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Costco has a brilliant strategy that allows it to pay workers $15 an hour

Business Insider logo Business Insider 3/18/2019 Kate Taylor

Costco gets some of the best press in America.

"12 Reasons To Love Costco, As If You Needed More," HuffPost reports. "Costco Was Named The Best Company To Work For, Because Duh," reads a Delish headline. Chef Samin Nosrat name-dropped Kirkland Signature organic extra-virgin olive oil in a recent Seattle Times interview, while Consumer Reports celebrated the chain's dishwasher pacs.

In the last month alone, Business Insider has published "9 times when Costco is better than Amazon," "Warren Buffett explains how Costco is dominating in one crucial area," and "Millennials are obsessed with raising plants, and Costco is poised to capitalize." 

Most American retailers would spend millions of dollars to plant this type of coverage, with a barrage of commercials and press releases highlighting companies' achievements. Clearly, the budget retailer's public relations team deserves a raise.

However, Costco doesn't have a PR team at all. And, while rivals spend billions on ads, the company spends nothing on advertising.

Why Costco believes advertising is evil

"We consider [advertising] evil," Costco cofounder Jim Sinegal told The Motley Fool in 2013. "Because it costs money; anything that is going to raise our price on merchandise is bad. We've got to have that type of an attitude." 

Amazon spent $6.3 billion in advertising and other promotions in 2017. Target spent $1.4 billion. Walmart spent $3.1 billion on advertising in 2018, up from $2.9 billion in 2017.

Costco saves an estimated 2% a year in costs by not advertising, allowing the company to reinvest that money in slashing prices. This strategy has allowed Costco to keep prices extremely low, often undercutting the competition.

"We recognize and appreciate that members of the media are interested in Costco, its products and its merchandising philosophy," Costco said in a statement to Business Insider. "However, the company's successful business model is based on maintaining a lean operation. As a result, departments such as Public Relations and Advertising do not exist at Costco."

This "lean" operation is obvious to any reporter trying to get in touch with Costco.

Related video: Costco workers will see their minimum wage raised to $15 an hour (provided by Yahoo Finance)

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Costco has reporters fill out a Google Doc, warning them that they likely will not receive a response for up to 48 hours. Typically, this response will be a couple of sentences or a variation on "no comment" from someone on the minuscule corporate communications team who ends emails asking not to be identified by name.

"In the same way we offer a no-frills shopping experience in a warehouse environment, choosing not to staff departments that aren't critical to our day-to-day business is one more way we're able to keep prices low and pass on savings to Costco members," one of these Costco representatives said in a statement. 

The average markup on a Costco item is just 11%, Fortune reports. For comparison, the average markup at Walmart is 24%. Supermarkets mark up prices by 30% on average, and Home Depot and Lowe's boost prices by an average of 35%.

Despite refusing to pay for advertising, Costco isn't stingy in other areas. The company is known for paying workers more than rival retailers, recently raising its minimum wages from $14 and $14.50 up to $15 and $15.50. The company regularly tops lists of the best workplaces in America.

Read more: Costco is raising its minimum wage to $15 as the war for talent rages on

In other words, instead of spending money on PR and advertising, Costco is spending money on paying workers more and making items more affordable for customers.

Apparently, a company doesn't need multimillion-dollar PR campaigns when employees and customers will essentially provide free marketing.

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