Retiring CEO of Costco takes a look back on his legacy
On New Year's Eve, Costco Wholesale co-founder Jim Sinegal will step down as CEO.
Seattle Times business reporter
On New Year's Eve, Costco Wholesale co-founder Jim Sinegal will step down as CEO.
He will hand off the job he loves and his open-walled office to Craig Jelinek, a veteran Costco executive whom Sinegal considers "almost a founder."
He will turn 76 on New Year's Day and stay for a yearlong transition before retiring to just the board of directors.
As Sinegal's days of wearing the silver ID badge reserved for 25-year employees wane, he talks about how it all started, companies staying true to themselves and why he was willing to spend $19 million to kick the state out of the liquor business.
Here is the edited interview:
Q: You were 47 years old when Costco opened. How did you come up with the money to start it?
A: [Chairman] Jeff Brotman and I raised about half the money from investors in San Diego and half from the Northwest. It was $7.5 million.
Q: Did you invest all your savings?
A: And everything I could put on my credit card. I'm only barely joking.
Q: Why did you leave Price Club in California?
A: I didn't fit in. Without trying to place any blame on why I left at that point in time, I think I probably own 100 percent of my 50 percent [of the blame].
Q: Why did you come to Seattle?
A: We looked at a lot of different cities. We considered Denver and Chicago and Dallas. We didn't know enough about the market-share aspects of the business to realize that you could have two of the same business in California. Today, obviously, that's the biggest market we have even though we merged with Price Club [in 1993].
Seattle was an attractive market from several standpoints. It was in the same time zone as California, and we knew that we'd be recruiting a lot of people from California, and it was easy to move up and down the coast as opposed to moving east and west.
Portland and Seattle were the least competitive markets relative to groceries and a shopping basket full of food in the 48 contiguous states. They had the highest price, so we thought that was a good sign. It wasn't just groceries, but also hard and soft lines that were the least competitive in this market.
Q: How did you choose the first store, on Fourth Avenue South?
A: We liked it because it was a mile south of the Kingdome — we thought that was an easy way to describe it — and there was a lot of traffic on that road. Then, right before we were going to open, they told us they were going to close that road for 18 months.
Q: Did they?
A: They eventually did, yes. I saw a notice in the paper that they were going to close it the weekend before we were going to open. I called and said, "You can't do this," and they said, "Of course we can. We're the city."
It just so happened I got somebody who was reasonable there, who said, "OK, I'll tell you what. We don't have to close it this weekend. We can go another 10 days."
As luck would have it, because it was right in the landing path for Boeing Field, they had ordered the wrong lights and the lights were going to interfere with the planes coming in, so the road stayed open for probably another four or five weeks beyond that.
You talk about dumb luck. We could have been shut down right there, because they literally barricaded the road. It was enough time for us to get started.
Q: Where is Costco's highest volume store?
A: It's in Korea. It's fantastic. I start to tear up just thinking about it.
That's a very dense area — Seoul, which has some 14 or 15 million people, and we have a great value proposition there. We have a great value proposition anywhere, but in Seoul it is fantastic. They love American goods, so about a third of the stuff we sell there is U.S. goods.
Q: You've always ignored analysts who suggest you pull back on things like employee benefits. Could that change under a new CEO?
A: Not a chance.
Q: Why not?
A: Because it's part of the DNA of our company. It's the culture.
Q: It's not a founder's luxury?
A: You certainly could argue that maybe I'll get away with it a little more than the next guy — Craig — but Craig's been here long enough; he's almost a founder. It's the third and fourth generation of management that probably will have more difficulty with that.
It's not altruistic. This is good business, hiring good people and paying them good wages and providing good jobs for them and opportunities for a career. If you accept the premise that we pay the highest wages in our industry [hourly workers average more than $20 an hour, including bonuses] and have the richest health care and benefit plan in our industry and the lowest price on merchandise and run the lowest-cost operation, then it must follow we're getting better productivity.
Q: As you look back, are there any things you'd do differently? Any big mistakes?
A: Listen, you haven't got enough space in your paper to print all the errors we've made. But what we like to say is that we're not going to make that same mistake five times.
We decided one time that we were going to get into the home-improvement business. We decided we were going to have a paint department. Most people who have paint have a thousand, two thousand colors. We had four, and three of them were white. The customers yawned and moved on. We learned from that.
We went into the Midwest [Minneapolis and Milwaukee] years and years ago, and we failed. Failure is a very painful process. We had to close those units and we exited the market in as good a position as we could. We offered every employee in our company a job to move with us someplace else. [His assistant, Karen Paulsell, was one of them.] We made sure every supplier was taken care of and paid in full. We refunded every dollar of membership. Even if somebody had been a member for 11 months and their membership was just about to expire anyway, we still gave them the full $25, which was the membership fee at that time.
