Costco Defies Street’s Wisdom
By George Anderson
Jim Sinegal, the CEO of Costco, says he pays attention to Wall Street analyst’s criticism of how he runs the warehouse club retailer. He simply doesn’t let it interfere with doing what he believes is in the best interests of the company, its employees and customers.
“On Wall Street, they’re in the business of making money between now and next Thursday,” he told The New York Times. “I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.”
One of the major criticisms of Mr. Sinegal is that he is too generous with employee compensation packages.
John Matthews, Costco’s senior vice president for human resources, said the company stands guilty as charged.
“When Jim talks to us about setting wages and benefits, he doesn’t want us to be better than everyone else, he wants us to be demonstrably better,” said Mr. Matthews.
Others contend that Costco is leaving money on the table by not charging as much as it could for many items.
Mr. Sinegal suggests his critics are missing the point.
“The traditional retailer will say: ‘I’m selling this for $10. I wonder whether I can get $10.50 or $11.’ We say: ‘We’re selling it for $9. How do we get it down to $8?’ We understand that our members don’t come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values.”
Mr. Sinegal thinks there are enough precedents in retailing history to justify his determination to keep prices low.
“When I started, Sears Roebuck was the Costco of the country, but they allowed someone else to come in under them,” he said. “We don’t want to be one of the casualties. We don’t want to turn around and say, ‘We got so fancy we’ve raised our prices,’ and all of a sudden a new competitor comes in and beats our prices.”
Moderator’s Comment: What are the biggest reasons for Costco’s success? What will be the company’s challenges going forward? –
George Anderson – Moderator
I think Costco has the right formula for success. Never mind what Wall Street says, most of them really don’t have the experience of running a business from day to day. All of them just put too much emphasis on improving the numbers every quarter. With very small population growth, where is the growth of business going to come from anyway (most likely from taking business away from one’s competitors)?
I totally agree with Jim Senegal — happy employees make happy customers and happy customers are the ones who are going to make one’s business strong. A very critical factor, which Costco has, is the absence of double standard–the CEO or the ruling class there is treated the same way the normal rank and file–which in itself is very rare in corporate America!
In the end, never mind what Wall Street thinks—happy customers come from good service and good employees. The Costco business model should become a golden yardstick of how success should be measured in the retail industry! Go Costco!
The biggest reason for Costco’s success? The founder is still in charge, he’s not interested in “cashing out” and leaving, and he appears excited, motivated, and vigorous.
The critical factor in retail success is the top leadership. When they get tired, when they get interested in selling their stock to sell out, when they get sidetracked by unrelated interests, the vision’s purity gets muddled, the implementation gets mediocre, the focus is reduced, and the competition starts to win.
If Sam Walton was still alive, would Wal-Mart have the same performance it has today?
1. They (COSTCO) know what they are.
2. Their customers know what they are.
3. They do not break their promise to the customer.
4. They keep it interesting.
5. They must not lose site of #1-4.
The reasons for their success are clearly stated in the article. It’s really that simple. Beyond that, their challenge will be to maintain their values and not crumble to greed.
There are consequences to their actions, as well as others. The consequences to the actions of the leadership at Costco are positive for the customer (first), the employees (second) and the shareholder equally as the first two.
They are a retailer worth admiring, not only for their position on wages and employee benefits, but in how they continue to be successful in delivering to the customer. They continue to be innovative and exciting to watch.
Now about those caskets???
The above have good observations that I won’t repeat. Costco caters to a higher income group and therefore Costco needs to have a better class of employee in their stores. That costs more money. Costco seems to be doing what works best for them. Retail is not a one size fits all industry. Costco is not Sam’s Club or Wal-Mart and the employees are of different quality. What works on Tobacco Road does not work on 5th Avenue. Going forward – I think they have a great future since we have a fast growing, wealthy population base.
Ron is right in that succession is a big deal, but I expect it is already being taken care of, quietly…which is how Sinegal and company like to operate. I do not look for the top two partners to change their stripes as retirement approaches and try to feather their personal nests. They’re way too classy for that.
Costco’s challenge going forward is “continuity of purpose”…value to customers, employees and share holders; and how Costco balances the global challenges of energy, supply chain economics with keeping prices low. The model now appears to be a winning one, albeit with strong leadership….but will this change going forward?
The biggest challenge going forward will be succession planning. What happens when Jim Sinegal and his partner Jeff Brotman, who are both in their 60s, retire? Is the next layer of management ready to take over? Will they take the same approach as the current execs, or will they try to appease Wall Street and get bigger paychecks? One of Sam Walton’s best decisions was to groom David Glass as his successor and thus ensure Sam’s legacy for at least another generation. Costco would be wise to take this lesson to heart and start grooming successors for Sinegal and Brotman. BTW, I like the idea of having a partnership on top of Costco – makes the atmosphere less commercial.
Off topic response to Scanner:
There is precedence for casket sales in retail outlets. My great grandfather started a general retail business that served a rural community in the Florida Panhandle. People used to knock on his door in the middle of the night to get him to come down and open the store so he could sell them a casket. This practice continued when my grandfather ran the business well into the early part of the twentieth century.
There isn’t much more I can add than what has already been said. What I would point out though is that if more retail CEO’s were like Mr. Sinegal, retail would be a more attractive career rather than the transit workplace it has become. Too many retail employees aspire to do something else rather than aspire to grow within the company.
There are a lot of great comments here, but one was missed. Costco covers all the basics, not just some of them. In retail, the most important decision is the first one…Where do I put my store? Costco continuously picks the best real estate and, may pay more for it, but there is a definite reason that their $/ft numbers are twice Sam’s Club and BJ’s…They buy premium locations, get a premium clientele and treat the customer right with value and service. This equation will win every time.
Too many public companies are slaves to quarterly numbers and analyst perceived actions inhibiting management’s ability to do the right thing for the long term. Costco is one of the few companies with the guts to be unconventional and do what is right for the business. Professionals like Mr. Sinegal know infinitely more about running a successful retail enterprise than recent MBA’s who know how to read financial statements. We need more Jim Sinegals in American business.
Costco knows retail, Wall Street does not. Nobody on Wall Street ever ran a business but they all know how it should be done. Paying employees too much?! Look at the pay for even the most junior people on Wall Street – no comparison to what retailers are paid. Wall Street is way overpaid.
What is wrong with retailers paying a decent wage? The people that are complaining are in a minority and probably never had to work as hard as a retail associate in their life. GO COSTCO.