Jim Sinegal, the cofounder of Costco Wholesale Corp., who turned 76 on January 1, has relinquished his role as chief executive officer after a 28-year career as head of a retailer that has succeeded beyond his, or anyone’s, dreams.

Jim Sinegal, Costco Wholesale Corp., Craig Jelinek, MMR, Lifetime Achievement Award, Kirkland private label, Sol Price, Costco, Warren Buffet, Bill Gates, SG&A

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Costco’s Sinegal takes pride in a job well done

February 6th, 2012

ISSAQUAH, Wash. – Jim Sinegal, the cofounder of Costco Wholesale Corp., who turned 76 on January 1, has relinquished his role as chief executive officer after a 28-year career as head of a retailer that has succeeded beyond his, or anyone’s, dreams.

As Sinegal steps down — though he will remain with Costco as a consultant and advisor to Craig Jelinek, his successor — he leaves a company on the brink of cracking $100 billion in sales, a pedestal that puts the warehouse club chain at No. 2 among all United States-based retailers and No. 7 among the world’s retail companies.

No executive in retailing history has led his company from its founding to Costco’s current level of sales so quickly, so smoothly — and so impressively.

For these and other reasons too numerous to detail here, the editors of MMR are proud to recognize Sinegal with the publication’s Lifetime Achievement Award.

As he relinquishes the role that has involved and consumed him for most of the past three decades, he does so, understandably, with mixed emotions. But the feeling that overwhelms all others is one of pride in accomplishments, an emotion this intensely self-effacing retailer does not often exhibit.

"I’m particularly pleased," he says, "with the fact that we have been able to provide 160,000 people worldwide with meaningful jobs. We’ve succeeded by hiring good people, building a team, promoting from within and providing career opportunities at Costco. How well our people have done their jobs can be attested to by the fact that Costco is routinely named one of the 50 best companies in the world."

Sinegal is satisfied as well with the way Costco has gone about the business of doing business. "We’ve managed to survive without a public relations or advertising department, and the added costs that these two functions accrue. By doing so we’ve managed to cut the structural costs of doing business," he notes.

Discussing Costco and its place in the business firmament, Sinegal admits to bring pleased with the reputation his company has earned over the past 28 years. "We’re known and admired for good quality, whether in branded products or our Kirkland private label," he says. "We’ve earned that reputation for a simple reason: If it’s not good we pull it off the shelf."

Costco’s former chief executive is particularly pleased with the reputation the Kirkland brand has among the retailer’s members, though he explains it with characteristic understatement: "We do a pretty good job."

Behind that description is perhaps the core thinking that has propelled Costco to its preeminent position in the retail marketplace of the early 21st century: The company does a pretty good job.

Elaborating, Sinegal points out the retailer’s ongoing attempt to be the best. "We’re the No. 1 optical chain," he notes. "Pharmacy is a signature department for us. Out meat department is widely viewed as the best. The reason is simple: We try to be the best. And we try to make shopping easier for our members. That’s why we have 10-foot parking stalls, rather than the traditional nine feet. We don’t want our members denting the bumpers on their expensive cars."

But Sinegal consistently returns to the one reason he cites above all others for Costco’s success: the quality of its people. He recounts stories of members approaching him at whatever Costco warehouse he happens to be in at the moment and confidently telling him that this particular warehouse is the best, because the people who work there are so professional. He’s never surprised at the member’s insistence — or exuberance. "The average warehouse manager,” Sinegal explains, “runs a $150 million business, is responsible for $10 million to $12 million in inventory, supervises 300 employees and serves 50,000 members. And the great majority began their Costco careers part-time while in college. So these are people who have learned their jobs — and have become absorbed in the Costco way of doing business."

Of course Sinegal takes pride in the success Costco has enjoyed, reeling off numbers with the ease and familiarity of someone who has lived with them for some considerable time. Which he has.

"In the 25 years since we went public our compound sales growth rate has been 13.5%, our compound earnings growth has been 13.9%, and our stock has increased by 17%," he says.

Behind these numbers has been an unshakable commitment to the Costco way of doing business. "People constantly ask me why we don’t open more warehouses," Sinegal points out. "Opening 100 warehouses a year would out-distance our capacity to manage them. We simply don’t have enough qualified managers to support that kind of growth. As a result, we’ve had to be more focused, more disciplined. Our goal has been to turn our inventory faster than our people. And that philosophy has worked for us. At the same time, we’ve resisted the temptation to take a quick hit in order to make our numbers. We’ve never raised prices or margins, even when we were told that our members would not notice. That’s not who we are."

This business philosophy — one anchored in hiring capable people and paying them well, in giving customers unequaled value, in always doing the right thing — has been at the core of Sinegal’s makeup for as long as he can remember. Indeed, he attributes them to the set of values taught by his parents.

