True Story: Sinegal

He Gained his experience working for retailer Sol Price. He left Price to be his own
boss and started Costco. Ten years later Sol Price asked to merge his company,
Price Club, with Costco

eventually making Sinegal the CEO of his company and his former boss' company.
James D. Sinegal is co-founder and CEO of Costco, an international low-price
membership retail chain and the largest U.S. wholesale club, headquartered in
Issaquah, Washington, U.S. He was named one of BusinessWeek's "Best
Managers" in 2003. He was named to Time Magazine's 2006 list

of The 100 most influential people. In 2009, Mr. Sinegal was considered one of "The
Top Gun CEOs" by Brendan Wood International, an advisory agency.

Jim Sinegal Articles

The Good CEO: The Early Years of Costco's Jim Sinegal

The average customer visits their local Costco 22 times a year. The company has
become one of the largest in the U.S., with 473 outlets and more than $50 billion in
sales, and is also the largest membership warehouse club chain in the world. Its
founder and CEO, Jim Sinegal, has been called the Sam Walton of the 21st century for

his low-key style and seeming defiance of all things Wall Street. But, whether
investors like him or not, America – and much of the rest of the world – has fallen in
love with his discount depots.

The son of a steelworker, Sinegal has come a long way to get to where he is today.
Born on January 1, 1936 in Pittsburgh, Pennsylvania, James D. Sinegal was raised in a
typical working-class Catholic family. As a boy, the young Sinegal dreamed of going
to medical school. He graduated from Helix High School in 1953 and decided he
would try to make his dream a reality by applying for enrollment in San Diego State
University. However, that dream was short-lived.
“My test scores were good, but my grades weren't that good, because I needed
focus,” recalls Sinegal, who was advised to first apply for a short program at San
Diego College. There, he not only earned an associate’s degree, but he also got back
his motivation and concentration. “It was at San Diego Junior College (now City
College) where I regained that focus, and paid attention,” says Sinegal, “because
deep down I knew education was important.” It was what Sinegal would do next that
would lead him to in fact become chosen as one of City College’s Most Distinguished
Alumnus.
After earning his degree, Sinegal finally enrolled in San Diego State University. To
help support himself through school, he applied for a job at Sol Price’s newly
expanding Fed-Mart. The 18-year old Sinegal was given the task of unpacking
mattresses as they arrived. “It wasn’t that great a job,” he says. “I was getting a
buck and a quarter an hour. But it was exciting.”
It was at Fed-Mart that Sinegal discovered his passion for retail. Within just a few
years, he had been promoted to store manager. He soon quit his university studies
and devoted himself full-time to Fed-Mart. Eventually; Sinegal would rise to become
the executive vice president of the chain.
In 1979, Price decided to abandon Fed-Mart and start a new venture, and he wanted
to take Sinegal with him. Over the years, Sinegal had proven himself a loyal and hard
worker, and Price did not want to lose him. Sinegal agreed, and together, the two
created Price Club. Initially, Price Club was meant to service small business owners,
but eventually its membership became open to the public. Sinegal was executive
vice president and was the major driving force behind helping his former Fed-Mart
boss establishes the new company.
By 1981, Sinegal realized he had been working with Price for almost 30 years. It was
time for him to move on. Both Fed-Mart and Price Club had been a success, but
Sinegal wanted to do something for himself. That year, he decided to leave Price, to
give up his secure job, and to risk it on all on his own.
Creating a Company That Cares: Costco's Climb to the
Top

Sinegal was in one of the top two positions of power of a rapidly expanding company,
when he decided to give it all up on a whim. Sinegal wanted to be on his own, to
have the feeling of success that only comes from when you have started your own
company from scratch. And so, in 1983, Sinegal joined forces with Jeff Brotman, a
lawyer and the son of a former clothing retailer, and created his own warehouse
retail club.

On September 15, 1983, Sinegal and Brotman opened their first Costco warehouse in
Seattle, Washington. Based on a similar business model as Sol Price’s Price Club,
Costco began charging a membership fee to its customers. In the beginning, it too
catered primarily to small business owners.

Over the next ten years, Costco would continue to grow in both membership and
sales. In 1993, after a decade of steady success, Sinegal decided to acquire the
company he had helped his once boss grow. With the merger of Costco and Price
Company, PriceCostco was formed, and effectively doubled the size of both. There
were now over 206 locations of this growing retail company, which was conducting
more than $16 billion in annual sales.

