Saturday, December 01, 2018

Nobody Doesn’t Like Costco – Part II

On December 22, 2003 an article in Forbes described Sol Price as a retailing “demigod,” a businessman whose influence on U.S. retailing in the 20th century created a $156 billion industry (as of 2018) now known as the “Warehouse Club.”  Unknown to most, Price, for a period of some twenty years, was the hidden benefactor and organizer of the Democratic Party in San Diego. For example, he played an indispensable role in the elections of Pat Brown to the governor’s mansion in 1958. He was Mr. Democrat for a while, and Brown, according to a venerable Democratic Party activist here, had to clear numerous nominees to the Superior Court bench with Price first.  Brown also emphasized, “If I had to name one single person who singlehandedly and personally influenced business and politics in this county, it would be Sol Price.”

Social Democracy

In last month’s article, I suggested that Sol Price operated his retailing enterprises as a Social Democrat.  Allow me to explain that phrase as defined by Wikipedia: “Social democracy is a political, social and economic ideology that supports economic and social interventions to promote social justice within the framework of a liberal democratic polity and capitalist economy.”  This was reflected specifically in how Price treated his employees, and how these policies are still functioning in today’s Costco.  A review of Costco employee policies by Business Insider are revealing:

“There is what might be called a trifecta of wages, benefits, and job security. The 401K match, health insurance, and vacation time were the perks most frequently thrown around by reviewers. One Costco employee told Business Insider that wages are ‘topped out’ and another employee said that the pay and benefits are especially good for those without a bachelor's degree. And what's more, there’s ‘a sense of security’ among Costco workers, an employee with three and a half years of experience told Business Insider.  And a 401K plan with a 50 cents on the dollar match up to $500, and ‘affordable’ health, dental, and vision insurance.”

Jim Sinegal

Although it was Sol Price who instituted these worker policies, he required executives to implement them. One of Price’s first hires at FedMart had been Jim Sinegal, an 18-year-old kid just starting college whose job was to unpack mattresses as they arrived.  Sinegal recalls, “It wasn’t that great a job.  I was getting a buck and a quarter an hour.  But it was exciting.  Sol was a major part of that excitement.”  Within a few years, Sinegal was promoted to store manager and ultimately rose to the position of executive vice-president.

After FedMart was purchased by a German company, Sol Price was fired, however Sol Price’s storied retail career didn’t end.  In December 1975. he founded The Price Company. In July 1976 the first Price Club opened, and for the next 17 years Sol Price and the Price Company created an international merchandising company growing to 100 locations, $8 billion in sales and 21,000 employees.

Price had also convinced Sinegal to join him in his new venture.  As executive vice president of Price Club, Sinegal helped Price establish that organization, but in 1981 Sinegal decided to leave.  At that point, he had been working for and with Price for a period of 27 years.

The Creation of Costco

In 1983 Sinegal received a call from Jeff Brotman a Jewish attorney in Seattle who was the son of an ex-menswear retailer. Brotman explained that he visualized opening a replica of the Price Club in Seattle. Together they also opened in an old unused warehouse, adopting basically, the exact same principles and policies advocated so successfully by Sinegal’s old mentor, Sol Price.  That replica is today’s Costco.

Costco became the first company ever to grow from zero to $3 billion in sales in less than six years. When Costco and Price Club merged in 1993 under the name Price/Costco. The combined company, operating under the name PriceCostco, had 206 locations generating $16 billion in annual sales.            

Despite the close relationship previously formed by Sinegal and Price, by 1993 Price took control of the non-retail portion of the company and left to start an international operation.  He subsequently retired in order to oversee his influential philanthropic foundation. For example, the Price Family Charitable Fund made a $50 million gift to endow and name the USC Sol Price School of Public Policy.  Sol Price passed away in 2011 at 93.

