Is Costco Giving Away the Store?

By Mac Greer
November 22, 2006

Retail giant Wal-Mart (NYSE: WMT) has been the target of frequent criticism for underpaying its employees and providing inadequate health coverage. Wal-Mart has been compared unfavorably to other retailers that are considered more employee-friendly -- retailers like Costco (Nasdaq: COST). But Costco has its own critics -- critics who contend that the company is overpaying its employees and undervaluing its shareholders. I recently had an opportunity to talk with Costco co-founder and CEO Jim Sinegal about this criticism and about the business of Costco.

Mac Greer: As you well know, Costco has taken some heat on Wall Street for being overly generous to its employees. According to a recent New York Times story, Costco store workers earn an average of around $17 an hour, which is 42% more than employees at Sam's Club, which is owned by Wal-Mart. You have said Costco's pay structure makes for good business. Explain.

Jim Sinegal: Well, first of all, we have a very low turnover in our company. Our turnover is something in the 20% range, and that is including a lot of seasonal hires that we have both in the summer and at Christmas. After employees have been with us for more than a year, that turnover rate goes below 6%, so we take great pride in the fact that people join us and they stay with us. 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 think we can say that that has been proved by the quality of people that we have and how they have built our organization.

Mac Greer: And following up on that a bit more -- in 2004, Wall Street analyst Bill Dryer of Deutsche Bank criticized you. He said that it was better to be a Costco employee or a Costco customer than a Costco shareholder. So I am curious: To what extent do you feel that you have to prioritize between Costco employees, Costco customers, and Costco shareholders?

Jim Sinegal: Well, we always recognized that in the final analysis the shareholders own the company and they are the boss. I think we have done a pretty good job of rewarding our shareholders. So despite the fact that we receive criticism from time to time, I think our stock has done pretty well and we sell for a very healthy price relative to the multiple on our stock.

In addition, I think that criticism from the marketplace is not inappropriate. I think that is what keeps us all on our toes. We are not fighting the system. The system works pretty well for us and we think it has worked pretty well for our company and our shareholders.

Mac Greer: Take me back a few years. You co-founded Costco back in 1983. Paint the picture of what that first Costco looked like.

Jim Sinegal: Well, it looked nothing like the Costco's that you see today. It was a plain, four walls-type of box. We still take pictures of that original building and show it at our manager's meetings and then show the contrast to what our businesses look like today and suggest to all of our managers that if we are going to continue to prosper as a company, we had better be as creative in the next twenty years as we have been in the past twenty years and that our success will depend on it. It is an imperative that you continue to be creative and build your business. We have added over the years things like fresh meat departments and bakeries and produce departments and one-hour photo labs and gas stations and optical shops and pharmacies and expanded apparel and expanded jewelry departments and much more comprehensive food and fresh food program in our warehouses. Those are all important additions to our business and we have to continue to be that on our toes and looking for new items and new categories to give our customers on a continual basis.

Mac Greer: Let's talk about the corporate culture at Costco. Costco does not have a public relations department. When I called you for this interview, for instance, and left a message for you, I was struck by the fact that you called back, not some publicist, not a secretary, not someone from investor relations. You answer your own phone; you return your own phone calls. Jim Sinegal, doesn't being founder and CEO mean you get to delegate all this stuff to other people?

Jim Sinegal: Well, these are important things, taking care of this stuff is important. We are not in the PR business. We think that the people who are running this business, and myself and my colleagues and the management team, are capable of answering the questions. If we are not capable, something is wrong with our business. As you know, we don't advertise, so all of the things that we do count on word of mouth, people saying good things about Costco and customers coming in to shop with us on that basis. Our press releases are very simple. They are typically only about sales and profitability and earnings reports. We are not one of those companies that do a press release every day, relative to new activities. We keep it pretty simple.

Mac Greer: And on perhaps a related note, Jim, I read where you were quoted as saying, "When you are trying to be top dog, you don't create loyalty." What do you mean by that?

Jim Sinegal: Well, I didn't know that I said that. (Laughter) ... If you self-promote too much, people will see through it. Customers are smart and the market is smart. They recognize when there is a bunch of hyperbole out there. We think that if there are good things to be said about Costco, it is just as well as somebody else saying it.

Mac Greer: What was your first job in the retail industry?

Jim Sinegal: I was working in the will-call of the first FedMart store that opened up down in San Diego, and my primary job was taking mattresses out and loading them on the top of people's cars so they could take them home.

Mac Greer: And in the spirit of learning from our mistakes, Jim, looking back on your career, what do you regard as your dumbest business decision?

Jim Sinegal: Oh, how much time you got on this program, Mac? Listen, it has been lots of things. We, in all likelihood and retrospect, if we looked at the Midwest where we entered the market about 20 years ago and then exited shortly after, probably, in retrospect, we would have stayed there and figured it out. It cost us a lot of money, closing and then going back into that market. But not too many complaints. You can't change anything, looking back. You have to continue to push forward. There are going to be some mistakes from time to time. You can't dwell on them.

Mac Greer: And you have achieved such incredible success. What motivates you going forward?

Jim Sinegal: I love the business, pure and simple. It is never drudgery to come to work. I love the business. I don't know what I would do with myself if I couldn't go in and visit the warehouses. It is incredibly exciting and I love the people aspects of it, both from the standpoint of the people that I work with as well as our customers and our suppliers and I just love every bit of the job.

Costco is a Motley Fool Stock Advisor recommendation. Wal-Mart is a Motley Fool Inside Value selection. At the time of this publication, Mac Greer owned shares of Costco. He does not own any of the other stocks discussed. The Fool has a disclosure policy.