PriceCostco was being run at the time by both Sinegal and Sol Price. But, in 1994,
Price left the company to found Price Enterprises with his son, Robert. In 1997,
following the departure of his partner, Sinegal officially changed the company’s name
to Costco Wholesale. The next year, at Costco’s annual meeting, Sinegal announced
his new ambitious plans for expansion. “We expect to open about 18 or 19 stores this
year and next,” he said, “then grow to about 25 or 30 a year worldwide after that.”

Today, by focusing on a strategy of high quality goods at low prices, Sinegal has
managed to grow his retail warehouse club into one of the largest in the world. His
company has a record 90 percent renewal rate for business membership, and
individual customers have proven equally as ready to embrace a new $100 per year
executive membership. Costco’s services have expanded to include everything from
optical centers, pharmacies, photo centers, hearing aid centers, food courts, and gas
stations. All of these have become major contributors to the company’s overall
growth, with some, such as the optical centers even being rated among the best in
the country in both quality and price.

Despite Costco’s tremendous success, Sinegal has maintained his salary of only
$350,000, plus stock options. Among the CEOs of billion dollar corporations, he is one
of the lowest paid. Conversely, Costco employees are some of the highest paid in the
retail industry. In fact, Sinegal has frequently butted heads with investors who
believe he is too generous to his workers.

But, Sinegal has never been one to care what others think. He stuck to his vision to
create of the largest, most widely respected companies in America, and he is not yet
done.

Lesson #1: Respect Can Reel In Greater Returns

In the world of corporate greed, where the up and coming often learn more about
finding the loopholes than following the law, Jim Sinegal sticks out like a sore thumb.
Named one of BusinessWeek’s “Best Managers” in 2003, Sinegal maintains one of
the lowest salaries compared to other CEOs at his level, while Costco workers are
among the most highly paid in the industry. Why did he decide to turn Wall Street on
its head by following this model, and how did he manage to make such a venture,
one that defies conventional business logic, not just possible but also profitable?

As a cashier at Costco, you would be one of the industry’s lucky few. With an average
salary of $17 per hour, you could be earning up to $40,000 a year after working with
Sinegal’s company for four years. Costco employees also pay just nine percent of the
cost of health insurance, one of the most generous benefit packages in the industry.
Critics from Wall Street were decrying Sinegal’s employment offerings, suggesting it
was doing more harm to their shares than good. But, Sinegal has a different logic.
“Our attitude has always been that if you hire good people and provide good wages
and good jobs and more than that – if you provide careers – that good things will
happen to your company,” he says. “I don’t see what’s wrong with an employee
earning enough to be able to buy a house or have a health plan for the family.”
Sinegal’s logic is not just an altruistic one. Costco has a mere six percent turnover
rate for employees with the company for more than one year. That figure is just one
fifth that of retail giant Wal-Mart. As a result, 95 percent of all promotions are from
within. “We have guys who started pushing shopping carts out on the parking lot for
us who are now vice presidents of our company,” says Sinegal. Costco also has the
lowest shoplifting rate in the industry, at .02 percent, and productivity is estimated to
be roughly $500,000 per employee.

“Wall Street is in the business of making money between now and next Tuesday,”
says Sinegal. “We're in the business of building an organization, an institution that
we hope will be here 50 years from now. And paying good wages and keeping your
people working with you is very good business.”

For Sinegal, what is crucial to success is to take a long-term perspective. Happy

workers mean happy investors in the long run, and Sinegal wants his Costco to be
around in the long run. “I think the biggest single thing that causes difficulty in the
business world is the short-term view,” he says. “We become obsessed with it. But it
forces bad decisions.”

Sinegal is obviously proud of the company he has created, with the help of each and
every Costco worker. By paying his workers well, he is increasing their productivity
and reducing his own loss from turnover and theft. “That's not altruism,” he says.
“It’s good business.”

Lesson #2: Keep Your Costs Low and Your Quality

High

“We only have one bullet in our gun,” says Sinegal, “the right product at the right
price.” It seems to be a simple formula for success, but how has Costco managed to
master it better than the rest? How has Sinegal been able to keep his company’s
costs low, wages high, and sales even higher for the over ten years it has been in
business?

Costco has a unique business model that has enabled it to set itself apart from the
rest. The first secret is in carrying a low amount of in-store stock. While the average
Wal-Mart carries more than 100,000 items, Costco stocks no more than 4,000, one
quarter of which are always changing. This leads to what Sinegal refers to as a
treasure hunt. “One time [customers] may come in and see that we have some
Coach handbags and they come in the next time and the Coach handbags aren’t
there, but perhaps there are some Fila jackets,” he says. “The attitude is that if you
see it, you have got to buy it because it may not be there next time.”

