Costco CEO Finds Pro-Worker Means Profitability

August 2, 2006 — -- What's the secret behind building a multibillion-dollar business empire that has instant name recognition? You might think it depends on a CEO who's ruthlessly competitive and drives company workers relentlessly. Well, Jim Sinegal isn't your typical CEO, and Costco, the business he founded, is not your typical store.

While it may be unorthodox, nobody could say Sinegal's business strategy isn't working. About 45 million shoppers visit Costco, and for some of them the experience borders on the spiritual. Shopper Jose Davila put it this way: "This is the best place in the world. It's like going to church on Sunday. You can't get anything better than this. This is a religious experience."

And Sinegal isn't just interested in taking care of his customers. He wants to take good care of his employees.

"It's a good place to work; they take care of us," said one Costco employee who spoke with "20/20" correspondent Bill Ritter.

And when Sinegal walks into one of his stores, he's treated like a celebrity. His employees seem to genuinely like him. And the feeling's mutual.

"The employees know that I want to say hello to them, because I like them," he said.

Unlike the stereotypical CEO, Sinegal doesn't try to distance himself from his employees. He even wears a name tag -- but not one that says "Jim, the CEO" or "Jim, Costco Founder." It just says Jim. He easily could be mistaken for a stock clerk.

His philosophy is simple, he said. "We have said from the very beginning: 'We're going to be a company that's on a first-name basis with everyone,'" he said.

That also includes answering his own phone. "If a customer's calling and they have a gripe, don't you think they kind of enjoy the fact that I picked up the phone and talked to them?" he said.

The son of a steelworker, Sinegal began in the warehouse business, loading mattresses. Sinegal's working-class values are ingrained in Costco's corporate culture. That may in fact be the key to the company's success

"Our code of ethics says we have to obey the law. We have to take care of our customers, take care of our people. And if we do those things, we think that we'll reward our shareholders," Sinegal said.

He certainly has rewarded them. This year's sales total more than $52 billion from 462 stores in 37 states and eight countries. Costco is now the nation's fourth-largest retailer, selling everything from crab legs to flat-screen TVs to caskets -- and even a Picasso painting.

Part of Costco's genius is its simplicity. A typical Wal-Mart stocks more than 100,000 items, Costco stocks only 4,000. Stocking only high-quality goods, Costco attracts the most affluent customers in discount retailing -- with an average income of $74,000.

Ray Dinari, a criminal defense lawyer and loyal Costco shopper, said: "I think I spend over $20,000 -- $25,000 a year buying all my products here from food to clothing -- except my suits. I have to buy them at the Armani stores."

The secret to Costco's profit is simple, too. Its margin on each item isn't very high -- but Sinegal says they make it up on volume. To give you an idea of the incredible volume, Costco sold 90,000 karats of diamonds and 26 million rotisserie chickens in 2004.

Costco is also the largest seller of fine wines in the world. And during this holiday season, it will sell $16 million worth of pumpkin pies.

Perhaps part of Sinegal's success is how much he enjoys his work. "This is almost like show business. I mean, every day you're opening up and it's show time," he said.

And Sinegal is the tireless show producer, managing from the road, hopping on the corporate jet, and visiting up to a dozen Costco stores a day.

"No manager and no staff in any business feels very good if the boss is not interested enough to come and see them," he said.

Sinegal's relentless attention to detail is legendary. Nothing misses his eye, and by the way they rave, you'd think the customers were paying for the privilege to shop there.

Actually, they are. Costco shoppers pay at least $45 a year for store membership and shopping privileges. Multiply that by almost 25 million members, and that's more than $1 billion.

"With that membership fee, you in essence lock them into shopping with you. You build that loyalty," Sinegal said.

And Sinegal says he's also built a loyal work force. In fact, Costco has the lowest employee turnover rate in retailing. Its turnover is five times lower than its chief rival, Wal-Mart. And Costco pays higher than average wages -- $17 an hour -- 40 percent more than Sam's Club, the warehouse chain owned by Wal-Mart. And it offers better-than-average benefits, including health care coverage to more than 90 percent of its work force.

Costco doesn't have a P.R. department and it doesn't spend a dime on advertising. There's a real business advantage to treating employees well, Sinegal said. "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," he explained.

Many Costco workers have been with the company since it was founded in 1983. Once hired, they rarely leave.

Susan MaConnaha, a Costco vice president and head baker, said working for Costco is a family affair. "My whole family works for Costco, my husband does, my daughter does, my new son-in-law does," she said.

And Sinegal rewards that loyalty. "We promote almost 100 percent from within our company. We have guys who started pushing shopping carts out on the parking lot for us who are now vice presidents of our company," he said.

In an era when many CEOs are seen as greedy and sometimes corrupt, Sinegal is proving that good guys can finish first -- and without all the corporate frills. Sinegal even sends out his own faxes from his bare-bones office-without-walls at company headquarters near Seattle. But the most remarkable thing about Sinegal is his salary -- $350,000 a year, a fraction of the millions most large corporate CEOs make.

"I figured that if I was making something like 12 times more than the typical person working on the floor, that that was a fair salary," he said.

Of course, as a co-founder of the company, Sinegal owns a lot of Costco's stock -- more than $150 million worth. He's rich, but only on paper.

Nell Minow, editor and founder of the Corporate Library and an expert on corporate governance, said she was shocked to discover that Sinegal's employment contract is only a page long. "I would love to clone him," she said.

"Of the 2,000 companies in our database, he has the single shortest CEO employment contract. And the only one, which specifically says, he can be -- believe it or not -- 'terminated for cause.' If he doesn't do his job, he is out the door," Minow said.

Sinegal admits that "paying high wages [to his employees] is contrary to conventional wisdom."

And conventional wisdom in this case comes from Wall Street. Analysts seem to be the only critics of Costco and Sinegal. They think the company could make even more money if it paid its workers less -- like Wal-Mart does.

Sinegal is unfazed by his critics. "Wall Street is in the business of making money between now and next Tuesday," he said. "We're in the business of building an organization, an institution that we hope will be here 50 years from now. And paying good wages and keeping your people working with you is very good business."

What Sinegal has proven is that a company doesn't have to be ruthless. Being humane and ethical can also make you money.