Q: Do you have advice for retailers in general, especially in this economy?
A: What works for us maybe doesn't work for everybody else. We have such an enormous assortment of merchandise, but very few stock-keeping units. To put it in perspective, we have less than 4,000 stock-keeping units for all different categories. Somebody like Wal-Mart carrying the same categories probably has 140,000 stock-keeping units.
People don't come and tell us: "Gee, we're really happy you only carry 5 pounds of peanut butter." They're saying to us: "You guys are nuts."
Everything is contrary to what conventional wisdom is. A typical retailer might look at this [digital recorder] and say, "I'm charging $49 for this. I wonder if I could get $52 for it." We look at it and say, "I'm charging $40 for that and I'm nine bucks under the market, but I wonder if I can get it down to $38?" Part of the advantage is we've got fewer items. We can spend a lot of time and detail on every item and making sure we're right on it.
So giving advice to other retailers is suggesting that what we're doing is going to work for them.
I certainly think all American businesses have to think more in the long term. One of the follies of American business is that we are all so tied in to these quarterly results and having to perform that it's damaged a lot of businesses.
Q: What made you decide to retire now?
A: As you can imagine, I'm very attached to this company, meaning I love it. In a perfect world I might have said, "Hey, I'd really like to work until I'm 80." But there are no guarantees in life. There's no guarantee of my health; there's no guarantee that the team is going to be as set as I think they are [now]. Things could go wrong in one fashion or another. So I feel a lot better about doing it at a point in time when that's set perfectly in place.
Q: When the recession started, you didn't know if people would keep paying for memberships, but it went very well for you. What would you have been willing to change if it hadn't?
A: We had supreme confidence that people were going to continue to shop with us. We think the value concept trumps everything.
When I go into Costcos in Texas or Florida or Chicago, invariably I'll get a couple customers to come up — it's not unusual to see two or three or even five different customers say something like: "This is the best Costco you have." It's almost like it's scripted. "This is the best Costco you have, and the reason is you have the most fantastic people here. They're great employees."
Do you know how good that feels? You feel like a million bucks, because these people are performing. You're not there, and they're performing.
Q: You spent $19 million on a voter initiative this year to get the state out of the liquor business. Why?
A: When I tell you this, you're going to say, "This guy is so full of it." But the whole reason we did this is we thought what was happening in this state and some other states was wrong for the consumer.
There was no justification for that type of system — certainly no justification for the state being in the business of selling alcoholic beverages, and no justification for all the price fixing that was going on relative to the distribution — and the consumer was paying the price for that.
As a result, many times when people were traveling to California or Arizona and other places, they were coming back loaded with liquor.
We think our customers expect us to take up the battle on those types of things. I think they expect us to be the consumers' friend; we consider ourselves the consumers' friend. ...
Now, you're not going to get any of your readers to believe that. They're all going to say it's a bunch of crap, but that really was a motivation for doing this thing.
Q: Why was the legal requirement for retailers to use distributors [also called the "third tier"] bad for consumers?
A: Because the distributors of wine, as an example, could set the price on it. If I'm the distributor on this, and it's going to cost everybody $52 whether you buy one or a thousand, and it's the same price — across the state — how is that possibly good for the consumer? I can set whatever profit margins I want.
Every place where there's competition, it's healthier for the consumer. And it is unhealthy and a cancer when you have those types of things going on, and people can make money artificially.
Q: What about the 10,000-square-foot minimum for stores to sell liquor? That's going to keep a lot of wine shops from being able to sell liquor, places that offer the variety you don't. It also could hurt local distilleries that were doing pretty well with our current system.
A: We have some private-label products, so we carry some of those products. But there will be plenty of other people like Safeway and Trader Joe's and others that will carry those products. I think there will be greater selection and probably greater distribution of a lot of products.
Relative to size limitations, they can't carry liquor now, so it's not going to change much, but I bet you they're going to be able to buy wine better. Small retailers figure out ways of doing business and offering things Costco is never going to offer. Service and selection and convenience, we don't offer.
Q: When you look back here in 10 or 15 years, what do you hope to see?
A: I would hope that 10 years from now, Costco would have sales of probably close to twice what they are right now and that they're significantly more profitable and that we have an even bigger presence internationally than we have today, that we have twice as many members shopping with us, and that we have established ourselves as a leading consumer advocate in the countries where we do business.
We think our mere presence in a community lowers the price of goods for everybody, even if they don't shop with us, because competition is a very good thing. Sometimes we moan about competition, but if we didn't have good competitors out there, we would get very lazy and not be a very good company.
Melissa Allison: 206-464-3312 or email@example.com. On Twitter @AllisonSeattle.
Dive into history in Now & Then