Costco's Consistency and Competition

David Gardner: You say, "What have you done for me lately?" But Jim Sinegal, one thing we notice about you (is) your consistency. In fact, I think you received quite a bit of attention for (it), and we have always noted it. You answer your own phone. You take care of scheduling your own appointments, and to say that is unusual among today's CEOs is quite an understatement. Is this part of keeping your costs down, Jim Sinegal, or is there some other reason?

Jim Sinegal: I think it is that. It is the persona that we want to establish for our business, that we are bare-bones, that we don't have a public relations department, that we handle these things ourselves on an individual basis. We think it is all part and parcel of how we run our business and the type of image that we create in our business, which is a bare-bones business.

David Gardner: The free publicity from, I don't know, people like me can't hurt much on it, either, eh?

Jim Sinegal: We like that. (Laughs.)

David Gardner: And speaking of test and learn, did you ever have an assistant and it just didn't work out? You just realized it doesn't work for me?

Jim Sinegal: No, I have an assistant, but my assistant takes care of things for me that are things that I can't get done when I am on the road, so answering the phone when I am not here and taking the messages, following up on customer and/or supplier and/or employee issues, answering mail.

David Gardner: Travel booking.

Jim Sinegal: Yeah, lots of travel booking. Lots of it. Lots of things that have to be done, and the people that I use for that are very good.

David Gardner: What is more profitable for Costco (Nasdaq: COST  ) today: food, household goods, or appliances?

Jim Sinegal: I think in totality it is probably food, although all of those are extraordinarily important categories for us. Part of the whole package with us is just that, the package. The reason for shopping with Costco isn't just that you can save 25 cents a jar on peanut butter but that you can save $350, $400 on a Movado watch or that you can save $1,000 on a plasma TV. It is that total package that makes it appealing to a customer. Customers come back because they can buy a pair of Calvin Klein jeans for $20 below the department store price, and that is what keeps them coming back.

David Gardner: I have a friend who was just marveling the other day, she bought something for her mattress that normally costs $500 or so and she was paying $140 for it, which really occasions the question to me: Jim, do you make a profit on everything you sell, or are there loss leaders that are in there in your business, you are taking a loss on them to get people in the door?

Jim Sinegal: No, we as a matter of fact, as a matter of policy, don't carry loss leaders. We think that is a deceptive practice, and we insist on making money on everything we sell. Now that doesn't include mistakes. Obviously if we bought something and made a big mistake with it and have to mark it down, we will sell that below cost, but that is a clearance item when you make those kinds of mistakes. But aside from that, we try to make money on every single -- it is our intention and it is our policy to make money on everything that we sell.

David Gardner: And Wal-Mart is sometimes criticized for supposed strong-arm tactics it uses, almost controlling the prices of what is being sold to it by suppliers. Costco doesn't strike me as having gotten that kind of publicity. Do you agree, and if so, why?

Jim Sinegal: We like to think of ourselves as very tough in negotiations. We would take a position with our suppliers that we are going to negotiate very hard and make a very tough deal, but that it is going to be a fair deal, and when we are done, we are going to honor the deal. They can count on us. We think that if you have a relationship with a supplier, you had better be prepared to respect them, and you had better recognize that no deal is good unless both parties are going to make some money on it. If both parties aren't going to make some money on it, some bad things are going to happen.

David Gardner: Looking over the competitive landscape, you have managed to avoid a price war with Sam's Club so far. How do you see that competition evolving in the future?

Jim Sinegal: We think that there will always be tough competition. I mean there will always be Sam's, there will always be Wal-Mart Superstores, there will always be Targets, there will always be very tough competitors out there that we have to watch, and we do watch. Competition, and this sounds very trite, and I am sure oftentimes people say, "Well, that is a bunch of baloney, and he doesn't mean it," but competition is healthy. You may not like it at the moment that it is happening to you, but in essence, if you don't have competition, you are not going to get better. You get lazy, and when you look at it in the final analysis, competition keeps you on your toes.

David Gardner: I guess you can lose your whole market share, not just a piece of it, if you get lazy.

Jim Sinegal: Absolutely. We have all seen examples of that. The competition, as I say, if we didn't have a Wal-Mart or a Sam's, I don't know what we would do. They are constantly keeping us on our toes.

David Gardner: Jim, Kmart announced bankruptcy not too long ago, has re-emerged and seems to be doing OK. What is your take right now on Kmart just as an observer of business?

Jim Sinegal: Well, I think most of what has been happening is from the real estate standpoint. I have been watching their operations, and we are going to watch them very closely through this fall season to see how they are doing, but clearly they have a very tough job to do to turn that around and to regain consumers' respect and confidence; but if it is well-run and if the management is well-done, they can do it. Consumers can be very forgiving if they think there is a sincere effort to bring the right products and the right prices to marketplace, so it is going to be an interesting study.

David Gardner: I am going to ask a question that touches on something that we talked about earlier. We may use that or we may reframe it this way so don't feel self-conscious if you are redundant in how you respond at all. It is just for our editing purposes.

Jim Sinegal: OK.

David Gardner: Here we go; 3-2-1, go. With Thanksgiving right around the corner, quickly followed by the rest of the holiday shopping and entertaining season, Jim, how important is this time of year to your business?

Jim Sinegal: It is very, very important. This is the time of year when our sales will jump up, and during that five-week period they will jump up to about 140% of what we ordinarily would be doing. Obviously any retail or any business person knows when you can pump out more revenues through your facility, you take advantage of those fixed costs that you have implanted in your business. It makes you more profitable, so it is a very important time of the year.

It is not just important from the standpoint of what it does in terms of revenue growth, but you build more reputation with your customers, and you also, if you are in this business and you don't enjoy the holiday season, you ought to get into something else.

David Gardner: Jim, you are pretty good at traveling and looking at your own stores on a regular basis. Now that it is holiday season, do you see, does a typical Costco make extra special preparations for this season, or given that you just mentioned that you get about 40% more business during these five weeks than usual, do you just kind of sit back and say, "Hey, we will get it"?

Jim Sinegal: No, obviously you have to plan, you have to have the right number of people, and you have to have the right amount of merchandise in there. At that point in time, your inventory turns go up, so do logistics and the art form of replenishment is extraordinarily important at this time of the year, particularly in building; in a business like ours, many of our high-volume warehouses will have less than a two-week supply on hand, so getting that goods in and out onto the floor is all part of the process and very, very important. It is the lifeblood of the business.

Stay tuned for Part Four of our interview tomorrow, and check out Part One andPart Two if you missed them earlier this week.

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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