True Story: Sinegal

He Gained his experience working for retailer Sol Price. He left Price to be his own

boss and started Costco. Ten years later Sol Price asked to merge his company, Price

Club, with Costco

eventually making Sinegal the CEO of his company and his former boss' company.

James D. Sinegal is co-founder and CEO of Costco, an international low-price

membership retail chain and the largest U.S. wholesale club, headquartered in

Issaquah, Washington, U.S. He was named one of BusinessWeek's "Best Managers" in

2003. He was named to Time Magazine's 2006 list

of The 100 most influential people. In 2009, Mr. Sinegal was considered one of "The

Top Gun CEOs" by Brendan Wood International, an advisory agency.

Jim Sinegal Articles

The Good CEO: The Early Years of Costco's Jim Sinegal

The average customer visits their local Costco 22 times a year. The company has

become one of the largest in the U.S., with 473 outlets and more than $50 billion in

sales, and is also the largest membership warehouse club chain in the world. Its

founder and CEO, Jim Sinegal, has been called the Sam Walton of the 21st century for

his low-key style and seeming defiance of all things Wall Street. But, whether

investors like him or not, America – and much of the rest of the world – has fallen in

love with his discount depots.

The son of a steelworker, Sinegal has come a long way to get to where he is today.

Born on January 1, 1936 in Pittsburgh, Pennsylvania, James D. Sinegal was raised in a

typical working-class Catholic family. As a boy, the young Sinegal dreamed of going

to medical school. He graduated from Helix High School in 1953 and decided he

would try to make his dream a reality by applying for enrollment in San Diego State

University. However, that dream was short-lived.

“My test scores were good, but my grades weren't that good, because I needed

focus,” recalls Sinegal, who was advised to first apply for a short program at San

Diego College. There, he not only earned an associate’s degree, but he also got back

his motivation and concentration. “It was at San Diego Junior College (now City

College) where I regained that focus, and paid attention,” says Sinegal, “because

deep down I knew education was important.” It was what Sinegal would do next that

would lead him to in fact become chosen as one of City College’s Most Distinguished

Alumnus.

After earning his degree, Sinegal finally enrolled in San Diego State University. To

help support himself through school, he applied for a job at Sol Price’s newly

expanding Fed-Mart. The 18-year old Sinegal was given the task of unpacking

mattresses as they arrived. “It wasn’t that great a job,” he says. “I was getting a

buck and a quarter an hour. But it was exciting.”

It was at Fed-Mart that Sinegal discovered his passion for retail. Within just a few

years, he had been promoted to store manager. He soon quit his university studies

and devoted himself full-time to Fed-Mart. Eventually; Sinegal would rise to become

the executive vice president of the chain.

In 1979, Price decided to abandon Fed-Mart and start a new venture, and he wanted

to take Sinegal with him. Over the years, Sinegal had proven himself a loyal and hard

worker, and Price did not want to lose him. Sinegal agreed, and together, the two

created Price Club. Initially, Price Club was meant to service small business owners,

but eventually its membership became open to the public. Sinegal was executive

vice president and was the major driving force behind helping his former Fed-Mart

boss establishes the new company.

By 1981, Sinegal realized he had been working with Price for almost 30 years. It was

time for him to move on. Both Fed-Mart and Price Club had been a success, but

Sinegal wanted to do something for himself. That year, he decided to leave Price, to

give up his secure job, and to risk it on all on his own.

Creating a Company That Cares: Costco's Climb to the

Top

Sinegal was in one of the top two positions of power of a rapidly expanding company,

when he decided to give it all up on a whim. Sinegal wanted to be on his own, to

have the feeling of success that only comes from when you have started your own

company from scratch. And so, in 1983, Sinegal joined forces with Jeff Brotman, a

lawyer and the son of a former clothing retailer, and created his own warehouse

retail club.

On September 15, 1983, Sinegal and Brotman opened their first Costco warehouse in

Seattle, Washington. Based on a similar business model as Sol Price’s Price Club,

Costco began charging a membership fee to its customers. In the beginning, it too

catered primarily to small business owners.

