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Eight lessons to learn from Costco

Inside Business

Posted: October 28, 2008 9:13 p.m.
Updated: December 30, 2008 5:00 a.m.
Twenty-five years ago, Costco opened its first warehouse store. At that time in the retail industry, selling annual memberships for the privilege of buying things was almost unheard of. The company has since grown to 544 locations in seven countries, employing 142,000 people and has annual revenue of $72.5 billion.

Some store sales grew 9 percent for the period that ended in August 2008; quite an increase considering what is taking place in the economy.

Voting at the checkout

One of the things that has set the company apart from other publicly-traded firms is that the management is firmly entrenched with the concept of building a company that will be around 50 or more years from now.

The belief system of the company is that long-term thinking is owed to not just the shareholders but to employees, families of employees, and the communities where Costco does business, as well as to the suppliers of goods and services who employ hundreds of thousands of more people.

The firm has a long-term strategic plan but does not allow people to be relieved from day to day execution which is critical to generating results.

As Jim Sinegal, co-founder and CEO of Costco stated in a recent interview, “the customers vote at the checkout.”

The first lesson is customers vote by where they spend their money, and if they have stopped visiting you, those sales are going somewhere else; find out why!

Fueling a myth

Sinegal has perpetuated a myth that he visits 12 Costco stores a day, for the simple reason that he wants to keep people on their toes. He and his leadership team understand that being close to the employees and customers through store visits can be a competitive advantage.

Store visits are conducted from the perspective of the customers. Understanding that nothing is a bigger turnoff than poor housekeeping, leaders physically look to make sure that every store is safe and clean, well-stocked and have the right merchandise out, given the time of year and local buying patterns.

Years of experience has taught Sinegal to note that having a sloppy building is an almost sure bet the store will have high shrinkage, meaning that shoplifting and pilfering abound. The second lesson is that management by walking around keeps people on their toes; an experienced set of eyes can spot problems others do not.

To take advantage of the growing appetite of customers who wanted high-quality products at less expensive prices, the company started the Kirkland Signature brand.

When the company made the decision to create the label, they made the defining decision not to reduce the quality of the products.

The third lesson is that by offering lower-priced but similar quality products might expand sales.
The company understands that their customers shop for value. They don’t spend money at Costco for cheap prices for cheap merchandise; the expectation is that they expect the company to deliver value on quality goods.

The fourth lesson is to understand why your customers buy from you because it helps focus and run the business better, eliminating guesswork.

Suppliers are partners
The company purchases products and marks them up 15 percent for sale to customers. This has been a long standing pricing policy that works for customers, but not always for a supplier.

Some companies don’t want to see Costco pricing on their products. But many do, including Movado watches, Michelin tires or Waterford crystal. These suppliers understand that Costco does tremendous volume, pays invoices quickly and is always seeking new and innovative products to sell customers.

The fifth lesson is to treat suppliers like partners and understand how they can help you and you can help them.

In addition to having brick and mortar locations, Costco expects to sell $1.6 billion from their e-commerce site this year, an increase of 33 percent in just one year.

The average customer ticket is more than $400 from the Web site.

The sixth lesson is to understand how your customer can buy from you and make it easy to do so; if they want to purchase from their home or office, let them do it.

Look for savings
The company is always seeking to reduce costs. In many warehouses, Costco has installed skylights and solar panels to reduce electricity costs. The average warehouse is 141,000 square feet, generating considerable energy costs.

The company recycles all the boxes that goods are shipped in, and considerable resources are focused on reducing packaging to save on fuel.

The company recently reconfigured how it packages cashews, changing the container to a square canister.

This single act saved the company and its customers more than 500 truckloads a year of that product alone.

The seventh lesson is that there are cost reductions just about anywhere you look; always be open to seeing opportunities that might be pennies but will quickly grow into dollars.

Stay close
The leadership team knows it cannot operate in a vacuum, so at least once a week they find themselves walking through their main rival, Sam’s Club.

Those leading Costco know that they are fighting a division of Wal-Mart, the largest corporation in the world in terms of sales volume. Sam’s Club, like Costco, continues to find ways, both big and small, to improve their operations.

The eighth lesson is to stay close to your competition, because you might just learn something from them!

Kenneth W. Keller is president of Renaissance Executive Forums in Valencia. His column represents his own views and not necessarily those of The Signal. “Inside Business” appears Wednesdays in The Signal.


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