December 14, 2005

Costco Revisited

This past summer I blogged about Costco. I thought that the story was interesting. That piece came about a week after I professed my love for Costco and Trader Joes. Now I am ready to share another piece about Costco that I found to be of interest.

It is an ABC story about Costco's CEO, Jim Sinegal that is very pleasant. In a time in which it is all too common to read about he excesses and corruption in big business I really enjoyed this. I want to share just a few excerpts.

"Unlike the stereotypical CEO, Sinegal doesn't try to distance himself from his employees. He even wears a name tag — but not one that says "Jim, the CEO" or "Jim, Costco Founder." It just says Jim. He easily could be mistaken for a stock clerk.

His philosophy is simple, he said. "We have said from the very beginning: 'We're going to be a company that's on a first-name basis with everyone,'" he said.

That also includes answering his own phone. "If a customer's calling and they have a gripe, don't you think they kind of enjoy the fact that I picked up the phone and talked to them?" he said.

The son of a steelworker, Sinegal began in the warehouse business, loading mattresses. Sinegal's working-class values are ingrained in Costco's corporate culture. That may in fact be the key to the company's success

"Our code of ethics says we have to obey the law. We have to take care of our customers, take care of our people. And if we do those things, we think that we'll reward our shareholders," Sinegal said.

He certainly has rewarded them. This year's sales total more than $52 billion from 462 stores in 37 states and eight countries. Costco is now the nation's fourth-largest retailer, selling everything from crab legs to flat-screen TVs to caskets — and even a Picasso painting.

Part of Costco's genius is its simplicity. A typical Wal-Mart stocks more than 100,000 items, Costco stocks only 4,000. Stocking only high-quality goods, Costco attracts the most affluent customers in discount retailing — with an average income of $74,000.

Ray Dinari, a criminal defense lawyer and loyal Costco shopper, said: "I think I spend over $20,000 — $25,000 a year buying all my products here from food to clothing — except my suits. I have to buy them at the Armani stores."

The secret to Costco's profit is simple, too. Its margin on each item isn't very high — but Sinegal says they make it up on volume. To give you an idea of the incredible volume, Costco sold 90,000 karats of diamonds and 26 million rotisserie chickens in 2004.

Costco is also the largest seller of fine wines in the world. And during this holiday season, it will sell $16 million worth of pumpkin pies."

That is a lot of pies.

"And Sinegal says he's also built a loyal work force. In fact, Costco has the lowest employee turnover rate in retailing. Its turnover is five times lower than its chief rival, Wal-Mart. And Costco pays higher than average wages — $17 an hour — 40 percent more than Sam's Club, the warehouse chain owned by Wal-Mart. And it offers better-than-average benefits, including health care coverage to more than 90 percent of its work force.

Costco doesn't have a P.R. department and it doesn't spend a dime on advertising. There's a real business advantage to treating employees well, Sinegal said. "Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you," he explained.

Many Costco workers have been with the company since it was founded in 1983. Once hired, they rarely leave.

Susan MaConnaha, a Costco vice president and head baker, said working for Costco is a family affair. "My whole family works for Costco, my husband does, my daughter does, my new son-in-law does," she said.

And Sinegal rewards that loyalty. "We promote almost 100 percent from within our company. We have guys who started pushing shopping carts out on the parking lot for us who are now vice presidents of our company," he said.

In an era when many CEOs are seen as greedy and sometimes corrupt, Sinegal is proving that good guys can finish first — and without all the corporate frills. Sinegal even sends out his own faxes from his bare-bones office-without-walls at company headquarters near Seattle. But the most remarkable thing about Sinegal is his salary — $350,000 a year, a fraction of the millions most large corporate CEOs make.

"I figured that if I was making something like 12 times more than the typical person working on the floor, that that was a fair salary," he said.

Of course, as a co-founder of the company, Sinegal owns a lot of Costco's stock — more than $150 million worth. He's rich, but only on paper.

Nell Minow, editor and founder of the Corporate Library and an expert on corporate governance, said she was shocked to discover that Sinegal's employment contract is only a page long. "I would love to clone him," she said.

"Of the 2,000 companies in our database, he has the single shortest CEO employment contract. And the only one, which specifically says, he can be — believe it or not — 'terminated for cause.' If he doesn't do his job, he is out the door," Minow said."

Pretty cool stuff if you ask me.

6 comments:

Ezer K'negdo said...

That ROCKS. As someone who has spent quality (and some not-so-quality) time in the retail world (as an employee - not just a consumer!), it is so heartening to see ethical business people do well. Kol HaKavod Costco!

-Ann said...

Yeah, Costco is definitely one of the things I miss. We went there once and were amazed by all the good stuff at decent prices. It is refreshing to hear that the place is run so humanely.

The Misanthrope said...

Costco is a nice store.

Jack's Shack said...

Costco is one of the few retail establishments that I ever considered working for.

Stacey said...

I'd read a similar article in August about Mr. Sinegal and was so impressed that I bought Costco stock (which has already done well for me!). I'd always loved Costco, but love it even more now, knowing what a mensch is at the helm.

MC Aryeh said...

Very impressive. And all too rare...thanks for the article, Jack, and for the pies comment. Wasn't expecting that, and it made me laugh.