Personal Reflection Costco Case Study

Personal Reflection Costco Case Study

Examine leadership behaviors that support decision-making; (2) understand the role of power in the decision- making process; (3) apply the decision- making process to participative, charismatic, transformational and cultural leadership; (4) understand how decision-making groups can be effective in organizations


Costco is one of the largest retail sales companies in the United States, and it has more than

500 stores in 37 states and eight countries. Despite low profit margins in the retailing industry,

the company is more profitable than most competitors, and it is growing rapidly. In theUniversity of Michigan’s annual survey of customer satisfaction with U.S. retailers, Costco has

had the highest ratings in recent years.


The company’s basic strategy is to provide quality products at the lowest available prices, and

the products include clothing, electronics, and food. Costco’s leading competitor—Wal‐Mart’s

Sam’s Club—offers more variety and some lower priced items, but Costco’s products are generally

of a higher quality. Around 20% of the products consist of limited‐time supplies of deeply discounted

luxury goods and other special bargains. Examples include Rolex and Movado watches,

gourmet imported chocolates, Waterford crystal, plasma televisions, and Burberry and Coach

handbags. This strategy of temporary special bargains creates customer excitement and increases

purchases of items that shoppers had not intended to buy when they visited the store.

Charging customers for the privilege of shopping at Costco provides a steady source of revenue

for the company and increases customer loyalty. Costco has two types of members: businesses

and individuals. Even though the cost of membership is a little higher than for competitors, Costco’s

card renewal rate was over 86% in 2006, and membership increased by 14%. To increase the value

of the memberships and attract additional customers, Costco also offers services such as travel

plans, health and home insurance, banking, and financial planning. Individual shoppers average

two Costco visits per month, and many travel great distances to stock up on supplies. Unlike most

discount stores, Costco has many affluent customers who are “treasure hunting” for the special bargains

on luxury goods rather than merely looking for low prices on basic commodities.


Costco’s merchandise buyers have to experiment and take big risks with luxury items,

because a lot of money is tied up in inventory if the items do not sell quickly. The buyers need to

rely on their intuition and creativity to find items that will be popular and profitable. Innovation

in design and packaging is also important for making some types of products such as food

items more appealing to customers. Recent initiatives, for instance, include the elimination of

Styrofoam trays from meat packages and the use of individually sealed packets. The design is

more environmentally sound and enables consumers to freeze unused portions without repackaging

or rewrapping products.


Costco has generous pay, excellent health benefits, and a good 401(k) plan for its more than

120,000 hourly employees in the Unites States. The average wage for a full‐time worker at Costco

is around 40% higher than at Sam’s Club. Around 82% of Costco employees have health‐insurance

coverage, as compared with less than half of the employees at Wal‐Mart, and Costco employees

pay much less of their health premiums. Around 91% of Costco’s employees are covered by retirement

plans, as compared to 64% of employees at Sam’s Club, and company contributions to the

plan are nearly twice as high per employee at Costco. The company policy is to promote from

within the ranks, and workers at all levels have good opportunities for advancement.

The company has one of the most loyal and productive workforces in the retailing industry.

The high level of organizational commitment is reflected in the turnover rate (around 6%

for workers on the job for more than one year) which is well below the average rate of 44% for

the industry. The cost from turnover (lost productivity, recruiting and training new employees)

is 40% lower at Costco than at Sam’s Club. Employee theft at Costco is the lowest in the

industry. The savings from lower turnover costs, lower employee theft, and higher employee

productivity more than offsets the higher cost of compensation at Costco. The operating profit

per hourly employee in the United States is nearly twice as high at Costco as at Sam’s Club.

The high level of employee motivation and commitment is not only because they are

well compensated, but there is also a high level of intrinsic motivation among Costco employees.

They are encouraged to suggest ways to improve the stores and product mix, and creativityis valued. Each morning before the store opens there is a conversation about ways to be more

efficient and to provide better customer service. All employees are trained to be friendly and

helpful when customers need assistance. When shoppers need assistance in locating an item,

employees are expected to show them where it is rather than merely pointing to a distant spot or

providing vague directions.

The methods Costco uses to minimize costs include a no‐frills approach to their

stores, which also function as their warehouses. The buildings have metal exteriors and steel

racks. Instead of individual products on shelves, there are pallets on steel frames that soar to the

ceilings. Above every pallet is a card with a simple product description, and they keep everything

as simple as possible for the product displays. Marketing costs are low because Costco does not

do any advertising; there is no public relations manager or expensive advertising agency. Instead,

Costco depends entirely on happy customers who tell their friends about the fantastic bargains

available at Costco stores.

The company keeps layouts standard in its stores to reduce costs and give shoppers a feeling

of familiarity at every location. The products sold in each store are similar, except for foods,

which vary according to local tastes. Inventory costs are reduced by having only a limited variety

of product sizes, and by packaging many products for bulk sales. Products move right from

the delivery truck to the sales floor, and the signage looks like it was made with a cheap laser

printer. There are not even any shopping bags for customers. A computer system that tracks

sales in the stores makes it possible to determine when more fresh foods are needed in the display

cases and reduces costs from waste and overproduction.


Jim Sinegal, the CEO of Costco, is very modest about his contribution to the success of

the company and quick to share credit with others. He understands how important it is to have

talented people working for a company, and he does many things to attract and retain them. At

the company headquarters in a Seattle suburb, his office is an open space with no door. His

desk is pushed up against the wall so that, at first glance, he appears to be someone else’s secretary.

Sinegal usually answers his own phone, uses a nametag like other employees, and usually

wears one of the low‐priced dress shirts sold in his stores. As the cofounder of Costco, Sinegal

is a major shareholder, but his annual compensation is only 10% of the average amount for

CEOs. He tries to limit his salary and bonus to no more than twice what a Costco store manager

earns, and he declined his bonus for the last three years in order to achieve that objective.

At the annual Managers’ Conference, Sinegal meets with more than 1,000 Costco managers

and product buyers to review the past, discuss the present, and plan the future. He also has

monthly budget meetings with groups of around 70 store managers to talk about the importance

of exercising tight cost controls, getting the details right, and adhering to the Costco

credo. Important values at Costco include hard work, respect for customers, and high ethical

standards. Sinegal communicates a strong concern for high performance, but he is not coercive

or overly critical. He is careful not to discourage his product buyers when they take risks on new

products. Employees are empowered and encouraged to “think outside the box.” Sinegal still

attends every new store opening, and he tries to visit every Costco store twice a year. He spends

nearly half of his time on the road checking out his stores as well as the competition to make sure

they are not undercutting Costco’s prices.


Sinegal has a strong concern for his employees, and he is perceived as dedicated, caring, and

hard‐working. He is able to remember the names of most of his managers, and they know him by

sight. At a recent annual meeting when he answered a question by stating that he had no plans to

retire soon, the audience gave him a spontaneous standing ovation. In 2003, the rising cost of healthcare made it necessary to increase the employee contribution to their health insurance. Sinegal sent

a letter to employees explaining why the increase was necessary, and the letter generated more than

100 responses, nearly all of which were supportive.

Sinegal tries to do what is right for employees, customers, vendors, and stockholders. Recently

a major decision was made to put a 90‐day limit on customer returns of electronics products. The

old policy was unique in American retailing, but it was becoming too costly. The new policy could

save the company more than $100 million a year, but Sinegal did not want to change it without a

viable alternative. Thus, as part of the new policy, he decided to extend the manufacturer warranty

by a year.Copyright © 2008 by Gary Yukl