Costco: The Evolution of a Giant

Join The Motley Fool for a conversation with retired Costco (COST 1.01%) CEO Jim Sinegal. In love with retail since his first job as a bagger in 1954, Jim co-founded Costco and served as president and CEO of the retail giant from 1983 until his retirement in January 2012.

Jim recalls the early days of Costco and its growth and development since then, and explains why the retailer doesn't open more stores, more quickly.

To watch the full interview, click here.

Brendan Byrnes: Hey, Fools, I'm Brendan Byrnes and I'm joined today by Jim Sinegal. Jim is the co-founder and the former CEO of Costco. Thank you so much for your time.

Jim Sinegal: My pleasure, Brendan.

Brendan: I was wondering if you could walk us through the Costco business model and how it has evolved over time?

Sinegal: Well, when we started in downtown Seattle, we had a building that was 100,000 square feet. It was a pretty simple facility. We didn't have many of the enhancements that we've added to the business since then.

It was clearly a warehouse; an open-beam ceiling and cement floors and industrial steel and forklifts moving around in the facility. As time has gone on, the model has incorporated a lot of new things that we've put into the business.

We added the fresh foods -- the meat department and the produce and the bakery in there -- we've added a pharmacy, we've added gasoline, we've added a food court with a pretty significant menu of products; maybe about eight products that we're offering in our food court. We've added one-hour photo processing and optical and enhanced a lot of the departments that we had in the general merchandise area as well.

That's all been an evolutionary process that gets you to the model that we have today, that is generally about 145[,000] to 150,000 square feet, compared to the 100,000-square-foot facility that we had in downtown.

Brendan: Could you talk a little bit about managing growth, both in the early years and more recently -- not wanting to expand too aggressively and too fast, but also maintaining solid growth -- how do you marry those two?

Sinegal: Well, we're very pleased with our growth. The growth in the 27 years since we've gone public, since we became a public company, our growth in revenues has been at a 13.8% compounded rate, so we think that's pretty healthy.

But we've always been very mindful of not outdistancing the management team that we have to be able to grow the business intelligently. We have, as I suggested, put the brakes on from time to time. People often have asked us, "Gee, these things do so well. Why don't you open 100 of them in one year?"

Well, we don't have the appetite and the management team because we home-grow all of our management. All of the people that are running the Costcos today are people who have been with us 10 and 12 and 15 years prior to becoming a warehouse manager.

When you're going to promote from within and grow the talent from within the company, you have to be mindful of what your limitations are.