Over the next ten years, Costco would continue to grow in both membership and

sales. In 1993, after a decade of steady success, Sinegal decided to acquire the

company he had helped his once boss grow. With the merger of Costco and Price

Company, PriceCostco was formed, and effectively doubled the size of both. There

were now over 206 locations of this growing retail company, which was conducting

more than $16 billion in annual sales.

PriceCostco was being run at the time by both Sinegal and Sol Price. But, in 1994,

Price left the company to found Price Enterprises with his son, Robert. In 1997,

following the departure of his partner, Sinegal officially changed the company’s name

to Costco Wholesale. The next year, at Costco’s annual meeting, Sinegal announced

his new ambitious plans for expansion. “We expect to open about 18 or 19 stores this

year and next,” he said, “then grow to about 25 or 30 a year worldwide after that.”

Today, by focusing on a strategy of high quality goods at low prices, Sinegal has

managed to grow his retail warehouse club into one of the largest in the world. His

company has a record 90 percent renewal rate for business membership, and

individual customers have proven equally as ready to embrace a new $100 per year

executive membership. Costco’s services have expanded to include everything from

optical centers, pharmacies, photo centers, hearing aid centers, food courts, and gas

stations. All of these have become major contributors to the company’s overall

growth, with some, such as the optical centers even being rated among the best in

the country in both quality and price.

Despite Costco’s tremendous success, Sinegal has maintained his salary of only

$350,000, plus stock options. Among the CEOs of billion dollar corporations, he is one

of the lowest paid. Conversely, Costco employees are some of the highest paid in the

retail industry. In fact, Sinegal has frequently butted heads with investors who

believe he is too generous to his workers.

But, Sinegal has never been one to care what others think. He stuck to his vision to

create of the largest, most widely respected companies in America, and he is not yet

done.

Lesson #1: Respect Can Reel In Greater Returns

In the world of corporate greed, where the up and coming often learn more about

finding the loopholes than following the law, Jim Sinegal sticks out like a sore thumb.

Named one of BusinessWeek’s “Best Managers” in 2003, Sinegal maintains one of

the lowest salaries compared to other CEOs at his level, while Costco workers are

among the most highly paid in the industry. Why did he decide to turn Wall Street on

its head by following this model, and how did he manage to make such a venture,

one that defies conventional business logic, not just possible but also profitable?

As a cashier at Costco, you would be one of the industry’s lucky few. With an average

salary of $17 per hour, you could be earning up to $40,000 a year after working with

Sinegal’s company for four years. Costco employees also pay just nine percent of the

cost of health insurance, one of the most generous benefit packages in the industry.

Critics from Wall Street were decrying Sinegal’s employment offerings, suggesting it

was doing more harm to their shares than good. But, Sinegal has a different logic.

“Our attitude has always been that if you hire good people and provide good wages

and good jobs and more than that – if you provide careers – that good things will

happen to your company,” he says. “I don’t see what’s wrong with an employee

earning enough to be able to buy a house or have a health plan for the family.”

Sinegal’s logic is not just an altruistic one. Costco has a mere six percent turnover

rate for employees with the company for more than one year. That figure is just one

fifth that of retail giant Wal-Mart. As a result, 95 percent of all promotions are from

within. “We have guys who started pushing shopping carts out on the parking lot for

us who are now vice presidents of our company,” says Sinegal. Costco also has the

lowest shoplifting rate in the industry, at .02 percent, and productivity is estimated to

be roughly $500,000 per employee.

“Wall Street is in the business of making money between now and next Tuesday,”

says Sinegal. “We're in the business of building an organization, an institution that

we hope will be here 50 years from now. And paying good wages and keeping your

people working with you is very good business.”

For Sinegal, what is crucial to success is to take a long-term perspective. Happy

workers mean happy investors in the long run, and Sinegal wants his Costco to be

around in the long run. “I think the biggest single thing that causes difficulty in the

business world is the short-term view,” he says. “We become obsessed with it. But it

forces bad decisions.”

Sinegal is obviously proud of the company he has created, with the help of each and

every Costco worker. By paying his workers well, he is increasing their productivity

and reducing his own loss from turnover and theft. “That's not altruism,” he says.

