Ideas Made to Matter
How Costco’s obsession with culture drove success
Todd Miner runs one of the best Costco meat shops on the East Coast, and he can prove it.
His operation is considered a “standard bearer” for other Costco butchers in his region. Its metrics place it near the top of all meat shops in the company, and he works hard, six days a week and sometimes on holidays, to keep it that way. So when a new warehouse manager showed up last year, Miner was skeptical the manager would have meaningful advice for him.
But he did and it ran counter to everything Miner believed: stop working so much. He was doing a stellar job, but he was doing it at the cost of spending time off with his family. “Who says that?”
A Costco manager, that’s who, said James Sinegal, who founded Costco in 1983 and was CEO until his retirement in 2011. Sinegal and Miner spoke to professor Zeynep Ton’s “Management of Services: Concepts, Design, and Delivery” class May 7, where Sinegal described the culture he spent decades cultivating at the company and that he considers critical to its success.
Costco was one of four companies Ton focused on in her 2014 book “The Good Jobs Strategy,” which examined how companies invest in employees to improve operations and drive profits. In the book, Ton details four “operational choices” central to the strategy: offer less, standardize and empower, cross-train, and operate with slack. All play into Costco’s success.
Today, the wholesale giant is the second largest retailer in the world with more than $126.2 billion in sales in 2017. The company has 225,000 employees in 723 stores around the globe. It promotes leadership from within and consistently beats out its competitors, boasting a 12.9 percent annual growth rate, Sinegal said.
But with its unusual retail model for the time — fork lifts zipping around to pull pallets of product from ceiling-height shelves, cavernous warehouses and membership fees to shop in them — the company didn’t always see those numbers, Sinegal said. A foray into the Midwest in the late ’80s proved disastrous, though the company later re-entered the market there.
“Everyone is always going to question what business model you have,” Sinegal said. “They’re going to say you probably won’t be in business six months from now. We said ‘How do we overcome all of the objections people are going to have to shopping with us?’”
Focus inward, on the culture
The answer was to focus inward and look at things from the members’ viewpoint, he said, developing a culture that ensured a good experience by carrying a generous return policy on top-quality products, always passing on the savings of purchasing those products at wholesale on to the customers, spurning the use of misleading advertisements, and offering high wages and good benefits to employees.
“No one was going to be able to say we’re making money off the backs of our employees, because we were going to pay the highest wages in all of retail,” Sinegal said. Seventy cents of every dollar spent by Costco goes to employee wages, he noted, and the company has a 7 percent turnover rate, compared to 60 to 70 percent at other retailers, Sinegal said.
Culture isn’t the most important thing — it’s the only thing
For Sinegal, that culture of promoting passion, integrity, ownership, and motivation in his employees and ensuring that the customer can trust that they are always getting the best deal by shopping with Costco is the core of the company and the key to its success.
Sinegal drove the point home by describing a time when the company was selling Calvin Klein men’s jeans for $29.99 a pair. The garments sold out as fast as they could be stocked, he said, and when the company secured a deal on an order, paying only $22.99 per pair, Sinegal said it would have been easy to continue selling the discounted jeans at the higher price for a huge profit. But that’s not what he did.
“We pass the savings on to the customer, every time. Do you know how tempting it is to make another $7 on a pair? But once you do it, it’s like taking heroin. You can’t stop.”
With a sky-high internal promotion rate, it’s a philosophy that Sinegal worked to instill in everyone who worked for him.
Leading from the floor
During his time at the head of the company, Sinegal spent about 200 days of each year visiting warehouses. He felt that was crucial to spend as much time as possible on the frontlines, where money was being made and merchandise was being sold.
But his goal wasn’t to parachute in and tear the place apart. Rather, it was to provide constructive criticism to his managers and to be sure they were constantly teaching their employees.
“The biggest mistake any boss can make is running around and doing everything yourself. If you haven’t learned to delegate, you haven’t learned a very valuable lesson,” Sinegal said. “If I could stock every shelf, ring every register, buy every product and push every cart, I would. But I can’t, and you’ve got to hire people to do it. You want them to do it as well as if you were doing it, and you only do that by teaching.”
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