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Originally published November 15, 2009 at 12:10 AM | Page modified November 16, 2009 at 10:32 AM

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Q&A: Costco CEO Jim Sinegal talks about recession, succession

Jim Sinegal, the famously accessible co-founder and CEO of Costco, sat down at the company's Issaquah headquarters recently to answer questions about the country's third-largest retailer. He talks about the recession, his love of California and the chess game of negotiating with electronics manufacturers over Asian markets.

Seattle Times business reporter

Costco by the numbers

563

Number of warehouses in 40 states, Australia, Canada, Japan, Korea, Mexico, Puerto Rico, Taiwan, and the U.K.

142,000 square feet

Average warehouse size

$131 million

Average warehouse sales

147,000

Number of employees,

including 104,900 in the U.S.

56 million

Number of cardholders

$71.4 billion

Revenues for the fiscal year ended Aug. 30.

$60.47

Price of stock at Friday close. Traded over the past year between $38.17 and $60.69.

Source: Costco Wholesale

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A few days before flying to Colorado for the opening of Costco Wholesale's 561st store, co-founder and CEO Jim Sinegal sat down at its Issaquah headquarters to talk about the country's third-largest retailer after Walmart and Kroger.

Less than a month later, Costco is up to 563 stores, including its first in Manhattan, which opened last week.

Costco has fared better than many retailers during the recession and avoided layoffs by appealing to consumers' heightened desire for discounts, including ramping up its private label brand, Kirkland Signature.

The famously accessible Sinegal, who answers his own phone and has a no-door (and no wall facing the hallway) policy, talks about the recession, his love of California and the chess game of negotiating with electronics manufacturers over Asian markets.

This is an edited version of the interview.

Q: Costco is one of the few major retailers not laying anybody off during this recession. How did you decide on that?

A: We made it a point. We knew how difficult the economic times were last October and November. We knew how nervous everyone was. It's certainly one of first times in my life I can recall fear in people relative to economics. I mean, people were literally hiding money under mattresses and buying Treasury bonds that had a negative return.

We said ... two things: No. 1, we want to drive our business to succeed, so we're going to lower prices and try to drive more business into our buildings. And in addition, our employees ... deserve our loyalty. They needed it just as much then as they ever did, or more. So we said, let's see how we can get through this thing without having layoffs.

We thought we could conduct our business in a fashion that the attrition would handle whatever reduction in force we wanted to have, and we had some new warehouses coming up also, so it enabled us to transfer some people to some of those new facilities.

It worked out for us, and we feel pretty good about that. We feel good that we were able to accomplish it, and I think our people appreciate that and understand that an effort was made to make sure everyone kept their jobs.

Q: You have low attrition for a retailer.

A: Our turnover is less than 12 percent. That's very low in our business.

Q: Will you hire for the holidays this year?

A: We'll hire some seasonal people ... through December. Attrition will allow us to bring back some people.

Q: How many people do you hire nationally for the holidays?

A: About 8 percent of our total work force.

Q: Has Costco ever had layoffs?

A: We haven't, other than seasonal layoffs or a new warehouse where we hire 280 people and find we only heed 250 once the warehouse gets going.

Q: Costco has said health-care expenses are up, but it's not willing to change its insurance plans. Why?

A: Because we think employees are entitled to a good health-care plan. It's an expensive business, and we try to do things to mitigate it, to be better purchasers of health care, and try to encourage employees to do that as well.

We try to do things in the preventive area to reduce ... health-care costs. Our work force is generally young; the average employee is 36 to 37 years of age. But that changes. As time goes on, they get a little older, and we're trying to suggest ... preventive programs. We offer a physical examination for every employee and try to do things to [persuade] people to use it. The same with a mammogram.

Q: How has this downturn been different from others for Costco?

A: Not just for us, but for everybody. If you looked at Costco employees, they probably feel a lot more confident than people in ... other industries. There are some places, in Detroit or Arizona, where the economy is really terrible.