“It’s good business.”

Lesson #2: Keep Your Costs Low and Your Quality

High

“We only have one bullet in our gun,” says Sinegal, “the right product at the right

price.” It seems to be a simple formula for success, but how has Costco managed to

master it better than the rest? How has Sinegal been able to keep his company’s

costs low, wages high, and sales even higher for the over ten years it has been in

business?

Costco has a unique business model that has enabled it to set itself apart from the

rest. The first secret is in carrying a low amount of in-store stock. While the average

Wal-Mart carries more than 100,000 items, Costco stocks no more than 4,000, one

quarter of which are always changing. This leads to what Sinegal refers to as a

treasure hunt. “One time [customers] may come in and see that we have some

Coach handbags and they come in the next time and the Coach handbags aren’t

there, but perhaps there are some Fila jackets,” he says. “The attitude is that if you

see it, you have got to buy it because it may not be there next time.”

Of those 4,000 products that Costco stocks, all of them are high-quality goods. This

has helped Costco attract a wealthier customer, the average of which earns an

income of $74,000. Sinegal says that the “hallmark of our business is that we have

developed such a high-end clientele with a high-end product selection and

assortment.” So, while Costco might not carry as many products as its competitors, it

carries the best two or three brands of a product and does more sales in terms of

volume per unit.

To this end, Sinegal also keeps his profit margins on each item as low as possible,

refusing to mark things up more than 14 percent. What Costco might lose in margins,

Sinegal says it makes up for in volume. And, that volume is tremendous. In 2004,

Costco sold over 26 million rotisserie chickens, $16 million worth of pumpkin pies in

the holiday season, and more than 90,000 karats of diamonds. Costco has also

become the largest seller of fine wines anywhere in the world.

Costco is able to keep its profit margins so low because Sinegal has also become a

stickler for keeping his costs as low as possible. The fact that customers walk on

concrete floors and sell goods from steel racks is no coincidence. “We’re low-cost

operators, and it would be a little phony if we tried to pretend that we’re not and had

all the trappings,” says Sinegal. Costco is meant to be a no-frills shopping experience

so that those savings can be transferred onto the customer.

In the last few years, Costco has been attempting to increase its international

presence, expanding into countries like Canada all the way over to Japan. And, while

very country is different, Sinegal says, “The one constant is value. Value is

appreciated no matter where you go.” It is by keeping his costs low and the quality of

his products high, that Sinegal has continued to expand the value that is offered by

Costco.

Lesson #3: Use Technology to Temper Your Costs

When one thinks of Costco, a company with a thriving technological edge is not

necessarily the first thing that comes to mind. But, while Sinegal might not be your

typical CEO, he does understand the importance of utilizing technology to his benefit.

Not only has modern technology helped Costco automate many of its operations, but

in keeping with Sinegal’s all important goals, has helped the company lower its costs.

“Technology has made us much more productive,” says Sinegal. “With computers,

fax machines, and cell phones we have more productive time during the course of

the whole day and can react to situations more immediately.” Indeed, Costco’s

computer system is a relatively sophisticated one. With a wireless record of

purchases, Sinegal can get into the systems of any of his warehouses anywhere in

the world without ever leaving his desk, to check on such things as how one item

might be selling during the day. “Sometimes we have so much information it’s more

than we can deal with,” he says. “Our web site and our e-commerce business are

also profitable on a fully allocated basis, and that is somewhat of a milestone.”

Sinegal also embraced the concept of energy management and conservation early

on, using technology to cut down on his energy demand. Costco stores make heavy

use of skylights and controlled lighting based on the time of the day. They use high

efficiency heating and air conditioning, and are venturing into photovoltaics, or the

use of solar panels to generate electricity, and the use of hybrid delivery trucks. On

an environmental side note, Sinegal also gives subsidies to his employees who

carpool or use monthly bus passes. He believes that these efforts will not only benefit

the communities in which Costco does business, but also the company’s shareholders

and members in the long run.

