Costco's Learning Curve

David Gardner: Jim, in recent months, we have seen a wave of class action lawsuits alleging of corporate America, in many cases, sex, gender discrimination affecting pay and advancement in the workplace. Names include Boeing (NYSE: BA  ) , Morgan Stanley (NYSE: MWD  ) , Eastman Kodak (NYSE: EK  ) , Wal-Mart (NYSE: WMT  ) , Bellsouth (NYSE: BLS  ) , and your company, Costco (Nasdaq: COST  ) , among those being sued. Now I know you can't comment on pending litigation, but can you tell us what policies you have in place to prevent discrimination in the workplace?

Jim Sinegal: Well, you know I guess the simplest answer is we don't do that kind of stuff around here. We try to provide an opportunity for everyone in our organization, and we think our record reflects that. We think we do a pretty good job of promoting and being blind to gender and/or ethnic backgrounds. So the intention that we have and what we practice in our company is that there are opportunities for everybody in the company. As you may know, David, we promote almost exclusively from within our company, so it would be virtually impossible for someone to come to work at Costco as a warehouse manager. They would have to go through a prolonged training period, even if they had worked for a competitor for a long time. So we have a pretty set policy on what we do, and that means that our jobs are open to everyone in the company. We think the record reflects that.

David Gardner: If you are just tuning in, you are listening to The Motley Fool Radio Show. We are talking with CEO Jim Sinegal, CEO of Costco. Jim, it has been about a year and a half since we last checked in with you. You have made several changes to your business in that time. It is certainly not talked about as much as the launch of Costco Funeral Services in Chicago, Illinois. Since summer, I believe you have been selling coffins and funerary services for roughly a third off the traditional players in that market. Jim, how is it going?

Jim Sinegal: It has been doing well. We were obviously surprised by the amount of notoriety that we got when we offered these for sale. I woke up, I happened to be in Chicago the morning that we introduced -- the morning after we introduced it in the Chicago market. I woke up and looked at the Chicago Tribune and there was a picture on the front page of a woman looking at a coffin display in a Costco. Then I went to the USA Today, and there was a front-page article on it in USA Today. We certainly didn't expect that. We had an organization; the family business that made this presentation to us. They did it in a very professional fashion, and we liked what we saw and we decided to test it.

Since that test, we have expanded it to our online business and we are in the process of expanding it to the Detroit, Michigan, market. So we are pleased enough with it that if we can expand it in some other areas and continue to grow it. Whether or not it has some appeal. It seems strange, but obviously we take a look at a product and see if we can save our customers that kind of money, we think it has to have some appeal.

David Gardner: Jim, have you purchased your own coffin, or do you plan to at any point?

Jim Sinegal: I am not going to deal with that at the moment, David. (Laughs.) I am going to try and get through the holiday season.

David Gardner:(Laughs.) You know, celebrated investor, Peter Lynch, you may well know this, advised investors to take a good, hard look at the death business because in fact so many Wall Street analysts completely avoid it, like so many of us avoid any thinking, really, about death. Lynch has always contended that that is a great place to look for good and successful business. Jim, I guess you at least share some of that mentality.

Jim Sinegal: Well, I mean again, it is the simple thing that here was a product that is extraordinarily dear, in terms of pricing, to the consumer, and there is an umbrella where you can save the consumer a tremendous amount of money. Oftentimes, a person feels helpless at that moment. They are most vulnerable at that moment, and that is probably the point in time when somebody should be looking out for the consumer.

David Gardner: It seems to occasion the question, Jim, what can Costco not sell?

Jim Sinegal: Well you know, we look at any of the businesses out there and we ask ourselves three questions when we consider a new business or a new category. Number one, can we do it? Well, number two, can we save our customers money? Costco members save a substantial amount by purchasing the product through us. And number three, can we make a profit? If we think the answer is "yes" to all three of those questions, then we are prepared to try just about anything, assuming that it is legal and appropriate for our business.

David Gardner: Jim, can you give, and perhaps think of young entrepreneurs listening right now, can you give us an example of something you tried to sell that didn't work out?

Jim Sinegal: Oh, how much time have you got, David?

David Gardner: How about a good minute for this?

Jim Sinegal: We have had lots of items that haven't worked for us. We tried to get into different aspects of the home improvement business with a very limited selection, and I think it is safe to say, we underwhelmed our customers. So from time to time, we have run up against the wall and don't succeed. So we move on, go on to something else.

David Gardner: Is it fair to say that Costco has a "test and learn" mentality?

Jim Sinegal: Oh, absolutely. We know one thing for certain that we have to continue testing. If we are going to continue to grow our business, we have to be inventive and creative with new things and bringing new things to market. The retail business, as you know David, is oftentimes theater. What have you done for me lately? That is what keeps bringing the customers back.

Stay tuned for Part Three of our interview tomorrow, and check out Part One if you missed it yesterday.

Costco is aMotley Fool Stock Advisorpick. Want to learn more? Subscribe today without risk for six months. The Motley Fool isinvestors writing for investors.


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