There is fear, most particularly in areas hit the hardest. I'm sure everybody looks at WaMu and the elimination of those jobs, and the cutbacks at Microsoft, which are unusual. Boeing had some layoffs.

That type of thing starts to trickle through the whole community, and everybody here in Puget Sound knows or has a family member that works for Boeing or WaMu or Microsoft, so it affects all of us.

Q: How about for the business? You mentioned lowering prices.

A: We took a very aggressive attitude with our business. We want to make sure the customer recognizes Costco is the place to shop. We're going to be the low-cost provider of goods. We're going to reinforce that. We're going to look for better values, and we're going to try to present those values to our members on a more consistent basis.

We've done it through expanding our private label [Kirkland Signature] program, [which] has caused some manufacturers to lower their prices on brands, because they see the competitive nature of our products. And we've gone in and negotiated tougher deals and lowered prices on commodities.

Q: Can you give an example?

A: It's across the board. Kraft has lowered some prices, Procter & Gamble has lowered some prices, Starbucks has lowered some prices on products that we carry, Frappuccino and stuff like that.

Q: As big as you are, you could be a contributor to deflation?

A: I would suppose that as big as we — the combination of we and Wal-Mart — are, that yes, we could, if we both got on the bandwagon.

Q: Do you think that's happened? There's been a bit of deflation.

A: There has been. We've lowered prices, but commodities have come down also.

Q: I hear deflation talked about as if it hurts Costco, but how does it hurt if you're the ones doing it?

A: Let me give you an example. Last year, the 12-month sales on televisions were up about 42 percent [in units], but down about 2 percent in dollars. You can imagine how much harder you have to work to sell more goods for same amount of dollars.

Q: Do you still refuse to sell below cost?

A: The only time we sell below cost is when we've made a mistake and have to mark it down. We don't engage in loss leaders.

Q: And your margins never go above 14 percent? Has that been true during this recession?

A: Yes. With the advent of private label, we've been able to boost some margins, some prices have come down, and our margins have been fine.

Q: What sold well last holiday season compared to previous holidays?

A: There were categories of goods that customers were backing off on — housewares, home improvement-type products, domestics, sporting goods, trim for the home.

And there were categories where they were purchasing more. Electronics happened to be one. We sold more television sets, people saying we'll stay home and get an extra television set and entertain ourselves as opposed to going someplace.

Q: Did the downturn catch you by surprise?

A: We turn our inventory so quickly [roughly monthly] that we're able to adjust, but of course it caught all of us by surprise. No one expected in October that the world was going to come to a screeching halt. But we were in a position to accommodate quickly.

Q: How do you prepare for this holiday in light of that and the fact that you just had a good quarter?

A: It's always a crapshoot. You're prognosticating and trying to figure out how the consumer's going to respond. I can tell you that if you plan for a down season, you'll have one, guaranteed, because you won't have enough stock.

We've tried to be rational in our thinking and to buy recognizing that we think we'll have an increase from last year, but not go crazy with the numbers.

And we'll be prepared to scramble for merchandise. We'll try to judge our product assortment on more basic things, so if it didn't sell for Christmas, we can still sell it after Christmas.

Q: Why is it important for Costco to be in Manhattan?

A: Because it's there. Because you have a market with 2 million people, and prices are very high, and we think that we can generate an enormous amount of volume and bring real value to that community. Now there are some down sides. Who can buy 36 rolls of toilet paper [for smaller homes]? But we do business in Japan, we do business in the U.K., and both of those are markets where the homes are not nearly as big. We think you'll find customers who will shop together and figure out a place to put those 36 rolls of toilet paper.

Q: Will you stock the same products there?

A: We'll have some local products and probably won't do as much patio furniture in Manhattan, but aside from that we'll carry essentially the same electronics, the same food with some assortment changes for local tastes. The same pharmacy and, we won't be able to sell wine there because of state laws.

