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Lesson #2: Keep Your Costs Low and Your Quality High

Article Overview: “We only have one bullet in our gun,” says Sinegal, “the right product at the right price.” It seems to be a simple formula for success, but how has Costco managed to master it better than the rest? How has Sinegal been able to keep his company’s costs low, wages high, and sales even higher for the over ten years it has been in business?

Lesson #2: Keep Your Costs Low and Your Quality High

“We only have one bullet in our gun,” says Sinegal, “the right product at the right price.” It seems to be a simple formula for success, but how has Costco managed to master it better than the rest? How has Sinegal been able to keep his company’s costs low, wages high, and sales even higher for the over ten years it has been in business?

Costco has a unique business model that has enabled it to set itself apart from the rest. The first secret is in carrying a low amount of in-store stock. While the average Wal-Mart carries more than 100,000 items, Costco stocks no more than 4,000, one quarter of which are always changing. This leads to what Sinegal refers to as a treasure hunt. “One time [customers] may come in and see that we have some Coach handbags and they come in the next time and the Coach handbags aren’t there, but perhaps there are some Fila jackets,” he says. “The attitude is that if you see it, you have got to buy it because it may not be there next time.”

Of those 4,000 products that Costco stocks, all of them are high-quality goods. This has helped Costco attract a wealthier customer, the average of which earns an income of $74,000. Sinegal says that the “hallmark of our business is that we have developed such a high-end clientele with a high-end product selection and assortment.” So, while Costco might not carry as many products as its competitors, it carries the best two or three brands of a product and does more sales in terms of volume per unit.

To this end, Sinegal also keeps his profit margins on each item as low as possible, refusing to mark things up more than 14 percent. What Costco might lose in margins, Sinegal says it makes up for in volume. And, that volume is tremendous. In 2004, Costco sold over 26 million rotisserie chickens, $16 million worth of pumpkin pies in the holiday season, and more than 90,000 karats of diamonds. Costco has also become the largest seller of fine wines anywhere in the world.

Costco is able to keep its profit margins so low because Sinegal has also become a stickler for keeping his costs as low as possible. The fact that customers walk on concrete floors and sell goods from steel racks is no coincidence. “We’re low-cost operators, and it would be a little phony if we tried to pretend that we’re not and had all the trappings,” says Sinegal. Costco is meant to be a no-frills shopping experience so that those savings can be transferred onto the customer.

In the last few years, Costco has been attempting to increase its international presence, expanding into countries like Canada all the way over to Japan. And, while very country is different, Sinegal says, “The one constant is value. Value is appreciated no matter where you go.” It is by keeping his costs low and the quality of his products high, that Sinegal has continued to expand the value that is offered by Costco.

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Article Tags: better than the rest, business model, chickens, clientele, coach handbags, costco, fine wines, formula for success, hallmark, holiday season, karats, product selection, profit margins, pumpkin pies, quality goods, rotisserie, store stock, time customers, treasure hunt, wal mart



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