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8 Tips for Business Success from Costco's Jim Sinegal

9 Tips for Business Success from Costco?EUR(TM)s Jim SinegalThink you know it all? Here are a few start-up lessons from one of retailing’s greats.

Costco, the well-known discount-warehouse store, was started in 1983. By 2004 Costco had become the 5th largest retailer in the U.S. and the 11th largest in the world. Sales by store and online have continued to grow, with Costco.com reaching $1 billion in annual revenue and each location averaging $130 million in sales every year by 2007. It is also recognized for its loyal customers and happy employees. All of this in spite of Costco’s unusual approach of requiring customers to pay for the privilege of buying things.

As one of the smartest and most successful retail shops besides, maybe, Walmart, what has Costco done to build this success? To start, here’s what co-founder Jim Sinegal says about his operation: "Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, and billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members." But this quote is just the tip of the iceberg.

Here are eight other keys to Costco’s success:

1. Put the customer first. This seems obvious, but consider Costco’s $1.50 hot dog. After 15 years, its price hasn’t budged. To keep costs and prices low, Costco execs built their own meat plant and bakery. Essentially, Costco completely changed the way it did business for just one product. And that’s in spite of the reality that most customers wouldn’t notice slow price increases. The decision was about doing the right thing for customers, not impressing them or even keeping them loyal. That’s a customer focus that goes all the way to the bone.

2. Eliminate the frills. Costco warehouses have concrete floors and the same boxes that products arrived in are used to hold customer purchases. Shelving is simple and steel and you often have to pull your own goods out of the original shipping containers. But when you can get top-notch produce and meat at prices noticeably less expensive than standard grocery stores, it’s not about the ambience.

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3. Bring your truck. You can pick up a bathroom vanity that would cost several thousand dollars in another store for $700 to $800, but you’d better plan on bringing your own truck to get it home. In recognition of the challenge of offering larger items, Costco lets customers use flat-bed carts for easier loading and unloading — and that’s it. Costco’s business centers and Costco.com do, however, offer delivery for high-dollar purchases.

4. Offering the best. When you’re saving serious money on Dom Perignon champagne or lobster tails and bacon-wrapped scallops, it stops being about finding bargains. By choosing to offer luxury goods at warehouse prices, Costco has gained a cachet even among those who regularly shop retail.

5. Private labeling. The Kirkland brand, Costco’s generic product label, is one of their smartest decisions. It’s because Kirkland products are often better than the recognized brands, but cost significantly less. Large volumes allow Costco to source and offer exceptional deals with Kirkland products.

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6. Rewarding employees. Costco provides exceptional benefits including medical with subsidies for spouse and dependent coverage, dental, vision and a 401(k) plan. Other pluses such as short and long-term disability and life insurance are part of the package. They even offer long-term care insurance for employees with more than 10 years with the company. Costco is also committed to promoting from within. Most of Costco’s managers started in a warehouse.

7. Valuing suppliers. Unlike other retailers, Costco works closely with its suppliers to help them discover ways to run their businesses better. The company is committed to supplier diversity and makes extensive use of regional sources for fresh meat and produce. The magazine sent to Executive Members, Costco Connection, has numerous articles that recognize suppliers for their ethical and smart approaches to their business and their products.

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8. Sticking to the fundamentals. Costco’s philosophy and values haven’t changed since its start, despite the company’s incredible growth over the last few decades.

What management tips would you add to this list? Let us know in the comments section below.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Adam Toren is a serial entrepreneur, mentor, investor and co-founder of YoungEntrepreneur.com. He is co-author, with his brother Matthew, of Kidpreneurs and Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right (Wiley). He's based in Phoenix, Ariz.
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