James D. Sinegal: A Long-Term Business Perspective in a Short-Term World

James D. Sinegal is president, CEO, and a Director of Costco Wholesale Corporation, America’s top warehouse retailer, based in Issaquah, Washington. Costco operates more than 400 stores, employs more than 100,000 people, tallied $38 billion in sales to more than 23 million members, and made $700 million in profits in fiscal 2002.
Sinegal was founding CEO of Costco in 1983 (with co-founder Jeffrey Brotman, who serves as Chairman) and has remained at the helm through its transitions and growth, including its merger with The Price Company in 1993. From 1954 to 1977 Mr. Sinegal worked his way up the ladder at San Diego-based discount retail chain Fed-Mart from bagger to Executive Vice-President. Early on at Fed-Mart, he abandoned studies at San Diego State after getting a job promotion. Business Week magazine featured Sinegal along with five others in their September 23, 2002, cover story on “The Good CEO.”

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Low Prices and High Wages: Why?

Ethix: Costco is distinctive among its competitors with its policies of never marking anything up more than 14 per cent (with an average mark-up of only 10%). You have been known to lower prices on items when the wholesale price went down—even if market competition and customer awareness didn’t require it, even if you had purchased the item at an earlier, higher price. Costco also is determined that its employee wages and benefits lead the industry. Business Week reported that a Costco cashier with four years experience can earn more than $40,000 with full benefits. Where do these policies come from? How did you decide to run your business this way?

Jim Sinegal: Part of it is just sound business thinking. It shouldn’t surprise anyone that if you find good people, give them good jobs, and pay them good wages, good things will happen.

Part of the reason may also have to do with the kind of business we have. When we opened our first warehouse in downtown Seattle with forklifts running through stacks of tires and electronics, food and mayonnaise and cranberry juice, people would naturally ask the question, how can they sell things for such low prices? What are these guys doing? We decided that we would take away any objections or questions a customer might have, such as perhaps we could be treating our employees unfairly in order to sell things at low prices. We also decided to establish a stronger and better “guarantee of satisfaction” on every product we sold, that would exceed the warrantee offered by any other company.

We have the same attitude toward our suppliers and everyone else who has contact with our business. We operate this way because we believe philosophically that this is what we should be doing—but we also do it because of the nature of our business. People would always ask “What’s the catch?” We wanted to make it clear that there were no catches.

Don’t investors pressure you to increase quarterly profits and raise shareholder value by cutting wages and raising prices as the market dictates or allows? How do you and your Board resist that?

We get it every day. That’s not an unreasonable question for someone in the business of making money. Their job is to buy low and sell high. But that’s not our job. Our job is to build the company, hopefully one that’s going to be here fifty years from now. You don’t do that by changing every time the wind blows in a different direction. The things that we do are basic and intrinsic to our business and our company.

Our reputation for pricing is an example. We have sweated over this for years. Why would we sacrifice that just to make a quarterly target? It wouldn’t make sense — sacrificing everything, risking our whole reputation. We believe our strategy will maximize shareholder value over the long term.

Customers have price and quality incentives to come to Costco. Employees have wage and satisfaction incentives to work at Costco. What is the incentive for investors? Must they always share your long term view?

The record shows clearly that we are successful over the long term. I don’t know what the exact number is but look at our return over the past five or ten or fifteen years. Our mission is to do four essential things: obey the law … take care of our customers … take care of our people … and respect our suppliers. If we do these four things, and do them consistently, we will succeed as a business enterprise that is profitable and rewarding to our shareholders.

It is possible for some to ignore these things and reward their shareholders in the short term — but not for the long term. We feel an obligation to build businesses so that communities can count on us being there, suppliers can count on us being there, employees can count on the security of jobs, and customers who shop with us know that they can count on us. When they buy a washing machine or a television, we’re still going to be around a couple of years from now.

This all seems pretty obvious but many are not doing business this way. Why?

In the past year public attention has been focused on the “crooks in business” and how to stop them. The result has been a bunch of new legislation and rules. You know as well as I do that the crooks are going to go on “crooking” — they’re going to figure it out. But I believe that, by and large, most businesses are running on a basis similar to ours.

The Good CEO

Business Week called you one of the good CEOs. What in your view makes a good CEO? As you look for a successor some day at Costco, what characteristics matter most?

I’m flattered of course that Business Week included me in that group. Characteristics? Good leaders make the determination how to run the company and then communicate it to everyone in the company so that they all understand it. Honesty and doing the right thing cannot be the responsibility of management alone. Every level of the company should understand what the rules are and every employee in the company should be mortified if the company and its people don’t do what they are supposed to do. The attitude has got to be pervasive throughout the organization: “We don’t do that kind of stuff around here! Period!”