Despite Sinegal’s embracement of new technologies in his bid to create a lean and

efficient operation, he is wary not to go too far. “Technology helps us become more

efficient and productive but our business still has a lot of art as opposed to strictly

science,” says Sinegal. “The reason that the dot-com companies didn't succeed is

that they were very good at the science end but they didn't understand anything

about the art of buying and selling merchandise. They thought that was the easy part

but it turned out to be the most difficult.”

Sinegal makes sure his Costco team understands that buying and selling

merchandise is the real business of their company, while everything else simply

augments that aspect of it. “If you don't have the right merchandise in the right place

at the right time you can forget about everything else,” he says. “All the satellites in

the world aren't going to help you.”

No matter how much online business is moved in the future, Sinegal still sees the

future of shopping in physical stores. “People are still going to want to go out and

have that social exchange,” he says. To that end, Costco focuses all its energies –

and technologies – on making that experience the best it can be.

Lesson #4: An Open Door is A Company Score

You have been on the job for five years now. You come in every day at 8 a.m. and

stay until well past closing time. You work hard, you work well, and you have never

taken a sick day. So, when that better position opens up, you think you have a good

chance of getting it. But, when your application comes back rejected, what do you

do? You feel like your efforts are not being justly rewarded, but who can you talk to

about it? Well, if you work at Costco, you can go straight to the head honcho, the

man in charge, Jim Sinegal.

For as long as he has been in business, Sinegal’s managerial style has been as

unique as his business model itself. Choosing to maintain an open door policy,

Sinegal has striven to create a company of real people – and of equal real people at

that.

His office in Issaquah, Washington is a small one with little but a second-hand desk

and chair. To look at it, one would never know it is the home of one of America’s

most successful businessmen. But, what makes this office even more astonishing,

aside from its modest furnishings, is the fact that its door is always open. Any Costco

staff member can walk right into this CEO’s office and have a chat with the

millionaire. With no secretary, Sinegal even answers 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 says.

Sinegal is not just a friendly man, although he may well be that too. His open door

policy reflects the belief that it will foster greater managerial accountability, across

his Costco stores. “If warehouse managers know that their own regional bosses have

open door policies and will talk to any employees about their issues, then they are

going to be a little faster to talk to the troubled employees themselves,” says

Sinegal. “They don’t want the problems to come back to them through their bosses.”

Once a year, Sinegal makes a personal visit to each and every Costco warehouse. He

wants his employees to feel like, at least in theory, they could have the chance to

talk to the company’s CEO himself. This, he says, will make them feel like a more

valued part of the Costco team. And, when he visits, he wears a name tag that reads

just, “Jim.”

“We have said from the very beginning,” says Sinegal. “We’re going to be a company

that’s on a first-name basis with everyone.” For Costco, that is not just a fluff

statement; that is its living and working mantra.

Sinegal is no softie; do not make that mistake. He runs tough budget meetings and

spares no sympathy for managers who fail to meet profit margin goals. But, soft or

not, he does not want any Costco employee to ever be able to say he was not there

for them.

Lesson #5: Marketing Does Not Need To Mean

Spending Millions

Conventional wisdom says that no company can stay at the top by competing on

price alone. But, Sinegal has managed to become the envy of entrepreneurs the

world over. He has been able to create a billion dollar business without spending

millions of dollars in marketing. How did he do it? How has Costco risen to become

the retail giant that it is, without hundreds of radio, television and print ads telling us

it is so?

With Costco, Sinegal took a deliberately low key approach to marketing. In fact, the

company has never even had a public relations department, and spends zero percent

of its budget on advertising. Instead, Sinegal has taken a two-prong approach to

marketing: treating his employees well, and maintaining a close, personal

relationship with small businesses. Though the direct benefits might not be as visible,

Sinegal believes they have paid off, and will continue to do so in the long run.

The first part of Sinegal’s marketing strategy is to create a team of happy, motivated

and loyal workers. He does that by offering one of the most generous pay packages

and health benefits in the industry. He also promotes primarily from within, keeping

those who start off with Costco as cashiers with him all the way through to

managerial positions. But, Sinegal is not doing that just because he wants his

company to have a nice family feel to it. No, Sinegal has implemented such a plan

because it makes good business sense. “Imagine that you have 120,000 loyal

ambassadors out there who are constantly saying good things about Costco,” he

says. “It has to be a significant advantage for you.”

