty simple. Investing in your employees creates:

• Enhanced Productivity: Loyal employees are more experienced and efficient.
• Better Customer Service: Happy employees lead to happy customers.
• Reduced Costs: Lower turnover means less spending on recruiting and training.

Conversely, if you look at companies with high turnover rates, indicating that they tend not to care for their employees, you see:

• Increased Training Expenses: Constantly onboarding new employees is costly.
• Operational Disruptions: High turnover can lead to inconsistencies in performance.
• Reputation Risks: Negative perceptions about employee treatment can affect brand image.

Employee loyalty is more than a noble ideal; it's a strategic asset. As illustrated by Costco's success, investing in a positive work environment leads to measurable business benefits. Companies that prioritize their employees not only enhance their profitability but also build a sustainable foundation for long-term success.

In the words of Fred Reichheld, "Loyalty is dead; long live loyalty." In an age where the only constant is change, loyalty remains a powerful driver of business excellence. By nurturing loyal employees, companies can unlock the full potential of their workforce and achieve remarkable results. As leaders, we should give that some serious thought.