How Costco Differs From Other Retailers

Join The Motley Fool for a conversation with retired Costco CEO Jim Sinegal. In love with retail since his first job as a bagger in 1954, Sinegal co-founded Costco and served as president and CEO of the retail giant from 1983 until his retirement in January 2012.

In the following video, Sinegal shares Costco's economic model, and how it can offer the highest wages in retail -- with great benefits -- and still sell goods and services for less than its competitors.

To watch the full interview, click here.

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Brendan Byrnes: Obviously you've built Costco into such a successful retailer. What's it like now to be outside the driver's seat, and what kind of involvement do you still have, day-to-day?

Jim Sinegal: Well, there's very seldom a day that I don't go into a Costco, as you can probably imagine. To the extent that I'm helpful to [current CEO Craig Jelinek] and to his management team, then great. To the extent that I think that I'm meddling a little too much -- I've got to be very careful not to engage in that -- then I want to back off a bit.

But I still have an office here. I still come into the office. I'm handling some things, some projects that Craig has asked me to participate in, and I'm happy to do that. I'm still on the board of directors. I'm still a shareholder. I still have a very keen interest in the success of the company, as you can imagine.

I will be easing off a little more over the next year and probably be spending less than full time.

Byrnes: Could you give us a background how Costco's economics differ from other retailers, and how you use that to your advantage?

Sinegal: Well, the economics of our business is pretty simple. High volume -- we do well when we generate high volume and high revenues out of our businesses. We don't do nearly as well when the revenues are low.

We count on very significant productivity. We pay high wages and have a very healthy benefit plan. If you buy into the concept that Costco is the low-cost provider of goods and services -- and I hope you'll buy into that concept -- if you buy into that concept, and if we also pay the highest wages in retail and have the richest benefit plan, then we must be getting better productivity because, of every dollar that we spend on our business, $0.70 is on people.

That is clearly the most significant expense item that we have, and it's clearly the ratio that we have to watch most carefully, but we do it, and we do it because we're able to generate high volume and high revenues.

The economic model is great value on a consistent basis, driving up the revenues, getting people to shop with us more frequently than they did the year before, and we've been pretty successful in the last couple years in accomplishing that.


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