The New CEO

Sinegal retired from Costco in 2011, and was replaced by Craig Jelinek, who started his career with Sol Price at FedMart, and had been  President and Chief Operating Officer at Price Club. Here is a recent quote from him that sums up Costco.

“Last year (2018), the company recorded $126 billion in sales, making it the second-largest global retailer behind Walmart’s approximately $485 billion) and curiously (on average each year), Costco sells 135 million hot dogs and 87 million rotisserie chickens; fills 43 million prescriptions in its pharmacies; and sells nearly 3 million pumpkin pies during the shortened week leading up to Thanksgiving)”.  Costco’s single best selling product is a classic staple – toilet paper. Costco sells more than a billion rolls of it a year – enough to wrap around the Earth 1200 times.

Today’s Costco

Today, Issaquah-headquartered Costco has 749 stores worldwide, and employs approximately 239,000 people. According to Jelinek, the average Costco worker earns $22 per hour, (considerably more than any other major retailer), and 42 percent of the company’s employees have been with Costco for more than 10 years. The company’s employee loyalty is just as fierce as customer loyalty, according to Jelinek.

The company’s 92.2 million members pay annual dues to shop at its stores.” (Fees have been raised to $60, and $120 for executive membership.)  These membership fees comprise all of Costco’s profit.  Treatment of Costco employees still reflect Sol Price’s influence, They enjoy far and away the best health insurance plan, and the highest wages in the industry.  92 percent of employee health plan costs are covered; and 95 percent of all promotions are from within.

This results in an unbelievable mere six percent turnover rate for employees with the company for more than one year, (estimated to be about one fifth of Wal-Mart); productivity is at $500,000 per employee, and Costco has the lowest shoplifting rate in the industry (.02%).

Why Love Costco?

So, Costco, why do so many love thee?  Perhaps it’s because unlike so many other merchants who consistently seek higher profit margins, Costco’s main goal is to lower prices rather than raise them. In the case of its famous hotdog/soda $1.50 combination (that includes a soda refill), Costco has maintained that same price for the past 34 years, and as Sinegal has promised — will do so forever.

In fact when Costco president W. Craig Jelinek once complained to Costco co-founder and former CEO Jim Sinegal that their monolithic warehouse business was losing money on their famously cheap $1.50 hot dog and soda package, Sinegal listened, nodded, and then did his best to make his take on the situation perfectly clear. “If you raise the price of the effing hot dog, I will kill you,” Sinegal said.  Obviously Jelinek got the message. What helped is that Costco has opened two Kirkland hot dog factories, thus lowering costs.

Chickens, Chickens, and more Chickens

Then there are the 87 million rotisserie chickens Costco sells at $4.99, To maintain that price,  it will be spending almost $300 million building a facility that will produce 100 million chickens a year again cutting costs.     

But here is where I must make two disclosures.  First, it’s necessary to acknowledge that I own stock in Costco (although, with 452 million shares outstanding, I doubt this article can do much to move the stock.)

The second admission is that not quite everyone loves Costco.  Wall Street is annoyed that the company treats its customers and employees better than shareholders.  For example, the retailing analyst at Deutsche Bank is quoted, “From the perspective of investors, Costco’s [employee] benefits are overly generous.”

However, Warren Buffett’s Berkshire Hathaway owns 500,000 shares of Costco, and Jim Sinegal takes the rather quaint position that, “I happen to believe that in order to reward the shareholder in the long term, you have to please your customers and workers.”  In other words, don’t fix what ain’t broken.  This day, for a CEO to adhere to that philosophy is really quite bizarre, yet, that’s exactly why nobody doesn’t like Costco.

Note:  A copy of the 2007 Viewpointe issue in which this article first appeared was sent to Jim Sinegal, the CEO of Costco, and he responded with a signed letter as follows:

Dear Bob,

A belated thanks for your note and the great article you wrote about Costco.  “Nobody doesn’t like Costco is a great tag line for an ad campaign––except we don’t advertise.  We appreciate your support.”

Jim Sinegal


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