This Is Costco's Secret Weapon

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Is it possible to be too good to your employees, customers, and suppliers? When Wall Street analysts pose that question to Jim Sinegal, CEO of Costco (Nasdaq: COST  ) , the backhanded subtext is obvious: "All of this lavish treatment of your workers, shoppers and suppliers is costing us shareholders money!"

Quite the contrary, Sinegal told us during a visit to Fool HQ last week: "This is a people business. And we pay an awful lot of attention to people because it is such an important thing." Subtext: Costco shareholders -- make that long-term shareholders -- make money precisely because of the company's generous policies.

We know it's no fluke that shares of Costco have outperformed competitors like Wal-Mart (NYSE: WMT  ) , BJ's Wholesale Club (NYSE: BJ  ) , and Target (NYSE: TGT  ) . The company's unwavering focus on its primary constituents and its ability to balance their needs while still making a profit is one of the reasons we named Sinegal the Most Foolish CEO back in 2006.

Costco shareholders are in good company
Sinegal and partner Jeff Brotman founded the company in 1983, raising $7.5 million to open three stores. Today, Costco's 560 locations around the world employ 142,000 workers and welcome 55 million members.

Under Sinegal's hands-on leadership -- the guy answers his own phone and spends more than 200 days a year visiting stores -- Costco has earned the respect, admiration, and investment dollars of great thinkers and investors. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) owns 1.2% of the company's stock, and Warren Buffett's right-hand man, Charlie Munger, has sat on Costco's board of directors since 1997.

Built to last
Sinegal's focus on membership -- from disclosure to shareholders to aggressive low pricing (sometimes at the expense of margins) to having the highest employee retention rate in the industry -- doesn't always meet Wall Street's wishes for short-term profits. But long-term shareholders shouldn't let monthly sales results solely drive their investing decisions. In his words, "We want to be here 50 years from now. We think all of the people who are stakeholders in our company deserve that."

Among the company's core values are:

  1. Obey the law.
  2. Take care of your customers.
  3. Take care of your people.
  4. Respect your suppliers.

Don't expect that list to change. "We think it is possible to be profitable and to thrive in the short term without paying attention to those four elements of your business," Sinegal says. "But we don't think you can do it long term ... you are going to trip up and you are going to fail."

Sinegal in his own words
Following are edited highlights from our interview with Sinegal. You can listen to the entire audio interview right here via the direct download, or watch video highlights through the links at the end of this article.

The secret to Costco's 87% member retention rate
"Customers are not going to keep coming back if you are boring. ... We try to make it an exciting place. We try to bring in and create this treasure hunt-type of atmosphere that people comment on all the time. Even the letters of complaint we get start off with "I love Costco. You have got to understand, I love Costco, but I am just angry about this one thing that happened here.'"

Recession realities
"We can always blame bad sales on weather and on economic conditions and everything else. But when we have the right merchandise out on the floor, it sells. ... [W]e don't like the fact that the [average customer] basket is down, but we certainly like the fact that the customers are coming back more frequently and, as things turn, they will start to buy again. Now it is on us to get the hot merchandise."

Why he answers his own phone
"Staying in touch with your business in that fashion -- when you are getting calls from customers or you are getting calls from employees -- is very healthy. If you have it filtered, it comes back to you in an entirely different fashion." 

Leaders he admires
"In the 1990s everyone was trying to start a dot-com business and the only one of them that I thought was trying to build a company was [ (Nasdaq: AMZN  ) CEO] Jeff Bezos. Where the rest of them were looking for an exit strategy as fast as they could get it, he was looking at the long term and trying to build and improve his business. I admired that about him."

Wall Street critics aren't always wrong
"You have got to run your business on the basis of what you think the right decisions are, not what the investment community thinks the right decisions are. I should point out that our stock consistently sells for a higher multiple of earnings than any of our competitors.

"Having said that, [analysts] make you think. They make you pay attention to the questions that might really piss you off at the moment, but once you reflect on privately, you recognize that it wasn't a bad question, and I should probably pay a little more attention to that area."

Being a team player
"This is not a one-man game. If you look at the management team of our company, I think we have 17 members on our executive committee and I think the average tenure is over 22 years. We have all been together and have grown the business together."

If you want to learn more about Jim Sinegal -- including the inside story behind the coffins that Costco sells -- follow the links below for an expanded conversation with the CEO.

Dayana Yochim does not own any Costco stock, but her vacuum, water pitcher, and contact lenses were purchased at deep discount at one of their warehouses., Berkshire Hathaway, and Costco are Motley Fool Stock Advisor selections. Berkshire Hathaway, Costco, and Wal-Mart are Inside Value recommendations. The Fool owns shares of Berkshire Hathaway and Costco. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2009, at 5:58 PM, bandlands wrote:

    These are good reasons why Costco is so succesful But the main difference between Costco and Walmart, Bjs and Target is Costco has wide parking spaces that help protect the higher end customers cars in the parking lot. If you don't believe me check it out on your next trip to costco.

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