Of those 4,000 products that Costco stocks, all of them are high-quality goods. This
has helped Costco attract a wealthier customer, the average of which earns an
income of $74,000. Sinegal says that the “hallmark of our business is that we have
developed such a high-end clientele with a high-end product selection and
assortment.” So, while Costco might not carry as many products as its competitors, it
carries the best two or three brands of a product and does more sales in terms of
volume per unit.
To this end, Sinegal also keeps his profit margins on each item as low as possible,
refusing to mark things up more than 14 percent. What Costco might lose in margins,
Sinegal says it makes up for in volume. And, that volume is tremendous. In 2004,
Costco sold over 26 million rotisserie chickens, $16 million worth of pumpkin pies in
the holiday season, and more than 90,000 karats of diamonds. Costco has also
become the largest seller of fine wines anywhere in the world.

Costco is able to keep its profit margins so low because Sinegal has also become a
stickler for keeping his costs as low as possible. The fact that customers walk on
concrete floors and sell goods from steel racks is no coincidence. “We’re low-cost
operators, and it would be a little phony if we tried to pretend that we’re not and had
all the trappings,” says Sinegal. Costco is meant to be a no-frills shopping experience
so that those savings can be transferred onto the customer.

In the last few years, Costco has been attempting to increase its international
presence, expanding into countries like Canada all the way over to Japan. And, while
very country is different, Sinegal says, “The one constant is value. Value is
appreciated no matter where you go.” It is by keeping his costs low and the quality of
his products high, that Sinegal has continued to expand the value that is offered by
Costco.
Lesson #3: Use Technology to Temper Your Costs

When one thinks of Costco, a company with a thriving technological edge is not
necessarily the first thing that comes to mind. But, while Sinegal might not be your
typical CEO, he does understand the importance of utilizing technology to his benefit.
Not only has modern technology helped Costco automate many of its operations, but
in keeping with Sinegal’s all important goals, has helped the company lower its costs.

“Technology has made us much more productive,” says Sinegal. “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.” Indeed, Costco’s
computer system is a relatively sophisticated one. With a wireless record of
purchases, Sinegal can get into the systems of any of his warehouses anywhere in
the world without ever leaving his desk, to check on such things as how one item
might be selling during the day. “Sometimes we have so much information it’s more
than we can deal with,” he says. “Our web site and our e-commerce business are
also profitable on a fully allocated basis, and that is somewhat of a milestone.”

Sinegal also embraced the concept of energy management and conservation early
on, using technology to cut down on his energy demand. Costco stores make heavy
use of skylights and controlled lighting based on the time of the day. They use high
efficiency heating and air conditioning, and are venturing into photovoltaics, or the
use of solar panels to generate electricity, and the use of hybrid delivery trucks. On
an environmental side note, Sinegal also gives subsidies to his employees who
carpool or use monthly bus passes. He believes that these efforts will not only benefit
the communities in which Costco does business, but also the company’s shareholders
and members in the long run.
Despite Sinegal’s embracement of new technologies in his bid to create a lean and
efficient operation, he is wary not to go too far. “Technology helps us become more
efficient and productive but our business still has a lot of art as opposed to strictly
science,” says Sinegal. “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.”
Sinegal makes sure his Costco team understands that buying and selling
merchandise is the real business of their company, while everything else simply
augments that aspect of it. “If you don't have the right merchandise in the right place
at the right time you can forget about everything else,” he says. “All the satellites in
the world aren't going to help you.”

No matter how much online business is moved in the future, Sinegal still sees the
future of shopping in physical stores. “People are still going to want to go out and
have that social exchange,” he says. To that end, Costco focuses all its energies –
and technologies – on making that experience the best it can be.

Lesson #4: An Open Door is A Company Score

You have been on the job for five years now. You come in every day at 8 a.m. and
stay until well past closing time. You work hard, you work well, and you have never
taken a sick day. So, when that better position opens up, you think you have a good
chance of getting it. But, when your application comes back rejected, what do you
do? You feel like your efforts are not being justly rewarded, but who can you talk to
about it? Well, if you work at Costco, you can go straight to the head honcho, the
man in charge, Jim Sinegal.

For as long as he has been in business, Sinegal’s managerial style has been as
unique as his business model itself. Choosing to maintain an open door policy,
Sinegal has striven to create a company of real people – and of equal real people at
that.

