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ISSAQUAH, Wash. — The year 2013 was a challenging one for mass market retail, as a sluggish economic recovery and cowed consumers frustrated the hopes of many retailers. In that environment, only a handful of chains emerged undaunted.
The year 2013 was a challenging one for mass market retail, as a sluggish economic recovery and cowed consumers frustrated the hopes of many retailers. In that environment, only a handful of chains emerged undaunted.
For Costco Wholesale Corp., 2013 constituted a challenge on another level as well. After 30 years, its co-founder and chief executive officer, Jim Sinegal, had retired the previous year, handing over the reins to Craig Jelinek, a 30-year company veteran who had been named president in 2010.
Yet Costco not only turned in another record financial performance, one that included achieving sales in excess of $100 billion, it further demonstrated the strength of its organization, culture and leadership with a seamless transition at the top. Those achievements, on their own, would suffice to justify Costco’s selection as MMR’s Retailer of the Year for 2013. But beyond that, Costco is being recognized for its commitment to a business model different from many if not most large corporations, one based on a culture and code of ethics that concretely recognizes the value of its employees and makes their welfare a priority.
"In this organization, there are not a lot of things that are going to cost you your job, unless, it’s an integrity issue," explains Jelinek. "There’s always some place, if you’re trying to do a good job, where a person can fit in this company. Our view is, there’s a lot going on in your life, but if you come in and do your job, we’re going to support you and take care of you and you’re not going to have to worry about whether you’re going to get your check next week as long as you do your job."
That approach does not reflect mere sentimentality. Costco’s executives have seen ample proof over the years that well-paid and well-treated employees are motivated to do their best, and by doing their best, deliver a better experience to the customer and, ultimately, superior results to the company’s shareholders.
Costco’s ability to achieve consistently superlative financial results while maintaining its distinctive culture continues to baffle some Wall Street analysts who fail to understand that the company’s commitment to its core values is part of, not an obstacle to, its success. But one common thread that ran through interviews with a dozen of Costco’s senior executives recently was their belief in the vital importance of maintaining those values to ensure the retailer’s continued success.
"There’s no question that maintaining the company’s culture is our No. 1 goal," says Jelinek. "The culture is, in our view, the most important part of any organization, and it’s so important to our future."
To be sure, maintaining the kind of momentum that Costco has sustained will be a formidable enough challenge. Net sales have grown steadily from $69.89 billion in 2009, when the recession’s full impact was felt, to $102.87 billion in fiscal 2013. Net profit, an even more important metric, has risen from $1.09 billion to $2.04 billion, an increase of nearly 88% over the same span.
Characteristically, when Costco announced its financial results for the year, it included no fanfare or self-congratulations on the achievement of breaking the $100 billion barrier, an achievement that few retailers around the world have matched. It was, however, typical of a company that does not have a public relations department to trumpet its attainments or put a positive spin on its missteps, yet still enjoys much more positive publicity than negative, simply because of the way it conducts business.
Costco’s impressive top- and bottom-line growth has been driven in part by the steady growth of its store base, which has expanded from 527 locations worldwide at the end of fiscal 2009 to 648 on December 31, 2013. But it has also been the result of growing membership and the fact that members are shopping more often, which has helped boost the average sales of its warehouses.
Even more aggressive growth is planned for the future, as management has set an ambitious goal of doubling the size of the company over the next decade. That expansion will be achieved in part by opening more warehouses and expanding market share in this country, but even more through international growth, including countries where Costco now operates and new markets, such as Western Europe. It will also involve further development of the company’s e-commerce operation, which is already growing at a rapid pace. Costco is making a major investment in its technology infrastructure to prepare for its ongoing growth plans for the next decade. In addition, the company recognizes the considerable potential of its business centers, a distinct operation geared to the particular needs of small businesses and which involves delivery service as a major component.
The current fiscal year will see Costco open about 30 warehouses, with roughly half of them in international markets. That marks a significant ramp-up from the 26 warehouses that opened in fiscal 2013 and the 15 openings in 2012. "I would like us to continue to open at least 25 to 30 buildings a year," says Jelinek. "We have to continue to build e-commerce, which is a growth vehicle. And I think we have a big opportunity with our business centers. If we just do those things right, we’ve got enough to grow this business for at least the next 10 to 15 years."
Impressively, those plans should hold up even if the economy sours again. Jelinek notes that the Costco brand is as popular as it has ever been, and when the company enters new markets now it is achieving much greater success faster than it did roughly 10 years ago.
"We think we do well even in tough times, and good companies build market share in tough times," he says. "We’re here for the long haul: We’re not a short-term business."
Nor does he see a need to alter much within Costco to accomplish its goals. The model has, after all, not only proven itself but has also shown its ability to perform in both good times and bad.
"The business will, of course, change over time; we just have to manage that change, innovate and continue to drive greater and greater value to our members."
There is, however, one major change on the horizon that occupies the thoughts of all of Costco’s senior leaders, almost all of whom have worked and grown together in the company since its start. "When Jim left, the management team was largely intact," Jelinek notes. "When I leave, most of this team will be leaving before me. So how we manage that is going to be very important."
Maintaining and transmitting the culture and values that have made Costco what it is to the next generation of leaders will be a critical part of managing that change. "It’s unbelievable how bright some of the individuals we have in the company are," he remarks. "They really understand the business. But the key is going to be making sure they understand the culture in terms of bringing value to the customer, taking care of the employees, taking care of the customer and taking care of the supplier.
"It’s doing the right thing, regardless of what the cost is. Because when you do the right thing, things will always have a way of working out."
