Monday, November 26, 2012

A Real American Success Story....

Brilliant piece about Costco in the NY Times: How Costco Became the Anti-Walmart(Emphasis mine)!

CEO Jim Sinegal is adamant that he treats his employees well

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

Mr. Sinegal is also adamant that he offer his customers quality products at a fair price:

But the pièce de résistance, the item he most wanted to crow about, was Costco's private-label pinpoint cotton dress shirts. "Look, these are just $12.99," he said, while lifting a crisp blue button-down. "At Nordstrom or Macy's, this is a $45, $50 shirt."

Combining high quality with stunningly low prices, the shirts appeal to upscale customers - and epitomize why some retail analysts say Mr. Sinegal just might be America's shrewdest merchant since Sam Walton.
 Mr. Sinegal also is consistent with his margins and not always trying to bleed an extra penny:

At Costco, one of Mr. Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

"They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices

All the while Wall St. is not very happy with his business model:

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."
How Ms. Kozloff still has a job is beyond me, because if she was even remotely competent at her job, she would know that Mr Sinegal is having his employees share the burden.  The burden he is having them share in though is success.    While Wall St. likes to make sure only a few people make all of the money, Mr. Sinegal believes that his $2 Billion net worth and annual salary of $350,000/yr are enough

Despite Costco's impressive record, Mr. Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among all American companies.

"I've been very well rewarded," said Mr. Sinegal, who is worth more than $150 million thanks to his Costco stock holdings. "I just think that if you're going to try to run an organization that's very cost-conscious, then you can't have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."
 All of this goes against everything Wall St. believes in and esepecially against everything that came out of the mouths of the Willard and Gilligan during the last election season.  Luckily for Costco's employees and customers, Mr. Sinegal does what he knows to be right, not listen to the greed induced Wall St. Consultants.

Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

He also dismisses calls to increase Costco's product markups. Mr. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall.
In other words, He could take Wall St.'s advice, but it would mean the end of Costco.  

Digging deeper into the Costco business model, there is no way they could survive if they were unionized right?  Wrong again!

Costco also has not shut out unions, as some of its rivals have. The Teamsters union, for example, represents 14,000 of Costco's 113,000 employees. "They gave us the best agreement of any retailer in the country," said Rome Aloise, the union's chief negotiator with Costco. The contract guarantees employees at least 25 hours of work a week, he said, and requires that at least half of a store's workers be full time.

 Wow, ignore Wall St's advice, treat your employees well, be fair to your customer and your vendors.  There is no way that is a successful business model right?

 Costco was founded with a single store in Seattle in 1983; it now has 457 stores, mostly in the United States, but also in Canada, Britain, South Korea, Taiwan and Japan. Wal-Mart, by contrast, had 642 Sam's Clubs in the United States and abroad as of Jan. 31.Costco's profit rose 22 percent last year, to $882 million, on sales of $47.1 billion. In the United States, its stores average $121 million in sales annually, far more than the $70 million for Sam's Clubs. And the average household income of Costco customers is $74,000 - with 31 percent earning over $100,000.
 Next thing you know, you will tell me the employees actually like working there?

  Beth Wagner, 36, used to manage a Rite Aid drugstore, where she made $24,000 a year and paid nearly $4,000 a year for health coverage. She quit five years ago to work at Costco, taking a cut in pay. She started at $10.50 an hour - $22,000 a year - but now makes $18 an hour as a receiving clerk. With annual bonuses, her income is about $40,000.

"I want to retire here," she said. "I love it here."
 Ok but with this much business success, he must be a strong supporter of the republican party.....

 Hmmm,  wonder if Mitt and Paul would consider Jim Sinegal one who is a taker and does not take responsibility for his own life and only wants gifts?

**Full disclosure, I recently joined the new Costco Sun Prairie!   


  1. A friend of mine just loves Costco. She said she has friends who go to Costco when they travel just to see what they are like because they are such a great store and also have local products. I thought she was being a little weird at the time, but having read your column, I will consider joining.

  2. The story is it would be nice to have it updated. I am a very happy Costco member. I've not seen anything that is a problem. There likely are some things out there, but still far better than Sam's.

  3. I didn't know this! Thanks for sharing! Great post!

  4. Wall Street is up uncomfortable with Costco for the same reason Republicans hate Social Security. Both both soundly disprove facets of the Right Wing ideology.

    Costco - "High prices, low wages/benefits equal Growth/Shareholder value.;" False. In reality, the bottom line and customer and employee satisfaction speak for themselves.

    SS - "Government can do nothing as well as the private sector." Wrong again. In truth, SS is the single most successful social program in human history.

    Bad strategy to let the proles get wind of stuff like this, ya know.

  5. This is why we dropped Sam's Club years ago and joined Costco. We get better quality, and we give a d*mn about workers.

    We have friends who came to Costco with us and liked it, heard our reasons why we switched -- and they went home to Australia to sign up with Costco, too. That makes it even easier and less costly for us to send them gifts, halfway around the world, without high shipping costs.

    Glad you're getting aboard, Jeff. You'll like it.

  6. Costco please come to the Green Bay,Fox Valley area. I would drop Sam's in a heartbeat. Great article.