‘Business is about more than making money’

 

How It All Began

I was a college student at San Diego Junior College — a sophomore, 18 years old, with a job where I was up at 4 o'clock in the morning to pick up clothing off of Navy ships in the S.D. Harbor and then go to school at about 8:30. I got a call from a friend that a new company had opened up in San Diego called FedMart. They had gotten in an unusual load of mattresses and needed help in putting the mattresses away. The pay was $1.25 per hour. But I didn't get paid the first day or the second day. So I just kept coming back, figuring eventually they were going to pay me. And on the third day as I was carrying a sofa over my head I heard this gruff voice say, “Put that damn thing down before you break your back, or worse yet, break something in the store.” And that is how I met Sol Price, the legendary retailer.

The Influence of Sol Price

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I had intended at that point to go to law school. I wanted to be like Atticus Finch, the lawyer in To Kill A Mockingbird. But after working with Sol Price for several months I changed my mind. I started to study business because I wanted to be like Sol Price.
Sol was an extraordinary person. He was one of the smartest people I have ever known. He was considered one of the most creative people in the retail business in the 20th century. To give you an idea of how good Sol was, the great Sam Walton once said, “I've stolen more ideas from Sol Price” — which he amended by saying, “I've borrowed more ideas from Sol Price than from any man I've ever known.”

He was also one of the toughest people I have ever met in my life. A reporter once called me, saying, “You worked for Sol Price for a long time. Do you remember him quoting Gandhi all the time?” In his later years Sol did start quoting Gandhi. Sol would say things like, “You have to give before you can get” — meaning you've got to take care of your employees before you make a profit and you've got to take care of your customers before you make a profit. But what I told the reporter was, “I don't really remember that, unless Gandhi said, ‘Cut the crap, kid, and get back to work!' Then maybe he was quoting Gandhi.”

Sol went on to start the Price Club, which was a very creative operation. Because there were all sorts of imitators starting up in this warehouse club business, he was asked one time by a reporter, “How does it feel to be the father of an industry?” Sol pondered it for a second and said, “I should have worn a condom.”

He was my early mentor. Sol taught us that business was more than just making money — that you have a contract with the communities in which you do business. That social contract was a concept that we embraced in developing Costco.

On Being Courageous

Someone once said to me, “You must have learned a lot working for Sol Price.” I said, “That is not true. I learned everything.” Here is one memorable example. In addition to being smart, in addition to being tough, he also had a tremendous amount of courage. In an expansion into Dallas we were retrofitting a building we had taken over. The contractor came to us and said, “You've made a mistake here. You've only got one set of restrooms.” We said, “What do you mean?” He said, “Well, you have to have a set of restrooms for whites and a set of restrooms for coloreds.” This was 1960. We took this to Sol and Sol's response was, “No blankety–blank way!” (You can fill in the expletive.) Sol would always take the right stand. You can imagine the impact that that had on a 24-year-old kid, and a lot of us who were working for him at that time were that age.

Everything that I ever learned about business came from Sol.

Getting Costco Launched

It was not easy. The process went on and on. As we were getting ready to open our first Costco in Seattle in 1983 we applied for a license to sell beer and wine. (At that point in time you could not sell spirits.) The liquor board came in and gave us a hard time. First of all, they didn't like our name, Costco Wholesale Club. They said you can't be a club and sell beer and wine. So we dropped the word Club. Then they told us we had to post outside the building our intent to engage and sell, which is a common practice in just about every state. So we posted for the 30 days that is required. They came back 30 days later and said, no we didn't mean here, we meant there — they moved the notice over about five feet on the wall. It was pretty clear that they were trying to stop us.

In addition, they put us through an enormous audit, checking the price of everything that we were selling — milk, eggs, tires, everything — which had nothing to do with a license to sell beer and wine. Then just about the time we are ready to open they called us and said, we also don't like the word Wholesale in your name — we want you to drop that. Well, I was seething. I had a two-word response, which I will tell you was not “Happy Birthday!” Eventually, we got our license.

I tell this story about how we got our company started because it illustrates why we stand for the things that we do. This process was a major wake up call for us. It made it obvious that we were going to come under a lot of scrutiny. People were going to ask questions about us and be skeptical about our business. What's the deal with these guys? You've got to pay a fee to go in and shop with them? Whoever heard of such a nutty thing? They've got cement floors . . . great big cavernous warehouses . . . stuff stacked up to the ceiling . . . forklifts running all over the place . . . there probably is no guarantee on anything you purchase . . . they're probably not paying their employees any money at all . . . and they'll be lucky to be in business six months from now.

Our business model was one that was inherently challenging. Yes, we were doing a lot of things that would raise questions and cause skepticism. We recognized that. So what it made us do is think about all the lessons we had learned over the years and how we were going to conduct the business. We were going to overcome every single objection that people would have in shopping with us.