The Pittsburgh native, who grew up amid the Great Depression and all the hardships entailed therein, had initially chosen a law career for himself and, with that objective in mind, enrolled in the University of California’s Hastings Law School. Then, at age 18, he took a summer job at Fed-Mart in San Diego, where he met Sol Price. That meeting changed his life.

"Sol Price was one of the most significant individuals in my life," says Sinegal. "His work ethic and set of values are at the core of everything we do at Costco. He taught me, by word and deed. He used to say when we did something wrong that this is not what we represent as a company. He taught that a company has an obligation to the community.
"Because of his teaching I’ve come to understand that our presence in a community benefits everyone — not just Costco members. When we sell gas for less the entire community ­benefits."

Five years ago, shortly before he died, Price finally paid Sinegal a compliment the Costco co-founder had been waiting for all his life. He wrote Sinegal a note telling him how pleased he was at the job Sinegal had done at Costco. Typically, Sinegal was both thrilled and somewhat annoyed that it took Price all those years to acknowledge his student’s ­success.

Now, as Sinegal steps down, he leaves a company, and a culture, that is the envy of businesses around the globe. "Our model forces us to be creative,” he says. “We are challenging our members: Instead of spending $2, spend $5."

In a sense Sinegal has spent a lifetime ignoring suggestions to change things, most of them coming from outsiders with little understanding of Costco. "We’re criticized for not having category or department signs. We have no signing for a simple reason: We want our members to shop the entire store. People suggest that we put in express checkout lanes. I tell them we may do so — for those members who spend $1,000 or more on goods."

Sinegal has taught Costco about a concept he has labeled the “intelligent loss of sales.”

"We carry one size of Advil — the 350-count, I believe," he notes. "People constantly suggest that we add smaller sizes. If we do, I have no doubt most people would choose a smaller size — and we would lose sales of the 350-count size.

"On the other hand, if 10 members come in looking for Advil, and we offer them only the 350-count size, we might lose one or two sales. But the other eight or nine members will buy the larger size. That what we mean by the intelligent loss of sales."

Asked what regrets he has, Sinegal instantly recalls the time Costco closed the retailer’s Midwest distribution centers, which at the time, in 1985, consisted of two warehouses in Minneapolis and one in Milwaukee. "They weren’t doing well," he remembers, "and as a result we were spending 80% of our time on 20% of the company."

He does recall, fondly, that Costco refunded 100% of each member’s membership fee, even if a full refund wasn’t called for, and that all the employees in the three warehouses were offered opportunities elsewhere in the company. He also notes, not incidentally, that the retailer has since reentered those Midwest markets it exited in 1985 — with considerable success.

Despite, or perhaps because of, Costco’s success, Sinegal remains a worrier. "I worry that, by promoting from within, we lose the advantage of not having enough outside influence in our company. But we’ve been able to compete successfully against some of the world’s best retailers. So maybe promoting from within has not hurt us all that much."

He also confesses to a fear of failure — for himself and for his company, which raises the obvious question: Why step down when he clearly remains at the top of his game?

"The timing is right," he answers simply. "The company is in very good shape. We have excellent people leading it. My most important job over the past five years has been preparing for this moment. And I’m confident that we’re ready for a change in ­leadership.

"I hope to continue to contribute as an advisor. But I want to be a help, not a hindrance. If I believe I’m in the way, I’ll walk away."

But Sinegal, ever the realist, knows that something will be lost at Costco: "I’m closely identified with the company. Many of the programs that guide us were ideas that I pushed for — the idea that an employee can’t be fired after two years on the job unless that termination is approved by a senior manager, as one example, or the fact that Jeff [Brotman, Costco’s cofounder and chairman] and I have always approved all sites.

"But there’s much about the company that I like right now. Sales are strong. Our international business is flourishing. Our SG&A is good. So the time is right for me to step down."

As he departs, and recalls one of the legendary careers any U.S. businessman has enjoyed, Sinegal is asked who in the business community has particularly impressed him. Two people come to mind: Warren Buffet and Bill Gates. "Warren’s business instincts, his gut feel for things, are amazing," he says. "As for Bill Gates, his range of knowledge and his grasp of affairs beyond technology is extraordinary."

While Sinegal may have his heroes, for the 160,000 people who work at Costco there is only one: Jim Sinegal. For many reasons, foremost among them the fact that, as he leaves, the same obsessions occupy him as those that filled his mind on the day the first Costco opened: Is the discipline there, are the prices low enough, can we lower more prices, and did I do the right thing?

And one other thing, one more recent and more important than the rest: "If someday someone reads my obituary," Sinegal asks, "will he be able to honestly say, ‘You did the best that you could. You did the right thing.’ "