Q: Are you working on that?

A: We work on it everywhere. But that's a tough place. I don't see that changing any time soon. But generally, you're going find the same products. Some of bulk products won't be there because they won't work there. I doubt that we'll carry that big swing set.

Q: But that's an extreme example. Will you still carry the huge packs of toilet paper and big cereal box and big mayonnaise container?

A: Absolutely. We went through these same types of discussions when we opened up in the U.K., Japan and Korea, where people who live in much smaller apartment buildings. In Japan, it's very obvious that customers shop together. The value concept is consistent throughout world. If you've got great pieces on merchandise, people are going come shop with you.

One of the things they told us when we went into business in Japan is that the taste for Japanese sweet goods is different. "They're not going to buy the bakery products you have." We almost changed ... to a different product. We said no ... we're going test it and we're going see how it works.

Well, P.S., today the penetration of bakery products in our Japanese warehouses is greater than any other country where we do business. (Penetration is what percent of our total business is bakery.) So we obviously go into these countries with an eye toward what is necessary, what really works. We're not so arrogant as to assume everything we're going to do will work just the way it does here. But we test things and try to figure out solutions. One of the things that makes our business attractive in places like Mexico or Japan or South Korea or Taiwan is our mix of U.S. goods. They like U.S. goods. So we do a very good job of selling American products there.

Q: What are some things you have had to change?

A: We had to change some our apparel. The sizing on men's shirts in Japan, Korea and Taiwan is entirely different. Our Kirkland Signature shirt has Asian cut to it, slimmer in the waist and smaller sizes. These things were draping on everybody.

We've had difficulty getting electronic products in Japan, because the big companies — Sony, Panasonic and Sharp — are reluctant to sell to us there because they want to protect the prices because these are very important markets for them.

Q: But they're not reluctant to sell to you here?

A: Of course not. They want to sell to us here. So, the leverage we have is the business we do with them in this country and in Canada and in the U.K. Bit by bit, we're making some headway. It helped that we put in a Chinese-made television set from Vizio. That kind of got their attention.

Q: In Japan?

A: In Japan. They didn't think that we'd be able to get it in there, and we did.

Q: Would I pay the same for toilet paper and other products in your Manhattan store as here?

A: Generally speaking. There are certain places — as an example, there's a premium on pricing in Anchorage and Hawaii because you've got the freight cost of getting goods in.

Q: Will products in your Manhattan store cost same as they do in Seattle?

A: Just about. They'll cost about the same as they do in our other New York-area businesses.

Q: Why did it take Costco so long to get into Manhattan?

A: Getting a site. Our site there is ... over 100,000 square feet. Can you image trying to find something like that in Manhattan?

Q: It hasn't been easy for you to find real estate in this market.

A: Many of the developers who control the property don't have money to go out and build on it, and some of the developers have gone broke. We had a site in the Virginia area where we concluded a deal with the developer, and there were several people already in the shopping center — I think a Lowe's and Target and Sports Authority or Dick's Sporting Goods.

We'd carved out our own space with a separate entrance and parking, and the developer went broke. So we went to the bank to see if we could resurrect the deal through the bank, and the bank went broke. So it's an unusual combination of circumstances, but that's what's happening in the world.

Q: Is your store near Honolulu still your biggest-selling store?

A: It is our highest-volume location. One of the units in South Korea passed it for one year, but then the currency exchange changed that. My guess is this year they'll be neck and neck.

Q: How will Manhattan compare?

A: We've got several others around the country that come a little closer than Manhattan will in the first instance. Manhattan we expect will be a high-volume unit, but it will have some constraints — parking constraints, logistics, getting the goods into customers' homes.

Q: How much business does your average store do now?

A: Our average business around the world this past year was about $131 million.

Q: Why does the Honolulu store do so well?

