More Lessons from Big Box Retail: Costco’s Unique Strategy

By Allan Pulga

Last week, Matthew Boyle wrote a Fortune profile about Costco CEO Jim Sinegal and how he turned his Seattle-based wholesale operation into the fourth-largest retailer in the U.S. and the seventh-largest in the world.

The article, entitled “Why Costco is so addictive,” investigates how Sinegal’s sales philosophy has kept customers coming back in droves. With $59 billion in sales from 488 warehouse locations, Costco is No. 28 in the Fortune 500.

“While Wal-Mart stands for low prices and Target embodies cheap chic, Costco is a retail treasure hunt, where one’s shopping cart could contain a $50,000 diamond ring resting on top of a 64-ounce vat of mayonnaise,” writes Boyle.

I don’t know about the diamond ring part, but I agree. Anybody who’s shopped at Costco understands the randomness of the merchandise as well as its propensity for carrying quality brands and bulk goods.

The draw of unexpected bargains is the secret to Costco’s appeal and it’s not by fluke. Sinegal, 70, has spent 52 years in retail and over the years has become a veritable merchandising wizard. Boyle describes him as “an exceedingly shrewd practitioner of the unglamorous but elusive art of getting the right product in the right place at the right time for the right price.”

There’s no telling whether Sinegal’s merchandising tricks could work in specialty retail outlets, such as cellphone stores, but their underlying principles certainly suggest that retailers don’t always have to play by the rules.

Costco cuts out all the frills of a conventional shopping experience. Its concrete floor and absence of décor, advertising, commissioned salespeople and even shopping bags make it a store designer’s nightmare. It is, in fact, just a warehouse.

All this skimping means two things: the company keeps its prices down and its employee wages and benefits up (see “Productivity and Performance” below). Costco doesn’t mark up any item above 14 per cent, compared to supermarkets and department stores, which often carry markups of 25 and 50 percent, respectively.

And in the end, the customers are content to sacrifice the shopping extras to get the stuff they want at a price they can barely believe.

This is where Sinegal’s merchandising approach goes from clever to brilliant.

“We only carry about 4,000 items,” explained Sinegal in Fortune, “compared to 40,000 in a typical supermarket and 150,000 in a Wal-Mart supercenter. Of that 4,000, about 3,000 can be found on the floor all the time. The other 1,000 are the treasure-hunt stuff that’s always changing.

“It’s the type of item a customer knows they’d better buy because it will not be there next time, like Waterford crystal. We try to get that sense of urgency in our customers.”

Thus, Costco drives existing demand for its bargains even further.

Because of its employee-friendly reputation, Costco has never had trouble recruiting; new store locations always have a line-up of applicants waiting outside the door. Sinegal makes a point to hire smart young workers to whom he can impart his time-tested retail wisdom.

“One of the first places we recruit is at the local university,” he says. “These people are smarter than the average person, hard-working and they haven’t made a career choice.”

These attributes feed into the workplace culture and what’s more, management has a reliable pool of talent to move up the ranks. But only the employees who demonstrate the particular knack for merchandising will get a shot at warehouse manager. “Our managers are entrepreneurs, not somebody who just comes in and unlocks the doors,” explains Sinegal.

“People who have the feel for (merchandising) just start to get it. Others, you look at them and it’s like they’re staring at a blank canvas. I’m not trying to be unduly harsh, but that’s the way it works. They’re not going to become a (warehouse manager).”