Sinegal’s marketing strategy does not stop with his staff of internal marketers, his

employees. He also makes sure that Costco focuses its priority on the business

customer. While Costco does service individuals and non-profit groups, 60 percent of

its business is with business customers. “Our business was founded so that small

businesses could come in and buys essentially everything they needed for their

business under one roof,” says Sinegal. “Café owners could purchase all of their food

and drink, cigarettes and candy, cleaning supplies, pots and pans, toilet paper and

towels, pads and pencils, and so on.”

With business owners as its primary target, Costco has attached company

representatives to each of its customers’ stores. Their main responsibility is to

maintain the good relationship with these business owners and network with future

ones. In each store, there are typically one or two Costco staff members who spend

their days calling prospective business clients and setting up appointments. From

one business, Costco staffers are often able to generate leads and network to others.

Sinegal likes to be cheap and he is not afraid to admit it. Why spend millions of

dollars on marketing, when he can put that money into his labour costs and achieve

even greater results? By focusing on creating employees that have only good things

to say about Costco, to concentrating on maintaining strong relationships with

business clients, Costco has managed to create a living, breathing marketing

machine at little cost.

Shopping For Success: How Sinegal Took Costco to the

Top

When Sinegal’s college presented him with its Most Distinguished Alumnus award,

the Costco founder was almost left speechless. “I’ve never been told I’m a most

distinguished anything,” was all he could say. With his poor grades and lack of focus

in high school, it is doubtful that Sinegal’s teachers ever thought he would amount to

much. But, today, with a billion dollar corporation under his belt, Sinegal remains not

only one of the most accomplished, but also one of the most admired and liked CEOs

in the industry. How did this once reckless young boy become the success he is

today?

Respect: Being a Costco employee is nothing to shrug your shoulders at. With one of

the highest pay rates in the industry, and an overly generous health package, Sinegal

has established a one-of-a-kind human resource management plan. In doing so, he

has also lowered his rates of turnover and theft, and created a thousands-strong

army of motivated and productive employees.

Value: For the past 18 years, Costco has charged $1.50 for its famous hotdog and

soda deal, and Sinegal promises that is something that will never change so long as

he is in charge. While not all of its product prices are guaranteed to remain the same

for so long, Sinegal has made it his priority to give his customers the greatest value

for their money. By keeping a low stock of high quality products, and refusing to hike

his profit margins by more than 14 percent, Sinegal has stayed true to his goal.

Technology: It may not be one of the industry’s most hi-tech companies, but Sinegal

has made sure that where it needs to be, Costco is at the forefront of technology. By

embracing new forms of automation, and being willing to experiment with energy-

reducing technologies, Costco has emerged as a technologically savvy retail leader.

Communication: “This is almost like show business,” says Sinegal. “I mean, every day

you're opening up and it's show time.” Sinegal loves his job, and that is why no

matter whether you are a cashier or a fellow CEO, he is willing to take the time to talk

to you. A down-to-earth businessman, Sinegal makes sure that all the processes are

in place to maintain a corporate system of accountability and openness.

Marketing: Is it odd that despite not ever spending a dollar on advertising, marketing

is considered one of Sinegal’s success factors? Well, despite the lack of money spent

on it, Sinegal knew what he was doing in terms of promotion. By creating a happy

and loyal team of workers, and focusing on growing strong relationships with small

businesses, Sinegal did, in fact, create a marketing machine in Costco.

“We’re not kamikaze pilots,” says Sinegal. “We want to do things in a sensible

fashion.” To that end, Sinegal has taken the time to plan out his growth strategy.

From the light bulbs in his stores to the population densities of the next cities Costco

plans to move into, Sinegal leaves no stone unturned. And, it is those details that

Sinegal says every entrepreneur needs to focus on. “Otherwise you’re just a hamster

running on a treadmill.”

Jim Sinegal Quotes

Competition makes you stronger. If our top competitor didn’t exist, we would

have to make them up.

