Q&A With Jim Sinegal Founder of Costco

I had the pleasure of attending a Q&A session this morning with Jim Sinegal, co- founder and CEO of Costco.

Costco racks up around $53 billion in sales, has over 500 outlets and employs over 120,000 workers. For his efforts as the founder of one of the nations largest retail companies, Mr. Sinegal takes home about $350,000 a year for his troubles.

Summarizing the Q&A

What impressed me with Mr. Sinegal was is unassuming, down to earth persona, mixed with a laser sharp focus on what his business does. In every answer, to every question it was apparent he not only knows the retail business inside and out, but the business model he has set for Costco permeates everything his does – he has never wavered.

I thought I’d try to summarize some key points from his talk this morning and hit on some of the highlights and “ah-ha” moments I had.

As you read through his thoughts and ideas, keep in mind he didn’t start the $50 billion dollar behemoth until he was nearly 50 years old. For those of you who think there is only one window of opportunity to start your own business, let Mr. Sinegal serve as a model for what can be accomplished at any stage of life.

Also keep in mind that Costco didn’t start out as “Big Business”, it’s beginnings trace back to 3 outlets in the Pacific Northwest.

On Starting-Up

Sinegal spent nearly 25 years in retail before he decided to build a retail business of his own. Here are some key points he made about the start-up phase:

• Have enthusiasm – he truly loved retail
• Be an expert in your field – he knew retail backwards and forwards
• Understand you can’t do it all, you’ll need to surround yourself with good people
• Know your market – Sinegal was from California and decided to start his company in Seattle, WA which market research told him was one of the “least competitive” regions in the US when it came to retail competition.
• Have a long term outlook – “Short term outlooks lead to short term goals”
• Be realistic about goals, but also stretch yourself – originally Costco’s goal was to get to 12 outlets. They thought that was the most they could do. He said he still has the original business plan with that number on it, and it’s a bit embarrassing now.

On Employees

Sinegal runs his company on the belief that if you treat people good, good things will happen. In every answer he gave, he referenced how important the employees are.

• Hire great people, who identify with your business
• Treat them well
• Give them good jobs
• If you do right by the people working for you, they will build you a successful business

On Management

Costco managers are always promoted from within. As Mr. Sinegal put it, “I can’t conceive of a time when we’d hire management from outside the company”.

Therefore his thoughts on how to manage were from the perspective that any one of the employees could some day be running the company.

• Training happens constantly – not just in classes or training sessions
• Grow your own talent – those are the employees who get what your business is trying to do
• Model what you want from your employees – Sinegal said that when he goes to a CostCo store, and takes the time to pick up a piece of trash on the ground, the employees see that and immediately know it’s important and therefore do it themselves.

On Business

Above I said Mr Sinegal has a laser focus on what his business does, and that focus is the core of what makes his company successful. A few of the highlights:

• Know who your customers are and why they do business with you
• Stay focused on your core business.
• Don’t try to be too much to too many, you’ll dilute your business model and loose focus
• Know on what level you compete – For Costco they compete on quality and price. They want the highest quality merchandise for the best value. Mr. Sinegal shared a story of selling designer jeans for $29.99 and selling out as quickly as they could stock the shelves. Every retailer in the nation had these jeans priced at $50 and above. He was asked why not move the price up just a bit, maybe capture another $2-3 per jean and still be the lowest price. His answer – that’s not our business. Our business is to give the customer the best value we can.

On Growth

Mr Sinegal sees no slow down, in fact he mentioned:

• Still opening new stores as we speak, with new stores opening in Hawaii, and parts of the Northeast
• Same growth plan as before – open 50-60 Costco locations a year (even one planned for Australia)
• Internet sales are growing, nearly $2 billion in revenue from the net
• Will run the business for long term sustainability. He wants Costco to be here long after he’s gone.

On Marketing

Someone asked how in the early stages of growing a business he could get away with not having any advertising, his answer:

• Word of mouth is the most powerful marketing tool there is
• It sounds better when somebody else talks about you than when you talk about yourself
• Costco still has no PR department and probably never will.

On Ethics

As Costco grows, becomes even more multinational, and his span of control widens, somebody asked if ethics plays a bigger part in his thinking. Again, his answer was very straightforward. He said they will continue to do business like they’ve always done:

• Obey the law
• Treat customers right
• Treat employees right
• Treat suppliers right

If they do the above, he felt ethically they would be just fine.

On Challenges

Of course he was asked what he see’s as the biggest challenges facing Costco, especially in tough times. His answer to this question struck more of a chord with me than anything else he said. Essentially,

• The biggest challenge will be what it always has been, not to loose focus of what we do, and our business model
• Focusing on our core business, and ensuring we do not loose sight of that, transcends any economical challenge we may face.
• He sighted other retailers who lost focus, and eventually lost their way and their business/market share.

Other Interesting Anecdotes

Mr Sinegal seemed to be a very unassuming, down to earth guy. Which means many of his answers were peppered with stories, and he really is quite funny. Here were some of my favorite facts/stories.

• His first retail job (just out of college) was a one day employment to help unload some mattresses off a truck and into the company’s warehouse. He did his job, but they didn’t pay him at the end of the day ($1.25/hr), instead they told him to come back the next. He came back, they had more work and again didn’t pay him at the end of the day. He said he just kept coming back everyday, hoping they’d eventually pay him, and after leaving the company 25 years later he felt it all worked out okay.
• The maximum markup at Costco is 14%. Meaning you never pay more than 14% more than Costco paid for the item.
• Costco has some of the lowest shrinkage in the industry (unexplained disappearing of merchandise) at 1/10 of 1%.
• Those people at the door who check your receipt before you leave aren’t just looking for theft, they find as many mistakes in the customers favor as they do against. It’s another way to make sure you got the best value.
• He likes to visit as many of the stores as he can every year, and still “perpetuates the myth” that he goes to all of them once a year. He said he likes them to think that he can show up anytime!

It was great getting a few minutes in the same room with someone so successful. After listening to him talk it is satisfying to know that great businesses can be made and sustained on the back of a set of core values, and that even at his level he hasn’t wavered from what makes his company great.

For Costco that means giving customers the best value, at the best price. Treating people right, and with respect. Acting ethically, and most importantly never loosing sight of what the purpose of your business is.

Inspiring.

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