In this age where reports of CEO getting high wage package that is uncorrelated with their actual performance are common, I thought this article featuring Costco's CEO Jim Sinegal was so refreshing. This article was published in Fast Company (found here).
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Flat-screen TVs, wedding rings, mini-quiches, gallon jugs of mayo -- and, of course, free samples. America's fourth-largest retailer, which opened its first warehouse store 25 years ago this fall, is booming. Wall Street grumbles that Costco cares more about its customers and employees than its shareholders; it pays workers an average of $17 an hour and covers 90% of health-insurance costs for both full-timers and part-timers. Yet revenues have grown by 70% in the past five years, and its stock has doubled. In typically blunt language, cofounder and CEO Jim Sinegal makes his case for why "big box" and "progressive" aren't mutually exclusive.
You answer your own phone, you send your own faxes, you talk to customers and employees. What motivates you to stay involved in the details of the business?
Because I love it. I've been doing it all my life, and it's my style. That doesn't mean it's the right style or the style that works for everybody, but it's my style.
You recently announced that August same-store sales were up 9%, yet Wall Street analysts were unhappy because you hadn't met their expectations.
You know, that has nothing to do with reality. Analysts put their own numbers on things, and we can't help them there. We think that 9% in the state of this economy is pretty good.
Some of those analysts have argued that Costco's generosity to its workers hurts the company and its shareholders.
You have to recognize -- and I don't mean this in an acrimonious sense -- that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security. We have 140,000 employees and their families; that's a significant number of people who count on us. We owe it to our suppliers. Think about the people who produce products for us -- you could probably multiply our family of employees by three or four times. And we owe it to our customers to continue to offer good prices. Our presence in a community makes pricing better throughout that community because when you have a tough competitor in the marketplace, prices come down.
Could we talk about your competition for a minute? Would you be willing to play a little game for us? Costco is to Sam's Club as _____ is to _____.
You're not going to get me to fall for that one. Listen, Sam's is a very formidable competitor. They're part of Wal-Mart. That's the biggest corporation ever in the world in terms of sales volume, and continuing to grow. They've made significant improvements to their Sam's operation. We watch them like a hawk. Hardly a week goes by that I'm not in a Sam's.
Do you buy anything?
I think I purchased one of their men's dress shirts one time, because I wanted to test it in comparison to ours. But I don't buy anything for consumption.
And obviously yours was better.
That's the reason I'm telling you the story [laughs]. No, I mean, we feel it's better. You know, you have to be careful not to delude yourself in what you're putting into a product. The final analysis is, the customers vote at the checkout.
What's the first thing you look for when you go into a Costco?
I try to approach the visits from the standpoint of a customer. Does the building have the right goods out? Is it well-stocked and clean and safe? Nothing is a bigger turnoff than poor housekeeping, most particularly in a place where you have food. Also, when you have a sloppy building, I can guarantee you're going to have high shrinkage [pilfering and shoplifting].
Sales on Costco's e-commerce site are expected to hit $1.6 billion this year, a 33% increase over 2007, and the average customer ticket is more than $400. What do you choose to put on the Web site as opposed to stocking in the regular warehouse?
We've generally tried to select items that are a little more unusual. For example, we've been offering floral arrangements for weddings. It's a complete package: The flowers for the tables and the flowers for the church and the flowers for the bridesmaids and boutonnieres for the men and the corsages for the ladies.
That seems unorthodox for a store like yours. Where do those kinds of ideas come from?
Certainly from our buyers, but they also come from our suppliers. When somebody sees that you're willing to take a chance on coffins, odds are they'll come up with some other good ideas.
Your coffin business is brisk?
They do well. They're generally special order. I think we sell more of them online than we do in our warehouses.
Are certain locations really great for coffins?
You mean like Florida [laughs]? No, no -- the unfortunate thing is people pass on everywhere.
What's done well that has surprised you?
Our Kirkland Signature wines. I thought, in that category of goods, people would be reluctant to take a house brand.
Kirkland Signature has become one of the most successful house brands out there.
There was so much pressure on prices going up, it created an umbrella for private labels to sneak in -- and under -- and to create significant savings. But we made up our minds that if we were going to make a private label, we weren't going to equivocate on the quality. Customers shop with us for value. They don't shop with us for cheap prices on cheap merchandise. They expect us to deliver value on quality.
What's an area that didn't work?
You don't have enough space in your magazine to talk about all the things that we've tried that didn't work out. Some time ago, we tried to get involved in the home-improvement business. We were going to have paint. There are places where you can get thousands of colors of paint. We were going to have four, and three of those were going to be white [laughs]. It's safe to say we underwhelmed the customer.
Do suppliers still balk at your policy of not marking products up more than 15%?
There will always be people who are going to be reluctant to sell to us. They use a lot of different excuses, but when you cut through all the defecation, the fact is, they don't want to see our prices on their merchandise. But most people have come around to say, "Hey, this is a pretty good company to do business with. They can sell a lot of our products." We have high-end customers. If anyone wants to purchase a Movado watch or Michelin tires or Waterford crystal, it's our customer.
How is the current economic climate impacting Costco?
We are subject to elements of the turndown just like everyone else. You might argue, "Well, gee, the value concept really holds these guys in good stead because people are looking for better pricing and perhaps are willing to go out of their way to find it." But Costco was developed to be cash-and-carry, catering primarily to businesspeople, and that business customer is probably seeing their business suffer a little bit, so their purchases are going to go down.
There are definitely purchases that are being deferred: patio furniture, housewares, and domestic products -- blankets and things like that. The upside is we're seeing more purchases of basic stuff like health and beauty aids and food. Apparel is doing reasonably well, but we're not in the business of selling $800 cocktail dresses.
Our healthiest business from a standpoint of sales growth has been in Asia; we're in South Korea and Taiwan and Japan. At the moment, our weakest, I would say, is in parts of California, Arizona, and around Las Vegas. Those are the places where we think more people have been hurt relative to this mortgage issue.
Are there economic issues you would like the next U.S. president to address?
I would like to see somebody paying attention to the deficits. I think they're significantly higher than have been stated, and they're not even taking into account the war or what's going to happen further down the line with Medicare and Social Security. How are we going to cover those costs? There's got to be some tough decisions made. These problems are not going to go away.
What's your stand on universal health coverage?
We should have it. I think that in the wealthiest nation in the world, it's a shame and disgrace that we don't. We try to provide a very comprehensive health-care plan for our employees. Costs keep escalating, but we think that's an obligation on our part.
What about high gas prices?
Even employees who work at Costco -- who make the type of wages that we pay -- are being hit at the gas pump. We're working very hard to schedule people from the same part of town so they can drive together. We're encouraging van pools. We're even testing 10-hour days, something we've never done in the past. If we can schedule some employees for four 10-hour days, that's one day they don't have to drive to work. They've got a 20% savings in their gas right there.
You've also installed skylights and solar panels in many of your buildings.
There's no sense in me BS-ing you. The reason we did it originally was exactly as you're suggesting -- to save money. We put the skylights in so that we didn't have to turn the lights on. But of course it's also environmentally correct. We also recycle all the boxes that the goods come in. And we're working on how we can simplify packaging and save on fuel. We just reconfigured our cashews. They were in a round canister, and we put them in a square canister. It sounds crazy, but we saved something like 560 truckloads a year of that one product. That's significant savings.
Is it true that you visit up to 12 Costco stores a day?
That's a legend I've tried to perpetuate, to keep everybody on their toes. You know, there certainly are days when I'll visit 12. I will be traveling to our warehouses every single week between now and Christmas. I love to hear the cash registers ring.
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