Still, it’s worth pausing amid the plaudits and praises to consider another longtime CEO and founder who announced his retirement during the past few days. On Wednesday, Costco’s chief executive, Jim Sinegal, said he would be stepping down from the chief executive job at the warehouse club on Jan. 1, 2012. When he does, Corporate America will lose a leader of a very different sort. It’s hard to imagine anyone with less pretense, more discipline or more integrity leading a major corporation today. Sinegal founded Costco with Jeff Brotman, the company’s chairman, in 1983 and expanded it in the 1990s when his company combined with Price Club, which was owned by Sol Price — who pioneered the warehouse concept and had been a mentor to Sinegal. From those beginnings, he’s created a warehouse behemoth that pulled in $76 billion in revenues in 2010. Despite the poor economy, customers kept paying the $50 to $100 annual fees for the privilege of shopping at Costco: 87 percent renewed their memberships in 2010.
He laid no one off during the recession, other than short-term staff for holidays and store openings. And yet, he has none of the trappings of success. Sinegal, who no doubt has become wealthy through Costco, makes about a third the pay of an average CEO. His salary is $350,000 a year, a fraction of the $1 million that’s common for most Fortune 100 CEOs. And his total take-home pay amounted to about $3.5 million in 2010 — a nice sum, to be sure, but again, far smaller than the median $9.3 million. It’s not just his pay that lacks showiness; the way Sinegal works is lacking in pretense, too. His office is a tiny alcove without a door; the furnishings are literally as fancy as folding chairs. When a reporter comes to visit the headquarters at the company, which does not have any public relations handlers on staff — a true rarity in big corporations — Sinegal comes out to the reception desk himself. He even answers his own phone (“Sinegal!”). He could probably charge more for the goods in his store than he does.
But Sinegal holds fast to a mantra that nothing in the warehouse should be marked up more than 14 to 15 percent from cost. Even if the market would bear more, Sinegal believes pricing goods higher would prompt customers to lose trust. His discipline is legendary. “People have always asked historically, who’s your toughest competitor?” the company’s chief financial officer, Richard Galanti, told me back in 2008. “And I say it’s Jim.” That disciplined approach to pricing hasn’t won many praises from Wall Street analysts. Neither has Costco’s wage and benefit policies, which are so generous that one analyst complained that "it's better to be an employee or a customer than a shareholder” at Costco. (It’s not now: Net income rose 10 percent in 2010 from the year prior, admittedly an off year during the recession, while Costco’s stock is up 40 percent over the last year.) It’s not just that Sinegal is generous with his employees; he also leads with an integrity that few CEOs can rival.
Consider this story Galanti told me in 2008. Back in 2003, Costco, which hadn’t raised its health care premiums to employees for nine years, said it was going to miss its earnings estimate due to rising costs, part of those being healthcare. For several years, Galanti and the company’s head of human resources had been pestering Sinegal about raising premiums, but Sinegal was adamantly against it. Finally, Sinegal agreed, but he wanted to keep it simple, with no fancy formulas for determining premiums and no glossy brochures to explain the increase. Instead, he would write a letter, in which he promised employees they wouldn’t pay more than 10 percent of the overall cost. Fast forward a few years, Galanti told me at the time, and “lo and behold, with the changes, with all the actuarial estimates, with all the things like employees [making] smarter purchases,” employees were paying a little more than the 10 percent. Most CEOs, of course, would have welcomed the cost savings, pocketing the difference and staying mum about something most employees would never have known.
But upon hearing this, Galanti told me, Sinegal wanted to pay employees back. To do so, he gave each employee an added bit of stock in their 401(k)s in 2008. From what I’ve seen, Sinegal has instilled these sensibilities in his executives, most of whom have worked with him for decades — yet another rarity in large corporations today. That includes President and Chief Operating Officer Craig Jelinek, who has been named as Sinegal’s successor. I doubt much will change when Sinegal retires. But he will be missed. Leaders with Steve Jobs’ brilliance and flourish and flash may get all the accolades when they move on. But those with Sinegal’s lack of pretense, principled discipline and steadfast integrity are just as rare. And they should be just as celebrated. More from On Leadership: Paul O’Neill: Only the president can restart America’s engine Michael Useem: Revising investor capitalism’s mantra Be in the know on everything we’re covering here at The Post’s On Leadership section.