A: Honolulu is one of the largest cities in the U.S. There are well over a million people in and around that area. It's very congested and very high-priced, and a lot of businesses come and buy from us.

Q: You still have several Costco Business Centers, but your Costco Home stores closed.

A: The idea behind the home concept was not to start a chain of stores. We looked at the Puget Sound and said, we have a couple hundred thousand people shopping with us in this community, and we are very successful with furniture ... in January and February, and in June and July, when we bring furniture in as a seasonal filler [after the Christmas and garden seasons].

And we said, "Gee, I wonder if we could sell furniture on a year-round basis if we had one in an area as populated with Costco members as we are here."

So we did one here and in Tempe, Arizona, and also said, "Can we learn anything about furniture that we can use in the future in other Costco buildings, and will we be able get new suppliers?"

We got to the point where we were profitable in the business. We had been profitable over the five years or so that we were running the business.

But it wasn't something we saw was going to make significant difference in Costcos. We said, it's a distraction at this point, and the leases were up on the buildings, and we said let's make better use of the resources we have — the money and the people.

Q: Why didn't Costco accept food stamps before this year, and why did you start in New York?

A: We did it in New York because there were a significant number of people using food stamps in that market and it was requested of us. In years gone by, we've said Costco customers don't use food stamps. We have a tendency to have upscale customers. But during these tough economic times, it became apparent there were a lot people who would ordinarily been have considered affluent who were having trouble.

Q: Do you sell the $1.50 hot dogs everywhere?

A: Yes. It's one of our top-selling items in Japan and Korea.

Q: How you account for that? Is it the American thing again?

A: It's a great meal. For a buck fifty — the prices vary depending on the currency obviously. The customers love it. They think it's a great item. I eat it myself. They're very healthy; they're very good for you.

Q: How long have they been $1.50?

A: Since we started. Well, we were open a year and a half before we put a hot-dog stand in at the original downtown location. It's been a buck-fifty for a hot dog and a coke.

Q: If that price ever goes up, what will it mean?

A: That I'm dead. It's amazing how creative we have been to figure out ways to keep the price down. It was a Sinai hot dog, and now it's a Kirkland Signature hot dog. It's actually 4.4 ounces, so it's slightly bigger than a quarter pound now.

It's a drink and a free refill on the drink for a buck fifty. We used to sell the soda in a can, and we put in soda machines, which took the price down. We improved the cost of the condiments, we've purchased better on buns and things like that.

It's the same quality hot dog, all beef, the best ingredients that you can imagine. I know it sounds crazy making a big deal about a hot dog, but we spend a lot of time on it.

Q: Why is it a big deal for you?

A: Because everybody talks about it. People look at that hot dog and say a buck fifty, this is unbelievable. It's the same thing you'd spend $7 or $8 at the ballpark for and not get the same quality dog. It's one of the things that we're known for.

When you get customers who are that delighted with something, it's worth your time and energy to make it work. I was standing in line behind some people in San Francisco one time, a young man and a woman just getting a hot dog, and he says, "No, you need your cup to get the drink," and she said, "We didn't pay for the cup," and he said, "No, you get the drink, too. Don't you get it? That's the great thing about this place!"

We have people who have parties at our hot-dog stands. Guys in Florida get together and have T-shirts that have the Costco hot dog on them. We have people who after their wedding party came over and got a hot dog at one of our warehouses.

We're known for that hot dog. That's something you don't mess with.

Q: How often do you raise membership fees?

A: We have raised the membership fee about every five years. We've taken the attitude that those dollars are fungible. They really lower the prices. We use all the membership fees we charge to keep lower prices on the shelf. We think that helps us control pricing and bring better value to the consumer, and that's what we do.

A customer pays us a $50 membership fee. I think when we started it was $25, and that's over 26 years ago, so you can see we haven't made a lot of increases. But now we charge a $50 membership fee, and we've enhanced the product assortment that we have and offer many more products than we did when started in business downtown.

