Breakfast with Jim: notes from the founder of Costco
We discussed Costco's beginning, how it built its brand, competition with Amazon, and how to operate
In 2019, thanks to the team at Maveron, I was given the gift of breakfast with Jim Sinegal.
Jim is one of a kind: extremely competitive, clear thinking, and disciplined. He’s also downright hilarious.
Costco was built slowly - with constant operating tweaks, brand consistency, and compounding over 42 years to become the seemingly simple mammoth it is today. I hope you enjoy this conversation as much as I did.
On Costco’s beginning
“At first no one was interested – I mean we couldn’t get arrested if we tried.”
We limited membership at the beginning to members of credit unions, and the credit unions gave us free distribution as a member benefit. Over time, we opened it up to everyone.
There was a good reason to object to our product in the early days– it was weird! Our warehouses were out of the way, we charged a membership, and you had to buy big boxes. So we had to get rid of the objections – all of them. That meant we had 100% return policy. We had to be so clear because we had to overcome how strange we were. It was forced upon us.
On Costco’s brand
Our brand: “Significant value on a consistent basis”
We communicated our brand through consistency – that’s the challenge – how do you stay consistent. It takes a long time to build a brand this way – it is not get rich quick.
Consistency, consistency, consistency. High quality, low markups. Don’t try to cheat – you’ll never stop. It’s easier to communicate when you don’t.
Once you start optimizing for margin, it’s heroin. We have one job: reduce the price of what we sell – even when it’s selling well.
Kirkland took years to convey that it would be better and cost less – now $35 billion/year [in 2019. In 2026 it’s $90 billion/year.]
Jim made sure to point out that his sneakers were Kirkland – $17.99
We started selling cars because a dealer came to us – that’s what happened with all of our categories – merchants came to us. Buying a car is distasteful, and we made it easy – now we sell 500,000 a year.
Consumers don’t want to take advantage of you, in general. They just want a good deal. We’ve had some atrocities, though – one man returned a $40,000 grand piano after 12 years. We accepted it.
Kill the bad vendors. Over time, we developed a reputation that we don’t mess around. But in the beginning, they’d pull all kinds of tricks. We had to teach them that we would not let them compromise on their products if they wanted to stay in business with us.
Every 5 years we raise the membership fee. The value of the membership must be reinforced every single time a customer buys something.
We were selling completely out of Calvin Klein jeans at $29.99. But we could lower it to $22.99. So we did. That wasn’t me telling the merchandiser to do that – that’s just what he did because it was our culture.
On Amazon:
“Retail is war without killing.”
“[Jeff] is going to have to match our prices – we won’t let him run our business.”
“I’m not gonna hit them with a water hose but I don’t want to have dinner with them. I really do hate them. But I also respect them.”
“He stole Prime from us but we steal his ideas all the time – but only when they’re better than ours.”
“People kept telling us that Amazon was going to kill us. But here we are bigger than ever. And they still haven’t matched our prices.”
I did buy a Kindle. It broke. I sent it in and got a new one the next day. That’s customer service. I emailed Jeff to congratulate him. He said to “consider me your personal customer support representative” going forward.
“Everyone bitches about competition but it’s the best thing for you. If you don’t have competition you will get lazy and you will die. That’s what happened to Sears. No competition. Started raising prices. Quality slipped. And then we clobbered them.”
On operating
Analysts and investors are going to tell you how to run your business. Don’t listen them. Do it your way. But make sure you understand their questions – that will make you sharper.
Other businesses are different than ours. They work differently. That’s why we developed all of our own people. Our culture was not most important thing. It was the only thing.
We have 4,000 SKUs – Walmart has 140,000 SKUs. Focus, focus, focus. We can zero in and optimize everything.
Put your foot on the gas when things are going well and when you have the management capacity.
Hire people who have a real feel for merchandize. You know it when you walk in the door. You don’t put a snow sled in the front in June in Tampa.
Our warehouses (stores) do $175m to $500m a year. The person who is managing one of those is managing that and 350 people. That’s a top 5 percentile business – these people have to be good.
I will judge Costco in 20 years (if I’m lucky) by the quality of our warehouse managers.
When he was CEO, he visited 200 Costcos a year. Now [at age 83 and retired], just 2-3 a week. “It’s a sickness, I realize. But I loved it. I still do.”