“Like” our page on Facebook, or follow us on Twitter: On Leadership at The Washington Post: @post_lead Post Leadership Blogger Jena McGregor: @jenamcgregor On Leadership Editor Lillian Cunningham: @lily_cunningham Rosa Say/Flickr"I really wish I had worn a condom." - Sol Price, the founder of Price Club (and later Costco), when some discount retail executive told him that he's the father of the warehouse discount retail concept.Do you love Costco? I love Costco ... maybe a little too much. a member of Costco since the Price Club days (Costco merged with Price Club in 1993 and became PriceCostco. In 1997, the company changed its name to the Costco Wholesale you know and love - more on that below).Back in those days, Price Club didn't use barcodes - instead, the checkout process consisted of an unloader and a cashier. The unloader took your items out of your shopping cart and yelled out the item numbers to the cashier. The cashier typed in the item numbers one by one into the cash register.
Oh, and back then, it was still possible to get parking on a Saturday morning.If there's one thing I know about Costco today is that it's impossible to leave the store without spending at least $100. Once, I was on a mission: to get that one thing I need at $50. I went straight to the item, grabbed one, and went to the checkout line without looking at anything else or (gasp) even sampling their food. I thought I had outsmarted them. When I got to the cashier, she informed me that I had to renew my membership at $55. Total spent (before taxes): $105! Anyways, here are 10 most fascinating facts about Costco:1. The concept for Costco was drawn up on a napkinLike I mentioned above, the Costco we knew and love today started out as Price Club, which was founded by legendary businessman Sol Price*. In 1975, Price was forced out of a chain of discount department store company he founded called FedMart**. Shortly after, he drew up the concept of a "warehouse store" retail model on a napkin.
A few of Price's friends and associates put together $2.5 million seed money for the first Price Club, which opened in 1976 (more below). Their first week's sale was downright disappointing. Price said, "It was terribly slow. Our sales were only about $32,000 in our first week, and it got worse from there."To make it seemed that the store was busy with customers inside, Price made his employees park their cars near the warehouse entrance. sales improved and Price Club was off and running.*What a perfect name for retail, huh? Legend has it that when his parents Samuel and Bella, immigrated from Minsk, Russia, the clerk at Ellis Island misheard "Press" or "Preuss" and wrote down**Another neat trivia: In the 1960s American businessman Samuel Moore "Sam" Walton opened his own retail store and decided that he liked the "Mart" in Price's "FedMart" name so much that he decided to name his store after it. Wal-Mart.2. Costco's first store: A converted airplane hangarThe first Price Club store we mentioned above was located in a converted airplane hangar once owned by Howard Hughes on Morena Boulevard in San Diego.
The store only sold to small businesses, who could "invite" non-business members. That created a "secret club" mentality that appealed to many people.This store is still in operation today.3. Costco's main layout is called "The Race Track"Costco purposely put fresh food at the back in the store, to make sure that their customers pass by every category of items - electronics, clothing, jewelry, amongst others - as they wind their way down "The Race Track" to the food section.This strategy obviously works because, as I mentioned above, it's impossible to get out of Costco for less than $100.4. Two types of things that Costco sells: Triggers and TreasuresA typical Costco warehouse store stocks only 4,000 types of items (in contrast, the average supermarket sells 40,000 types items. Wal-Mart stores, on the other hand, stock about 125,000 types of products). There's only one selection - you don't get to (or have to) make a choice from a variety, which is a clever strategy to combat choice paralysis.
