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Costco was founded in 1983 by Jim Sinegal and Jeffrey Brotman. Sinegal learnt about discount retailing from Sol Price, the same person from whom Sam Walton had admitted to borrowing much of what Walmart knew about the business. And, like Walton, Sinegal believed in People First. “We’re going to be a company that’s on a first name basis with everyone”, he said in an interview on ABC’s newsmagazine show 20/20. Following the same formula as other inspiring leaders, Costco believes in looking after its employees first. Historically, they have paid their people about 40% more than those who work at Sam’s Club, the Walmart owned discount warehouse. And Costco offers above average benefits, including health coverage for more than 90% of their employees. As a result their turnover is consistently five times lower than Sam’s Club.
Like all companies built around a cause, Costco has relied on their megaphone to help them grow. They don’t have a PR department and don’t spend money on advertising. The law of diffusion is all that Cosco needed to get the word out. “Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about you”, quips Sinegal, recognising the value of trust and loyalty of his employees over advertising and PR.
For years, Wall Street analysts criticized the Costco strategy of spending so much on their people, instead of on cutting costs to boost margins and help share value. Wall Street would have preferred the company to focus on what they did at the expense of why they did it. A Deutsch Bank analyst told Fortune Magazine, “Costco continues to be a company that is better at serving the Club member and employee then the shareholder.”
Fortunately, Sinegal trusts his gut more than he trusts Wall Street analysts. “Wall Street is in the business of making money between now and next Tuesday”, he said in the 20/20 interview. “We are in the business of building an organisation, an institution that we hope will be there 50 years from now. And paying good wages and keeping people working with you is very good business.”
Excerpted from ‘Start with Why’ by Simon Sinek