We didn't have a meat department, and we didn't have a bakery, we didn't have a produce department, we didn't have a pharmacy and we didn't have an optical shop, we didn't have one-hour photo, we didn't have a gas station, we didn't have a hearing-aid center, we didn't have a food court.

We think customers look at it and say $50 is a one-time pain for membership, but you're reinforced every time you come in and buy a television set or a 36-roll of toilet paper with the low prices.

Q: Some people look at your income statement and say the membership fees are the profit.

A: It's coincidental. It happens to be that percentage, but it's coincidental.

Q: How does the fee help you lower prices?

A: If you have that income, you can lower the price of a television set.

Q: When was last time you raised the fee?

A: About three years ago, I think. We have nothing on the radar screen for raising them.

Q: Costco is the target of a class-action gender-discrimination lawsuit, and has been accused of discrimination in a more recent lawsuit in King County. Do you get more than your share of these accusations?

A: If you checked our whole picture relative to lawsuits in general, you'd probably be amazed at how few we have for a company our size.

Q: Have you taken measures at corporate to look into the culture of the company?

A: We always look into the way we operate and try to avoid them [lawsuits]. We tried to avoid them before somebody filed suit. We're not in the business of discriminating against people or cheating our employees relative to their wages or anything. That's contrary to the way Costco does business.

You can always find someone who is dissatisfied with way you've done something and is going to bring a lawsuit. We have let these things work themselves through the process. I can't comment on any of them, because we're in the process determining what the next step will be.

Q: Are the gains from having so many warehouses in California worth the pain of being ... where it's so hard-hit?

A: Sure. California is a great state. It's always going to have the sunshine. It's always going to have the movies. It's always going to have people with hope. It's diverse. It's great, it's just great. When you walk into any of our businesses down there, the diversity you see is just great. That and the ideas, and there's always hope in California. There's always a bright day.

Q: What about sales?

A: It's the most populated state we have, bigger by wide margin than any other state. If it were a country, it would be one of the G-8. It feeds the whole country relative to agriculture, and the biggest crop I think is marijuana, and we're not even counting that one.

Q: You're 73, and you've refused for years to talk about a succession plan, although you say you have one. Why not talk about it?

A: It creates a lot of unrest in an organization when you've got people trying to be politic and campaign, and that's not what we're about. It's pretty inconceivable that whoever replaces me wouldn't be a member of management and probably have run one of our warehouses at some point.

Q: Have you chosen that person?

A: I update the board on all the top management people and where I think they fit in the picture. I'll make a recommendation to them, and the board will decide whether they want to accept my recommendation when the time comes. But nobody has been chosen.

Q: Do you have any plans to retire?

A: I am not planning to retire.

Q: Ever or soon?

A: Well, ever? You know, I serve at the pleasure of the board. Granted, being one of the founders makes it a little bit ticklish, that makes it a little more juicy if you will or spicy, or — what is the word I'm looking for — dicey, I guess! The board of directors, probably looking at me as a founder of company, is going to want to try to make it easy when it comes time to replace me, that I don't go kicking and screaming out the door.

Being very, very agile with the numbers is very important element of the business, and being able to go out and travel and visit the warehouses and make sure you go to every opening. At what point am I going to say, I don't want to go to Japan or the U.K. for every opening? You have absolutely no guarantees in life with good health. Any of us could get sick any point in time and that could change things. I'm healthy and enjoying things and still working hard and reasonably adept at what I'm doing.

Q: Why is there no wall between the hallway and your office?

A: When we were in our old offices over in Kirkland, I just had a bullpen, and everybody who came into the building had to walk past my office. When we moved out here, it didn't work in the configuration of this facility. We were looking to have a Costco nearby, so we could go over and drive the manager crazy.

That office was walled off, and I had the walls removed, trying to build an attitude that we have an open-door policy. No door, as a matter of fact.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com. Seattle Times researcher David Turim contributed.

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