But don't let that fool you. Costco's product selection is actually very deliberate. Three-quarters of Costco's products are what it calls "triggers" - staples such as paper towel, detergents, and cereals. The remaining one-quarter are "treasures" - items that make shopping an adventure. These items change frequently: one day you can find it's luxury watch offered at a ridiculous discount and the next day, it's gone. This creates a sense of urgency and the thrill of shopping that hooked people on what's been called the "Costco Craze" or the "Costco Effect."5. Costco sells over 100 million pounds of fresh ground beef every yearThe company is one of the largest meat purveyors in the world. It sells $4.5 billion worth of meat every year (on top of $4 billion worth of produce). See that rotisserie chicken roasting in the back of the store? Costco sells 103,000 of them every day. That's over 37 million chicken a year!6. Costco buys up half of the world's supply of cashewsPeople sure love cashews.
Costco sells $300,000 worth of them every week. If you noticed, Costco's cashew containers are square - not round - in order to maximize space on pallets.When they switched to square containers, they reduced some 400 truck trips in shipping the product to its 600+ stores every year.Love the $1.50 hot dog? A lot of people do - Costco sells more than 100 million hot dogs every year. The price has remained the same since 1985. To be able to continue to sell at that price, in 2008 Costco started making their own hot dogs in a facility in California's Central Valley.8. Costco has no public relations staffThis is definitely an anomaly - no other big public companies operate without having a public relations department. In fact, once, after Costco CEO Craig Jelinek conducted an interview with a journalist alone, its CFO Richard Galanti called to ask if his boss had inadvertently said anything negative.9. Costco makes virtually no profit on the stuff it sellsOkay, this requires a bit of explanation: Costco typically marks up its goods a maximum of 14% over its cost (most items have an 8% to 10% markup - Kirkland Signature brand has a 15% markup).
After accounting for expenses such as real estate costs and wages, Costco just about breaks even on those goods.Sol Price, the company's founder, once said: "My 'secret' is so simple that I'm reluctant to speak openly about it for fear of appearing stupid. I sell things as cheaply as I can."Eighty percent of the company's gross profit actually comes from the membership fees (between $55 to $110) from its 64 million members. That's nothing to sneeze at: Costco's annual profit is roughly $1.5 billion. Nearly 90% of its customers renew their membership every year.There's another benefit to requiring people to become members in order to shop: a customer who has to provide his details in the membership registration form is less likely to write bad checks or steal. Costco suffers only one-tenth the level of those two types of losses as compared to the average supermarket.10. Costco is amazingly generous to its employeesOn average, Costco pays its workers about $20.89 an hour (in contrast to Wal-Mart which pays its full-time employees $12.67).
More 80% Costco employees have company-sponsored health insurance. About 90% of its employees have retirement plans. In 2009, when the recession hit the United States, Costco CEO Jim Senegal approved a $1.50-an-hour wage increase, spread over three years:“The first thing out of Jim’s mouth was, ‘This economy is bad. We should be figuring out how to give them more, not less,” says CFO Galanti, who adds that Sinegal’s decision to parcel out the raise in three annual 50-cent increments, instead of more gradually, cost an extra $20 million. The founder’s stubborn resolve remains a point of pride. “Could Costco make more money if the average wage was two or three dollars lower?” asks Galanti. “The answer is yes. But we’re not going to do it.”As a result, employees rarely leaves. The turnover rate of employees who have been there over a year is 5%. Turnover rate of Costco executives is even lower at 1%. That way, the company saves quite a bit in having to train new employees and its rate of theft by employee is extremely low.
All in all, in 2006, Costco generates $21,805 in operating profit per employee as compared to $11,615 at rival Sam's Club, which paid its employees much lower wages. Wayne Cascio of University of Colorado at Denver summarizes:Costco’s stable, productive workforce more than offsets its higher costs ... These figures challenge the common assumption that labor rates equal labor costs. Costco’s approach shows that when it comes to wages and benefits, a cost-leadership strategy need not be a race to the bottom.Costco also loves to promote from within - in fact, 70% of its warehouse managers started out as cart pushers and cashiers. On the downside, the company acknowledges that this means that they rarely get outside views. John Matthews, vice president in charge of human resources, once commented that Costco is "awfully inbred."Bonus Fact I: Kirkland Signature is named after the city of Kirkland, WashingtonKirkland, Washington, is Costco's first corporate headquarters. Kirkland Signature, the company's private label, makes up about 15% of the store's product line.