His office in Issaquah, Washington is a small one with little but a second-hand desk
and chair. To look at it, one would never know it is the home of one of America’s
most successful businessmen. But, what makes this office even more astonishing,
aside from its modest furnishings, is the fact that its door is always open. Any Costco
staff member can walk right into this CEO’s office and have a chat with the
millionaire. With no secretary, Sinegal even answers his own phone. “If a customer’s
calling and they have a gripe, don’t you think they kind of enjoy the fact that I picked
up the phone and talked to them,” he says.
Sinegal is not just a friendly man, although he may well be that too. His open door
policy reflects the belief that it will foster greater managerial accountability, across
his Costco stores. “If warehouse managers know that their own regional bosses have
open door policies and will talk to any employees about their issues, then they are
going to be a little faster to talk to the troubled employees themselves,” says
Sinegal. “They don’t want the problems to come back to them through their bosses.”

Once a year, Sinegal makes a personal visit to each and every Costco warehouse. He
wants his employees to feel like, at least in theory, they could have the chance to
talk to the company’s CEO himself. This, he says, will make them feel like a more
valued part of the Costco team. And, when he visits, he wears a name tag that reads
just, “Jim.”
“We have said from the very beginning,” says Sinegal. “We’re going to be a company
that’s on a first-name basis with everyone.” For Costco, that is not just a fluff
statement; that is its living and working mantra.

Sinegal is no softie; do not make that mistake. He runs tough budget meetings and
spares no sympathy for managers who fail to meet profit margin goals. But, soft or
not, he does not want any Costco employee to ever be able to say he was not there
for them.

Lesson #5: Marketing Does Not Need To Mean

Spending Millions

Conventional wisdom says that no company can stay at the top by competing on
price alone. But, Sinegal has managed to become the envy of entrepreneurs the
world over. He has been able to create a billion dollar business without spending
millions of dollars in marketing. How did he do it? How has Costco risen to become
the retail giant that it is, without hundreds of radio, television and print ads telling us
it is so?

With Costco, Sinegal took a deliberately low key approach to marketing. In fact, the
company has never even had a public relations department, and spends zero percent
of its budget on advertising. Instead, Sinegal has taken a two-prong approach to
marketing: treating his employees well, and maintaining a close, personal
relationship with small businesses. Though the direct benefits might not be as visible,
Sinegal believes they have paid off, and will continue to do so in the long run.

The first part of Sinegal’s marketing strategy is to create a team of happy, motivated
and loyal workers. He does that by offering one of the most generous pay packages
and health benefits in the industry. He also promotes primarily from within, keeping
those who start off with Costco as cashiers with him all the way through to
managerial positions. But, Sinegal is not doing that just because he wants his
company to have a nice family feel to it. No, Sinegal has implemented such a plan
because it makes good business sense. “Imagine that you have 120,000 loyal
ambassadors out there who are constantly saying good things about Costco,” he
says. “It has to be a significant advantage for you.”

Sinegal’s marketing strategy does not stop with his staff of internal marketers, his
employees. He also makes sure that Costco focuses its priority on the business
customer. While Costco does service individuals and non-profit groups, 60 percent of
its business is with business customers. “Our business was founded so that small
businesses could come in and buys essentially everything they needed for their
business under one roof,” says Sinegal. “Café 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.”

With business owners as its primary target, Costco has attached company
representatives to each of its customers’ stores. Their main responsibility is to
maintain the good relationship with these business owners and network with future
ones. In each store, there are typically one or two Costco staff members who spend
their days calling prospective business clients and setting up appointments. From
one business, Costco staffers are often able to generate leads and network to others.

Sinegal likes to be cheap and he is not afraid to admit it. Why spend millions of
dollars on marketing, when he can put that money into his labour costs and achieve
even greater results? By focusing on creating employees that have only good things
to say about Costco, to concentrating on maintaining strong relationships with
business clients, Costco has managed to create a living, breathing marketing
machine at little cost.
Shopping For Success: How Sinegal Took Costco to the
Top

When Sinegal’s college presented him with its Most Distinguished Alumnus award,
the Costco founder was almost left speechless. “I’ve never been told I’m a most
distinguished anything,” was all he could say. With his poor grades and lack of focus
in high school, it is doubtful that Sinegal’s teachers ever thought he would amount to
much. But, today, with a billion dollar corporation under his belt, Sinegal remains not
only one of the most accomplished, but also one of the most admired and liked CEOs
in the industry. How did this once reckless young boy become the success he is
today?

Respect: Being a Costco employee is nothing to shrug your shoulders at. With one of
the highest pay rates in the industry, and an overly generous health package, Sinegal
has established a one-of-a-kind human resource management plan. In doing so, he
has also lowered his rates of turnover and theft, and created a thousands-strong
army of motivated and productive employees.

