In the early 80s, many companies like Sam’s, BJ’s, Pace, Wholesale Club or Price Savers, were cloning the successful Price club membership model. As a result, the retail world became more unpredictable, and in an unpredictable world, you can’t seem good without being good. While watching old Senegal’s appearances talking about Costco, I started thinking of “How lucky that someone so powerful is so benevolent.” But I realized it isn’t luck, in fact, it is by being benevolent that Sinegal became so powerful. The attitude has won Sinegal the adoration of his employees. He tries to visit every store at least twice a year, as a part of his store-hopping tour. Many of the employees have met him before.
Today, there is a new CEO, Craig Jelinek, running things now. He’s been at Costco right from the beginning, joining just a few months after Sinegal and his partner Jeff Brotman founded Costco. So, he’s quite well versed in the way the company operates and what makes it such a success. He has also spent a lot of time working with Jim Sinegal, especially in his last year.
If Capitalism is known as an economic and political system that empowers profit and private owners, Costco should be known for the exception that proves the rule. It seems very difficult to have shareholders, customers, and employees treated at the same level. Surprisingly, Costco strategy is based on a loyal relationship with their customers, by offering the best prices on a preselected variety of high quality products, a loyal relationship with their employees, by offering them a higher salary, better benefits on a happy environment, and a loyal relationship with their shareholders, by growing quarter after quarter and returning dividends backed by the stability of membership fees as factor of profit.
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Costco is consistent with their loyalty to customers. According to the New York Times, Costco reported a profit drop of fifteen percent in the Christmas of 2014. Apparently, they pushed up their discounts for members too much. When Costco’s CFO referred to the drop to Newsweek, he said: “We’re going to do what’s right each day on pricing, irrespective of how it’s going to be on margins that day”. This statement gives evidence that the loyalty to their members is more important than the short-term results.
Costco is consistent about high quality. Costco carries the same categories of merchandise that Target or Walmart but Costco have less than 4,000 thousands references in stock meanwhile Walmart or Target carry 140,000 thousand references. Costco preselects the merchandise to bring the best value in every single category to the market place. Sinegal call this preselection process “Treasure hunt”.
Costco is consistent about prices. In the city of Portland, they discontinued selling sugar for 5 years because every merchant in town was selling sugar below cost. They don’t sell items below cost and they didn’t have the right price for sugar. If Costco can’t have the best price on sugar, they would not sell it because the customer would have all the reasons to believe that the rest of the products would potentially not have the best price either.
Finally, Costco is consistent with their approach of managing the workforce. The bulk retailer ranks better than the world’s most profitable tech companies when it comes to how satisfied workers are with benefits and pay. Joanna Hoffman, original member of the Macintosh team joined Apple in 1980 when it went public. Recently, Hoffman shared an interesting detail about Steve Jobs managing approach, “We built our own factory to manufacture the Macintosh… We interviewed people from GE, GM, people who were supposed to be the best in the United States in manufacturing. Each one of them lasted about a month or two and then they got fired because they had no idea what they were doing. Lastly, Steve came to our head of Finance, whose degree was English Literature and he said, Debbie, do you think you can run manufacturing? Debbie (26) went and build the factory that produced the first Macintosh and produced Macintosh here in Fremont for many many years before manufacturing went abroad”. Steve Jobs hired a 26 year old English Literature graduate to run the manufacturing of what today is the most successful computer ever built. It seems this approach worked for Steve Jobs, and also works for Costco since seventy percent of its warehouse managers started at the company by pushing carts.
