I read a blog post the other day suggesting good customer service might be a leading indicator for stock performance. I've often believed customer service was a key component of well-run, profitable companies and Watermark Consulting has the study to prove it. Using Forrester Research's (NASDAQ:FORR) 2007 Customer Experience Index of best and worst customer service providers, it was determined that the 10 best publicly traded companies in terms of customer experience were able to deliver a 36% cumulative return between 2007 and 2009, compared to -6% for the S&P 500 and -53% for the 10 worst. I'll look at some of the winners from this study, as well as who might lead the pack in the next three years.

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Top 10 - 2007 Forrester Research Customer Experience Index

Company Cumulative Return
Costco (NASDAQ:COST) 15.8%
Borders (NYSE:BGP) -94.6%
Barnes & Noble (NYSE:BKS) -47.5%
Target (NYSE:TGT) -11.8%
Staples (NASDAQ:SPLS) -4.0%
Gap (NYSE:GPS) 13.3%
BJ\'s Wholesale (NYSE:BJ) 5.1%
Amazon.com (NASDAQ:AMZN) 240.9%
Wal-Mart (NYSE:WMT) 22.6%
Walgreens (NYSE:WAG) -17.0%
Overall 12.3%

S&P 500 -21.4%

Slightly Different Numbers
Because I don't have Watermark's actual data, I used share prices from the end of 2006 and 2009. While the returns using these points in time are lower, the difference between the top 10 and the S&P 500 are similar to Watermark's findings. Instead of a 42% difference, I've come up with 33.7%. That's still a significant amount. However, the one issue that I have with the findings is that Amazon.com represents almost all of the gains for the group. Take it out of the equation and you have a much closer contest. For me, a better way to select the top 10 would be to include only those companies increasing operating profits between 2004 and 2006; the three years leading up to Forrester's 2007 survey. It should produce some interesting results.

Top 10 - 2007 Forrester Research CXI - Based on Operating Income

Company Cumulative Return
Costco (Nasdaq:COST) 15.8%
Kohl\'s (NYSE:KSS) -21.2%
JC Penney (NYSE:JCP) -63.3%
Target (NYSE:TGT) -11.8%
Staples (Nasdaq:SPLS) -4.0%
Gap (NYSE:GPS) 13.3%
CVS Caremark (NYSE:CVS) 6.7%
Amazon.com (Nasdaq:AMZN) 240.9%
Wal-Mart (NYSE:WMT) 22.6%
Walgreens (NYSE:WAG) -17.0%
Overall 18.2%

S&P 500 -21.4%

Three Additions
By selecting only those companies that ranked high in customer service and also grew operating income between 2004 and 2006, three companies were removed: Borders, Barnes & Noble and BJ's Wholesale. Three companies were also added in their place: Kohl's, JC Penney and CVS Caremark. None of the three lit the world on fire in terms of price appreciation over the last three years. They simply lost less than those they replaced and that was enough to deliver an additional 5.9% in cumulative returns, which raised the relative return based on the S&P 500 to just under 40%. Any way you slice it, good customer service translates into a healthier bottom line performance. More revenue, more profits, more shareholder returns and most importantly, more success.

Bottom Line
I would like to see further, more in-depth studies done on this subject. It's clear that public companies have a hard time quantifying the value of good customer service. In that respect, it's a lot like the flu shot. We know it's good for us but we still don't go to the doctor's office. Investors should embrace those stocks whose companies strive for customer service excellence. The more awards they have, the better. ((For more related reading about customer services, check out The Globalization Of Financial Services and Banking On Customer Service.)

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