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Why Obama hearts Costco

(Susan Walsh/AP)

On Wednesday morning, just hours after he wraps up the State of the Union speech, President Obama will pay a visit to the Costco in Lanham, Maryland. There, he's likely to reinforce messages about raising the minimum wage and income inequality that are expected to be part of his speech Tuesday night.

It will hardly be the first time this administration has held up the discount behemoth as a model of corporate success. In his speech on the economy back in July, Obama hailed Costco as a company that "pays good wages and offers good benefits," proving "that this isn't just good for their business, it's good for America." At a campaign event held at Costco co-founder and former CEO Jim Sinegal's home in 2012, the president called the company "representative of what America is all about." Sinegal himself was a prime-time speaker at the Democratic National Convention in Charlotte in 2012. And Joe Biden, of course, made a famous shopping trip to D.C.'s first Costco.

Some of this could be due to the fact that Sinegal is a longtime Democratic donor, who has made campaign contributions to the president and raised funds for him during the 2012 election. He has praised Obama's small business policies in a campaign email and publicly backed the president's health insurance reforms.

But Sinegal also co-founded one of the few big, well-known companies in America that could illustrate the economic story the Obama administration wants to tell.

At a time when the minimum wage and health insurance are hot-button political issues, Costco provides a rare example of how a company can succeed despite offering generous health coverage and paying higher wages than many competitors do. Neil Stern, a senior partner with retail consultancy McMillanDoolittle, notes that people often say, "'The economy will be ruined if the minimum wage goes up, or goods will be priced higher if you have to pay your people more, or we can't afford to do that.' But Costco’s the example that says not only that you can do it, but you can build a thriving and successful company that also keeps its prices low."

Costco's generosity to employees has been well chronicled. According to a Bloomberg BusinessWeek cover story from June, the company pays hourly workers an average of $20.89 an hour, not including overtime. That's 65 percent higher than the $12.67 average hourly wage for Walmart's full-time U.S. employees. Costco also offers generous health benefits — the 88 percent of employees who are covered pay premiums that equal 10 percent of their plan's cost. (Human resources consultancy Aon Hewitt reports the average is 22.4 percent for U.S. companies.)

In exchange for all that generosity, Costco expects a lot out of their employees. Stern says Costco has one of the industry's lowest labor costs as a percent of sales, a key metric for retail companies. But with more productivity and responsibility comes the chance for more promotions, Stern says, which makes for happier employees and less turnover — a big problem in the retail world. At Costco, "the pieces work together really well. It's not just that they start their people off with more money, but those people have real opportunities for advancement." Bloomberg BusinessWeek reports that 70 percent of Costco's warehouse managers started as hourly employees in a store.

What's also notable, says Doug Stephens, a retail industry veteran and author of "The Retail Revival", is how religious the company has been about those standards even during the recession. "Costco has done a remarkable job of maintaining its competitive integrity throughout this entire economic downturn and so-called recovery," he says. The company "has really stuck to who it is. They could have made a lot of decisions — to drop the membership fee, to pay their people less. They haven’t done that."

Yet Costco offers the president another advantage as a corporate case study. The retail chain has become a cultural touchpoint that provides a president criticized as "elitist" with an everyman image of middle-class frugality. Other successful retailers that treat employees well, such as The Container Store or Whole Foods, are either too small to resonate widely or too laden with demographic stereotypes the president probably doesn't want to reinforce, Stern says.

Costco, meanwhile, is a company people can relate to and frequently visit. Says Stern: "It's a water-cooler conversation company." Surely, the president is hoping his policies become part of those conversations, too.

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