So first you’re looking for character and ethics?

You’re looking for a lot of things. You look for intelligence, industriousness, integrity, for someone faster than a speeding bullet—all of those things you want in a manager. If you start off with integrity, financial integrity as well as intellectual integrity, you’re starting on a pretty good base.

Values and Integrity Through the Ranks

How do you make sure that integrity and company values are part of the culture all the way down to the forklift driver and the mail delivery person?

As an organization, make sure that you are consistent. You put in place simple guidelines on how you run your business and then follow them.

One guideline we follow at Costco is that no employee who has been with us for more than two years can be fired without the approval of a senior officer in the company. We think an employee who has been us two years is entitled to that. No manager can come in on a bad day and decide some employee is history. There has got be a review process. Is it perfect? Of course not. We’re fallible. But it is one of the things that we do to show respect to our employees.

Another example is our open-door policy. People have a way to voice their grievances and get them addressed. All 100,000 employees cannot run to me (although sometimes it feels like they do) but I do take on some. It would be a very rare day that I don’t get a couple of calls from employees. But think about this: if warehouse managers know that their own regional bosses have open door policies and will talk to any employees about their issues, then they 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. They are smart enough to figure out that it is their responsibility to take care of things at their level.

You can’t know 100,000 employees personally and you can’t visit all your stores as frequently. What do you do differently now to maintain consistency in your culture and values?

It’s clearly much more difficult than in the early days. That rule about the two-year employee termination review used to apply just to my partner Jeff Brotman and me. When the company got too big we had to say the review will be by one of our senior officers. I used to pride myself on visiting every one of our warehouses between October and December. Now that is impossible. Some locations take two days of travel just to get there. I still try to get to every warehouse at least once a year. Why? That’s what I do for a living. I love the business and I enjoy doing it. It is important that those in management get out there and understand where the business is. Otherwise your business is going to fall apart on you.

Technology at Costco

Does information technology help you to stay in communication?

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.

When I think of technology and retail, I think of what Amazon has done at the front end of their business—and what WalMart has done at the back end of their business. How does Costco’s use of technology compare with what Amazon and WalMart have done?

We have a relatively sophisticated computer system and lots of technology. We have wireless recording of purchases and can go into any of our warehouses anywhere and check on how any given item is selling during the day. 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. Time will tell whether Amazon.com is going to turn a profit. My guess is that they will succeed. They are pretty sophisticated guys and there is a reason why they survived when the others were falling by the wayside. But buying and selling merchandise is the business. These other things augment your running the business but they aren’t the driving force. 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.

Retail in the Future

How do you see the retail world thirty years from now? Any dramatic changes?

I think there will continue to be the huge hypermarket types of businesses. People have been going to the marketplace for thousands of years for its social significance as much as for replenishing household needs.

It won’t all be done on-line?

I don’t think so. People are still going to want to go out and have that social exchange. I think there probably will be more hypermarkets. I think that WalMart-style, 200,000 square foot, superstores that carry everything will become the norm as time goes on. We could see shopping malls turn into superstores where there are independent stations within one superstore with one check-out. The expertise within those walls will reside in the little stores and boutiques inside the superstore.

Part of it is that people want to associate with people. But another part must be that people want to see and touch the merchandise. I’m not sure that even if you could make something holographically present in my living room it would be a satisfying substitute for going to a store and seeing and touching the thing itself.

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.

Is anything being lost, in your view, by the replacement of local merchants by huge national franchises in cookie cutter malls everywhere you go? There are certainly some efficiencies of scale with the Home Depots, SportMarts, Office Maxes, and Costcos in every community but can the smaller neighborhood store survive? Should we mourn its loss?

It comes down to the quality of the individual merchant. Those who run their businesses in an efficient manner are going to survive. But we need to ask also, what’s the difference between a 200,000 square foot WalMart superstore and a 200,000 square foot shopping center with shops carrying the same merchandise?

It may be that most traditional downtown shopping districts, especially in rural America, were smaller than the typical WalMart or Costco.

Some of these power centers have a drugstore, a supermarket, a sporting good store, a coffee shop, a clothier, and a couple of restaurants. All together they add up to a lot of square footage.

Costco and Small Businesses

How big is your emphasis on supplying small businesses? Maybe Costco is actually supplying (and preserving) small businesses rather than replacing them entirely.

The business customer is the key member that we service. We also supply a lot of nonprofits like churches, schools, and sports teams. Sixty percent of our business is with business customers.

Where Home Depot comes in, local hardware stores disappear. But where Costco comes in, it sounds like you might replace some stores, but you’re also helping others to survive by being their supplier.

Our business was founded so that small businesses could come in and buy essentially everything they needed for their business under one roof. Cafe 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. They also might buy a television set for home or work.