Because we had a lot of former FedMart and Price Club people working for us, we understood the concepts that Sol Price had taught us. We had that DNA of what we had learned from him. Business was about more than making money. Business had a responsibility.

Business had a social contract to the communities where they did business. And we had to fulfill those responsibilities.

So we systematically addressed every objection that anybody would have in shopping with Costco. The first thing is that we would carry nothing but the highest quality merchandise available to us. As a matter of company policy, there will be no seconds and no irregulars anywhere in our stores. We would have the best refund policy of any retailer in America. We are going to guarantee 100 percent of every single product that we sold. If anybody was dissatisfied with anything they bought from Costco, they could bring it back and get a refund on the spot. Additionally, they'd get a refund on their membership at any time. They could be a member for 11 months and if they said to us, “I'm no longer happy,” we'd refund the entire fee we charged them. We would never engage in any superlatives in describing anything we did in our stores or advertising. (Which was easy, since we weren't intending to advertise anyway.) And then, lastly, we said that we are going to pay our employees the highest wages and have the best benefit package in retail — nobody will ever be able to say to us that we are making money off the backs of our employees.

If I could find that auditor who came in and was checking the price on the milk and the eggs and everything, I would thank him. And I mean it. We became a better company as a result of that experience. We became more resolute than ever. 

The Costco Code of Conduct

We developed at that time our Code of Conduct. As a company, we had to do four things:

• We had to obey the law.
• We had to take care of customers.
• We had to take care of our people.
• We had to respect our suppliers.

If you did those four things, pretty much in that order, then you are doing what you have to do ultimately as a public company, which is to reward your shareholders. We think it is possible to reward your shareholders short term by not paying attention to these four rules but eventually you're going to stub your toe pretty badly.

‘A Really Big Number'

We have about 200,000 employees on a worldwide basis. We always had the attitude that it is all about people. If you go out and hire good people and provide good jobs and good pay and good benefits and good career opportunities, then good things are going to happen to your business. We've taken that position ever since we started.

Seventy cents of every dollar that we spend running our business is spent on people. That is how significant it is. The average hourly employee working on our floors in the U.S. is making $22 an hour. If you know anything about the retail business, you know that that is a really big number. It is well above the minimum wage and twice what the competition is paying.

When the financial crisis of 2008 came and the whole world was falling apart, the discussion we had with our people when it was time to review wages was around how much the increase should be. Never once did we consider not giving an increase or even holding wages to where they were. That is because the contract we have with our people is such a part of the culture of our company.

We grow our own people in our organization. We promote almost 100 percent from within. Every employee has an opportunity. Our turnover, after employees have been with us for one year, drops to less than five percent. That is also unheard of in a retail business.
We have to be very clever in our business to ‘out-efficiency' everybody else because we are paying those kinds of wages, but we take great pride in the fact that we can pay what we pay. We've had pushback over the years that perhaps we are paying our people too much. One analyst made the comment, “It is better to be a Costco employee and a Costco customer than it is a Costco shareholder.” What we are doing is not altruism. It is simply good business to do that because you get good people. It is all about people.

Supportive Board

Has our board been supportive? Absolutely. We've had some great board members, such as Charlie Munger, whom everybody knows; Tony James, who is the COO of Blackstone Group; Dan Evans, who is a two-time governor and a two-term U.S. Senator from the state of Washington; Bill Gates, who is the father of “the” Bill Gates; Sue Decker, who is the former president and CEO of Yahoo. Just the other day one of our board members asked us how we are doing in Mexico in terms of paying our employees? Are we abiding by the same rules in Mexico or are we using different rules because it is outside of the country? The answer, of course, is that we are abiding by our Code of Conduct. We are paying about 35-40% more than a traditional retailer in that country. That is just one example of how supportive and engaged in our business the board is.

Life After Being the CEO

Today, I go around to about 15 different universities every year, speaking mostly to MBAs at their business schools. In addition to telling them the history of Costco, I try to leave them with two things. The first is if you get involved in something that you're not passionate about, run don't walk to the fastest exit you can find. If you're not happy and you're not giving 100 percent, you're not doing yourself any good and you are certainly not doing the organization any good.
The second thing is to find a mentor. Find somebody who you really admire. All of us have had somebody who we truly admire — somebody who we've always thought had the right answer and handled every situation right like Sol Price. But, guys like Sol are not a dime a dozen. You are not going to find them on every street corner. So don't just hope it will happen. Seek it out and embrace it.

How lucky was I to find a mentor like Sol and to get involved in a business that I love so passionately that I would work at it for all these years? I still go in the office every day and I still go into a Costco every day.

What ‘Exit Strategy'?

I am always very upset when I hear people use concepts like “exit strategy.” You are supposed to be building a business to be around a long time — not thinking the most important thing is how do you get out of this thing at some point.        â– 

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