In 2004 a Wall Street analyst summed up his complaint about Costco in a single line that would follow the company for years: "At Costco, it's better to be an employee or a customer than a shareholder." He meant it as a criticism. Costco paid its hourly workers far more than its competitors did, covered most of them with health insurance, and refused to raise prices to fatten its margins. To much of the investment world, that looked like money left on the table.
The man responsible was Jim Sinegal, Costco's co-founder and chief executive. He had started in retail at eighteen, doing grunt work at FedMart in San Diego, and learned the warehouse business as a protégé of Sol Price, the pioneer of the warehouse club. In 1983 he and Seattle businessman Jeff Brotman opened the first Costco. Sinegal ran the company as president and CEO for nearly three decades, until he stepped down at the end of 2011.
His central bet was simple and unfashionable. If you pay people well, treat them with respect, and give them a future, they will work harder, stay longer, and serve customers better, and that will more than pay for itself. In 2004 Costco's average hourly wage was about $15.97, compared with about $11.52 at Sam's Club, its closest rival. By 2005 the Costco average was around $17. Roughly 85 percent of Costco workers had company health insurance, at a time when fewer than half of the workers at Walmart and Target did. Part-timers became eligible after six months.
He applied the same discipline to customers. Costco capped its markup at 14 percent on branded goods and 15 percent on its own Kirkland Signature products, while supermarkets commonly marked up around 25 percent and department stores far more. If a buyer found a way to get something cheaper, the savings went to the member, not to the margin. The cap meant leaving money on the table on purpose, item after item, to earn a reputation members could count on.
Then there was the hot dog. Costco's hot dog and soda combo has cost $1.50 since the mid-1980s. Years later, Craig Jelinek, Sinegal's successor as CEO, recalled asking him about raising the price. Jelinek's account of the reply has become company legend: "If you raise the effing hot dog, I will kill you." It was a joke with a point. Some promises to customers are worth more than the money you could make by breaking them.
Sinegal held himself to the same standard he set for prices. His salary stayed around $350,000 a year, a fraction of what chief executives of comparable companies earned, though he did hold substantial Costco stock. He worked from an open alcove with no door and spent much of his time visiting warehouses, walking the floor, and talking with the people who stocked the shelves. Explaining his pay, he said, "Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."
The numbers suggested the bet was paying off. Only about 6 percent of Costco employees left after their first year, compared with about 21 percent at Sam's Club, saving the company enormous hiring and training costs. Costco generated more operating profit per hourly employee than Sam's did and much higher sales per square foot. The company promoted from within, so a cart pusher could see a path to running a warehouse. Sinegal argued that paying people well was not only right but simply good business.
The criticism never fully went away. Analysts kept arguing that Costco could earn more for investors by squeezing labor costs, and the company's stock was punished at times when it chose employees over margins. Costco was not a perfect employer, either. Pay and benefits varied over the years, and only a minority of its workforce was unionized. But Sinegal refused to treat the next quarter as the only thing that mattered. He talked about building a company that would still be standing fifty or sixty years later, and today Costco is one of the largest retailers in the world.
Most managers do not set wages or markups. But every supervisor decides, every day, whether the people doing the work feel like a cost or like the reason the place succeeds. Sinegal walked the floor because he believed the money was made there, not in his office. That belief shaped every other choice he made.
Start on Monday by asking what your best people would have to go elsewhere to get. If the answer is respect, a fair shot at promotion, or a manager who knows their name, you can fix that yourself without anyone's budget approval. If the answer is pay, make the case upward with numbers, the way Sinegal did: turnover, training costs, mistakes, customers lost. Good people are not an expense to minimize. They are the cheapest way to get excellent work.
Then look at your own perks and promises. If you ask your team to sacrifice, make sure your sacrifice is visible first. If you have made a promise to customers or employees, keep it even when breaking it would be easy and profitable. People remember the $1.50 hot dog because it never changed.
Wall Street meant it as an insult when it said Costco was a better deal for workers and customers than for shareholders. Sinegal heard it as proof the strategy was working. Take care of the people who do the work, and they will take care of the people who pay the bills. The shareholders, in the long run, will come out just fine.