What's Next?

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Reed Saxon/AP

What’s Next for Costco?

September 05, 2008
by Lindsey Chapman
With its oversized grocery items and well-known consumer savings, Costco has been a fixture in the retail market for years. The store’s business philosophies may be a little unorthodox in the eyes of industry professionals, but the success of its strategy is undeniable.

Beginnings

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Costco opened in 1976 as a Price Club store in San Diego. First serving just small businesses, the company’s founders learned they could be more profitable by serving non-business owners as well. This decision to broaden their customer base gave way to one of the first wholesale stores in the industry. The first Costco warehouse opened in Seattle in 1983. Costco was the first store to increase sales from zero to $3 billion in less than six years.

Treating People Well

Experts say one of the secrets to Costco’s success is its treatment of customers and employees. Costco boasts the lowest employee turnover in the retail industry. Wages are approximately $17 an hour, and more than 90 percent of employees receive health care benefits. Costco founder and CEO Jim Sinegal doesn’t spend any money advertising for his business. “Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you.”

Analysts have noted how unique Sinegal is in his business strategy, and in his approach to the fact that he is a CEO of a major company. Nell Minow, editor and founder of the Corporate Library and an expert on corporate governance, pointed out that Sinegal’s employment contract is truly unique. It’s only one page, and is the only one Minow has seen that allows for him to be fired if he doesn’t do his job well enough.

Costco requires loyalty from its members, too, who pay a fee for the privilege of shopping there. The “Today” show looks beyond the sales floor to see how the store is able to offer its customers quality goods at bargain prices.

A Very Public Secret

“Costco is like a secret, because the brand isn’t saddled with the tired ubiquity of household name retailers that blanket the landscape with advertising,” writes Dale Buss of Brandchannel.com. Because the company relies primarily on happy employees and satisfied customers to spread the word about its goods and services, it saves about 2 percent a year on money it could have spent on advertising. This strategy was established at the company’s outset, said Paul Latham, vice president of marketing for Costco.

“The anti-Wal-Mart”

Worker benefits and privileges have helped Costco in other ways, earning the chain the title of the “anti-Wal-Mart” in some circles. With its strong community relations, the company doesn’t face the same type of resistance Wal-Mart often does when trying to open a store in a new location.

Protecting Consumers

Costco has gone to great lengths to keep from passing inflated prices on to its customers—particularly when it comes to higher fuel costs. While most suppliers purchase gas on a monthly basis, Costco purchases its gasoline daily, and purposely keeps its customer price at the lower end of the market range.

Picasso Meets Retail

In 2005, Costco teamed up with the art world in a big way when it sold a doodle from Pablo Picasso for $39,999. In 2004, the store sold another Picasso drawing for about $35,000. Costco said the executives were pleased with their fine art partnership. And the purchase of the painting wasn’t treated any differently than any other Costco sale. Ginnie Roeglin, senior vice president overseeing e-commerce and publications for Costco, said, “We do the same typical Costco guarantee that the artwork is in good condition, that it is authentic, and for any reason whatsoever, a buyer may return it with no questions asked.”
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