August 28, 2007 in Business

Costco CEO turns shopping trips into ‘treasure hunts’

Kris Hudson Wall Street Journal
 

Costco Wholesale Corp.’s eclectic product mix and customer-friendly policies have created fiercely loyal shoppers. But some on Wall Street think Costco should focus more on profit and have been pressuring Chief Executive Jim Sinegal to squeeze customers a little harder.

In 1983, Sinegal joined investor Jeffrey Brotman, now Costco’s chairman, to launch the company as a warehouse club. It’s the largest U.S. retailer of its type, amassing an anticipated $65 billion in sales this year from its 514 clubs worldwide. Along the way, Sinegal has proved himself to be a master merchandiser, honing Costco’s retail model with a success that outstrips competitors, including its chief rival, Wal-Mart Stores Inc.’s Sam’s Club.

Costco, based in Issaquah, Wash., charges its patrons annual membership fees of $50 to $100 for access to warehouses loaded with bulk goods priced at no more than 15 percent above its wholesale costs. For pizzazz, Costco uses the “treasure hunt” approach, peppering its stores with unexpected, limited availability items – ranging from designer jeans to $80,000 diamond rings – that keep shoppers coming back.

Investors, for the most part, have endorsed Costco’s strategy. The retailer’s stock trades at 21.2 times its projected per-share earnings for the next four quarters, far ahead of most other retailers. But some have begun to worry Costco could slip if it doesn’t show more profit growth.

Sinegal, who is 71, works at two folding tables in his office, and his wardrobe includes items from his stores. Sinegal recently sat down for an interview. Excerpts follow.

Wall Street Journal: You are constantly balancing the needs of customers, employees and shareholders. Some on Wall Street complain that shareholders seem to come third in that equation. Do they?

Sinegal: That’s not the case. We want to obey the law, take care of our customers, take care of our people and respect our suppliers. And we think if we do those four things pretty much in that order, that we’re going to reward shareholders. By the way, we sell for a pretty rich multiple. We’re not getting penalized by Wall Street.

WSJ: Giving customers a great deal can sometimes mean taking a hit on profits. Is it worth it?

Sinegal: There are all sorts of opportunities where you can try to sneak in a little more margin here and a little more profitability there, but that’s not what we’re about. When you start suggesting that it’s not important to save the customer money on this because they’ll never know the difference, you start to fool yourself. The customer trusts us. You don’t want to give up on that type of reputation.

WSJ: You’ve revoked at least one popular policy: unlimited returns of big electronics. Why did you decide to initiate a 90-day time limit on returns of flat-panel TVs earlier this year?

Sinegal: We were spending an enormous amount of dollars by taking these things back and (selling them to a salvage company) for 30 to 40 cents on the dollar. Most of the reason for the TVs coming back were that customers couldn’t understand what to do with them. We said, “We’re going to help you get this thing hooked up. We’re going to give you two years of warranty. We’re going to make sure, even if we have to send somebody out to your house, that it works.” We think we came up with a great solution.

WSJ: Why has the treasure-hunt technique worked so well for you in attracting customers?

Sinegal: We try to create an attitude that, if you see it, you ought to buy it because chances are it ain’t going to be there next time. You’re going to come in and find that maybe we have some Lucky jeans that we’re selling. You come in the next time and we don’t have those jeans but we have some Coach handbags. That’s the treasure-hunt aspect. We constantly buy that stuff and intentionally run out of it from time to time.

WSJ: What was one of the most successful treasure-hunt items at Costco?

Sinegal: We wound up finding a place where we could get several million pairs of Calvin Klein jeans, and we bought them at a great price. Every department store was selling them for $50. We easily could have said, “Well, we’re selling every pair that we get … Why not sell these for $29.99?” But we didn’t. We sold them for $22.99 because we made such a great buy.

WSJ: Can you recall one of your bigger treasure-hunt disappointments?

Sinegal: One year, we bought an IBM computer that we were going to sell for, I think, $1,000. We bought thousands of them, and it bombed. We had to lower the price. Several times. Yeah, we’re not infallible.

WSJ: Costco offers better wages and benefits than most of its rivals. Why is that?

Sinegal: We think that you get what you pay for. If you hire good people, pay them good wages and provide good jobs and careers, good things will happen in your business. We think that’s proven true in our case. We are the low-cost provider of merchandise, and yet we pay the highest wages. Wouldn’t that suggest that we’re getting better productivity?

WSJ: Costco plans to open about 30 new stores in the U.S. this year, pushing your total past 400. Your Wal-Mart rival, Sam’s Club, plans to open 10 or 20. Are you concerned about overreaching?

Sinegal: There’s lot of markets that we can go to. If we perform well, and if those new units get off the ground, we’ll feel pretty confident about continuing to grow at that pace and maybe even stepping it up a little bit beyond that.

WSJ: Municipal laws banning development of large-format retail stores have gained momentum this decade, especially in California, where Costco has quite a few stores. Will that limit you?

Sinegal: It doesn’t apply to us in many instances. But we don’t think that legislating in that fashion to limit competition is a good idea. Generally speaking, it’s difficult to ban something like our business when we pay the wages and we provide the types of jobs that we do. We’re a desirable business in the community.


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