Value: For the past 18 years, Costco has charged $1.50 for its famous hotdog and
soda deal, and Sinegal promises that is something that will never change so long as
he is in charge. While not all of its product prices are guaranteed to remain the same
for so long, Sinegal has made it his priority to give his customers the greatest value
for their money. By keeping a low stock of high quality products, and refusing to hike
his profit margins by more than 14 percent, Sinegal has stayed true to his goal.

Technology: It may not be one of the industry’s most hi-tech companies, but Sinegal
has made sure that where it needs to be, Costco is at the forefront of technology. By
embracing new forms of automation, and being willing to experiment with energy-
reducing technologies, Costco has emerged as a technologically savvy retail leader.

Communication: “This is almost like show business,” says Sinegal. “I mean, every day
you're opening up and it's show time.” Sinegal loves his job, and that is why no
matter whether you are a cashier or a fellow CEO, he is willing to take the time to talk
to you. A down-to-earth businessman, Sinegal makes sure that all the processes are
in place to maintain a corporate system of accountability and openness.
Marketing: Is it odd that despite not ever spending a dollar on advertising, marketing
is considered one of Sinegal’s success factors? Well, despite the lack of money spent
on it, Sinegal knew what he was doing in terms of promotion. By creating a happy
and loyal team of workers, and focusing on growing strong relationships with small
businesses, Sinegal did, in fact, create a marketing machine in Costco.

“We’re not kamikaze pilots,” says Sinegal. “We want to do things in a sensible
fashion.” To that end, Sinegal has taken the time to plan out his growth strategy.
From the light bulbs in his stores to the population densities of the next cities Costco
plans to move into, Sinegal leaves no stone unturned. And, it is those details that
Sinegal says every entrepreneur needs to focus on. “Otherwise you’re just a hamster
running on a treadmill.”

Jim Sinegal Quotes

• Competition makes you stronger. If our top competitor didn’t exist, we would
have to make them up.

• Just about the time you teach a horse to eat hay, the horse dies.

• 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.

• 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. 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.

• If a customer’s calling and they have a gripe, don’t you think they kind of
enjoy the fact that I picked up the phone and talked to them.
• If warehouse managers know that their own regional bosses have open door
policies and will talk to any employees about their issues, then they are 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.

• We have said from the very beginning. We’re going to be a company that’s on
a first-name basis with everyone.

• Imagine that you have 120,000 loyal ambassadors out there who are
constantly saying good things about Costco. It has to be a significant
advantage for you.

• Our business was founded so that small businesses could come in and buy
essentially everything they needed for their business under one roof. Café
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.

• 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.
• 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.

• 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.

• People are still going to want to go out and have that social exchange.

• We only have one bullet in our gun, the right product at the right price.

• One time [customers] may come in and see that we have some Coach
handbags and they come in the next time and the Coach handbags aren’t
 there, but perhaps there are some Fila jackets. The attitude is that if you see
it, you have got to buy it because it may not be there next time.

• One hallmark of our business is that we have developed such a high-end

clientele with a high-end product selection and assortment.
• We’re low-cost operators, and it would be a little phony if we tried to pretend
that we’re not and had all the trappings.

• The one constant is value. Value is appreciated no matter where you go.

• Our attitude has always been that if you hire good people and provide good
wages and good jobs and more than that – if you provide careers – that good
things will happen to your company. I don’t see what’s wrong with an
employee earning enough to be able to buy a house or have a health plan for
the family.

• We have guys who started pushing shopping carts out on the parking lot for
us who are now vice presidents of our company.

• Wall Street is in the business of making money between now and next
Tuesday. We're in the business of building an organization, an institution that
we hope will be here 50 years from now. And paying good wages and keeping
your people working with you is very good business.

• 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.

• We expect to open about 18 or 19 stores this year and next, then grow to
about 25 or 30 a year worldwide after that.

• My test scores were good, but my grades weren't that good, because I needed
focus.

• It was at San Diego Junior College (now City College) where I regained that
focus, and paid attention, because deep down I knew education was
important.

• It wasn’t that great a job. I was getting a buck and a quarter an hour. But it
was exciting.

• I’ve never been told I’m a most distinguished anything.

• This is almost like show business. I mean, every day you're opening up and it's
show time.

• We take great pride in the fact that people join us and they stay with us.

• We pay much better than Wal-Mart. That's not altruism. It's good business.
• If you’re a big-picture guy, you’re not in the picture. Retail is detail.

• It makes no sense to do inexpensively what we shouldn’t be doing at all.