Would you sell them a pick-up truck to drive all their stuff back to the office or home also?

Actually, I think on a referral basis we sell about 100,000 cars a year. That’s pretty substantial.

In the December 2002 issue of your magazine, The Costco Connection, I noticed an article about ethics in business. Is this to help small businesses improve their operating structure? Is that part of your work with small businesses?

Absolutely. Small businesses are our key customers and you will find articles in most issues that revolve around the businesses: advice on how to run a business, how to get staff, how to hire consultants, and so on.

Globalization Challenges

Costco has gone global both in terms of its supply chain and its sales outlets. What challenges have you seen in moving from an American company to a global company?

Every country is different. The one constant is value. Value is appreciated no matter where you go, though how you make it work can vary by country.

After we started our business in Seattle we had an opportunity to go up to Canada. We thought “Canada is only 140 miles away, how different could it be?” Well, we found out! They have a different system of weights and measurements, a different currency system, different laws, and a different language. Everything had to be printed in two languages. We found out very quickly that there was a lot to doing business in a different country even if it was only 140 miles away.

That experience helped prepare us to do business in countries that are much more difficult than Canada. Today we do business in 61 Costcos in Canada and we have 15 in the UK. We have 21 in Mexico, three in Japan, five in South Korea, and three in Taiwan. So, we’ve got an international presence in various places and we will continue to grow internationally, especially in Japan, the UK and Mexico.

The keys to doing international business are to understand local rules and laws, recognize what customers want to buy, and take care of our employees. Whether in the UK or Canada or in Mexico, we’re going to measure ourselves against every other retailer and make sure that we’re paying higher wages than anyone else. We would like to be able to turn our inventory faster than our people because excessive turnover of people is very costly.

Expanding Into New Product Areas

You manufacture some of the things that you sell, such as bakery goods. How do you decide what to make. For example, have you thought about becoming a book publisher? Is the process simply that somebody in your organization gets the idea, proposes it, and then you decide whether its cost-effective or not?

That’s pretty generally the way it starts.

Do you have a strategy to go out and aggressively build up your own manufacturing industry?

We get calls all the time from people who want us to do ancillary businesses and all sorts of deals or proposals coming to us about getting involved in salons or healthcare in our warehouses. It’s not our business and we think that probably it winds up just taking up valuable parking spaces. We do have a strategy of trying to bring new products and new services to our customers on an ongoing basis. The question in our minds is whether we can we do it well and provide value for the customer. If we think we can, we’re prepared to try it.

Ethical Screening of Products

Are there products where you could make money, but you would not pursue for ethical reasons. For example, how would you decide whether to sell pornography? Do you have stated policies on these things?

Yes, we do. We determined that we’re not going to carry any pornographic materials. We also don’t carry violent video games. We don’t carry guns or ammunition. These decisions came from those of us who run the company.

But you do have cigarettes.

We do have cigarettes. Obviously it’s a dilemma today. But it was a big portion of how we started our business taking care of wholesale customers. A lot of them sell tobacco in their stores, cafes, machines, and lunch trucks.

Do you have policies for your buyers to investigate how products are manufactured, i.e., that there is no child labor or slave labor? How would you enforce this?

There are lots of laws in the US and other countries. We also have a code of conduct for our suppliers that demands that they have to meet the laws of their own country, pay the right wages, and not use child, slave, or prison labor, etc..

What about bribery?

Bribery is clearly the worst. As an American company we can’t get involved in bribery because of the Foreign Corrupt Practices Act. We have a conduct policy for our suppliers. We visit our supplier factories on a regular basis to make certain they are complying with our standards and values.

What Went Wrong in Corporate America?

As you look back on the corporate scandals of the last couple years, what would you say has gone wrong in American business? What is the problem and the solution from where you sit?

I think the gates were too wide open, with too many opportunities. Clearly that’s something that has to be taken care of. But no matter what types of rules and regulations, no matter how many committees are set up, bad guys are still going to figure out some way to do wrong. The good news is that there aren’t that many bad guys. Most business leaders are trying to run their businesses in an ethical fashion. 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.

But you can’t regulate against it.

It’s a process. It’s the way our system works. The system is a very good one. I’m not knocking it. The pressure from analysts and Wall Street is good because it forces us to think carefully about our business. Reflection and thinking from another point of view is not bad at all.

Finding Time to Reflect

How do you find time for reflection, given the pace of life, the quantity of information, and competitive pressures?

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.

In the future, will Costco be in the Middle East, Africa, South America – or other places that might be a little more difficult than Mexico, Japan, or the UK?

There are lots of places for us to go that don’t have really severe problems but I could see a time where we might enter areas of greater challenge.

Do you have a grand vision for what you’d like to do with this company before you hand it off to somebody else?

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.