Just about the time you teach a horse to eat hay, the horse dies.

You have to schedule it. You have to plan the opportunity to think about your

business and plan what you're going to do. Otherwise you're just a hamster

running on a treadmill; you're never going to get anywhere. You've got to

schedule it. Strategic planning is an important part of running any business

and the more so for businesses that operating in multiple states and

countries.

We're not kamikaze pilots. We want to do things in a sensible fashion. If we

can speed up our growth, without outdistancing our management team, and

provide a quality product, then we will do so. Aside from the quality issues

and wanting to grow the business in a sensible fashion, we don't have any

grand scheme that says, for example, that we have to be in Latin America by

the year 2015 or have 1000 Costco's in ten years. A good example of that is

that ninety percent of our book sales are unplanned. A customer walks by the

book table, sees a book, picks it up, looks at the jacket, says "hey this looks

kind of interesting," and buys it.

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.

If warehouse managers know that their own regional bosses have open door

policies and will talk to any employees about their issues, then they are going

to be a little faster to talk to the troubled employees themselves. They don’t

want the problems to come back to them through their bosses.

We have said from the very beginning. We’re going to be a company that’s on

a first-name basis with everyone.

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.

Our business was founded so that small businesses could come in and buy

essentially everything they needed for their business under one roof. Café

owners could purchase all of their food and drink, cigarettes and candy,

cleaning supplies, pots and pans, toilet paper and towels, pads and pencils,

and so on.

Technology has made us much more productive. With computers, fax

machines, and cell phones we have more productive time during the course of

the whole day and can react to situations more immediately.

Sometimes we have so much information it’s more than we can deal with. Our

web site and our e-commerce business are also profitable on a fully allocated

basis, and that is somewhat of a milestone.

Technology helps us become more efficient and productive but our business

still has a lot of art as opposed to strictly science.

The reason that the dot-com companies didn't succeed is that they were very

good at the science end but they didn't understand anything about the art of

buying and selling merchandise. They thought that was the easy part but it

turned out to be the most difficult.

If you don't have the right merchandise in the right place at the right time you

can forget about everything else. All the satellites in the world aren't going to

help you.

People are still going to want to go out and have that social exchange.

We only have one bullet in our gun, the right product at the right price.

One time [customers] may come in and see that we have some Coach

handbags and they come in the next time and the Coach handbags aren’t

there, but perhaps there are some Fila jackets. The attitude is that if you see

it, you have got to buy it because it may not be there next time.

One hallmark of our business is that we have developed such a high-end

clientele with a high-end product selection and assortment.

We’re low-cost operators, and it would be a little phony if we tried to pretend

that we’re not and had all the trappings.

The one constant is value. Value is appreciated no matter where you go.

Our attitude has always been that if you hire good people and provide good

wages and good jobs and more than that – if you provide careers – that good

things will happen to your company. I don’t see what’s wrong with an

employee earning enough to be able to buy a house or have a health plan for

the family.

We have guys who started pushing shopping carts out on the parking lot for

us who are now vice presidents of our company.

Wall Street is in the business of making money between now and next

Tuesday. We're in the business of building an organization, an institution that

we hope will be here 50 years from now. And paying good wages and keeping

your people working with you is very good business.

I think the biggest single thing that causes difficulty in the business world is

the short-term view. We become obsessed with it. But it forces bad decisions.

We expect to open about 18 or 19 stores this year and next, then grow to

about 25 or 30 a year worldwide after that.

My test scores were good, but my grades weren't that good, because I needed

focus.

It was at San Diego Junior College (now City College) where I regained that

focus, and paid attention, because deep down I knew education was

important.

It wasn’t that great a job. I was getting a buck and a quarter an hour. But it

was exciting.

I’ve never been told I’m a most distinguished anything.

This is almost like show business. I mean, every day you're opening up and it's

show time.

We take great pride in the fact that people join us and they stay with us.

We pay much better than Wal-Mart. That's not altruism. It's good business.

If you’re a big-picture guy, you’re not in the picture. Retail is detail.

It makes no sense to do inexpensively what we shouldn’t be doing at all.