Jim Sinegal – Provost Lecture Series Spring 2017

Ladies and Gentleman please welcome San Diego
State University’s President Dr. Elliot Hirshman. Thank you and good afternoon. And on behalf of our more than 350,000 students,
faculty, staff and alumni it’s my pleasure to welcome you to our provost distinguished
lecture series. We’re honored that our speaker today is Jim
Sinegal CEO and Co-founder of Costco a legendary American retailer. One other thing you should know about Jim
he is a proud SDSU alumnus we are very glad that you are here to day Jim, welcome. I’m also very pleased to see many university
leaders here in addition to our Provost of course, vice presidents, associate vice presidents,
deans, department chairs we appreciate what you do everyday to move intellectual engagement
and the life of the mind here at San Diego State. Please join me in recognizing our university
leaders. And I want to give special recognition to
Provost Enwemeka who launched this series. Now when you have a leadership transition on
a campus it’s natural for there to be some trepidation and apprehension, but such transitions
represent opportunities to bring new perspectives to a campus. And when Provost Enwemeka joined us he brought
the recognition of the great value of bringing distinguished speakers to our campus and he’s
worked very hard with his staff to develop this important series. So thank you Provost Enwemeka for your vision. So this is about a communal goal. It’s a goal to make SDSU a place where scholars,
artists and thinkers consider the great issues of the day and create solutions to our societal
challenges. The Provost Distinguished Lecture series is
an important step toward that goal and it’s my great pleasure to introduce the creator
of that series our provost Dr. Chukuka S. Enwemeka. Good afternoon everyone. It’s my distinct honor and pleasure to welcome
all of you to our 3rd Provost Distinguished Lecture. Standing up here and receiving all of the
acknowledged from the president it really feels very good, but I can tell you that most
of it can go to Joe Belch, interim Dean for the College of Business who actually helped
us to organize this and bring our distinguished speaker to come. So please give a round of applause to him. And of course it took a lot of effort and
a panel of many people to organize this so my thanks and my appreciation goes
behind the scenes put this event together. So if I start naming them I’m very sure I
would miss out on some of their names. Let me attempt to introduce our distinguished
speaker. By all accounts its quiet impressive to introduce
him as the co-founder and director of Costco. There’s a few who are familiar with Costco.
Costco. Just looking at the sheer magnitude of each
of the stores. And in that large number of stores that we
have in this country and in 10 other countries, it’s impressive enough but that wouldn’t do
justice to the introduction that I’m supposed to do this afternoon. Jim begun his career in 1954 at a retail business
here in San Diego. As a college student, he happened to have
the opportunity to work with the legendary retailer Sol Price. When they ran a discount store called FedMart here in San Diego. He stayed there for about 23 years before
he co-founded Costco with a partner of his Jeff Brotman. If you do the math, 23 years plus 1954 puts
you right about in the middle of the 80’s so Costco came into existence right in the middle of
the 80’s when they started this. He served as CEO of Costco for 27 years. The founding CEO of Costco, so in a sense
he actually built Costco into the giant enterprise that it has turned out to be today He retired from Costco in 2012. And as evidence from the fact that he remains as advisor to Costco, he wasn’t tired when he retired. Costco is big, really big, really really big. They make a revenue of about $113 billion
not million but billions. 722 we’re wholesale stores, in a total of
about 11 countries if you include the United States. 10 other countries plus our own country. They are in 44 states in the Union and also in Puerto
Rico, more than 200 thousand employees work for Costco, so this is really big. Besides founding Costco, one of the things
that is really interesting about Jim is his own personality. I met him first this morning at about 9:30
today and one of the things that touched me a lot is how simple he is. He is a simple man, down to earth and when
he comes onto stage you’ll probably see that he doesn’t have a tie on or a suit or anything. In 2006 he was name in the 100 most influential
people in TIME Magazine. In 2009 he was named by US news and World
Report as one of America’s best leaders in April of 2011 he was named 5th ranked by Forbes magazine by Forbes magazine
as one of the most favorite bosses in America. And you’ll love this he is a alumnus of SDSU. He graduated in 1959. In 1999 he received an honorary doctor of
letters degree from SDSU as well. At present he serves on the board of SDSU’s
Campanile foundation board. He is also on the advisory board of Fowler
College of Business and in the last several days he will serve as an executive in residence
in our Fowler College of Business. I could go on and on about this introduction
but I know I am taking the time that is supposed to be given to the lecturer that is here to
present. So I simply ask you to join me in a big round
of applause to welcome our own Jim Sinegal. Is the mic on? You know to be introduced and be honored by
the president of the university and the provost is quite a thing. I can tell you it wasn’t always that way guys. As a matter of a fact I told a class earlier
this morning when they offered me the honorary doctorate my suggestion was that they look
at the transcripts number 1, but secondly maybe we should start with something a little
more modest like maybe a C in accounting so. I’m going to show you a film, and this is
a film that we did at our last share holders meeting in January and the reason I show it
is I think it gives a flavor of Costco. Number 1, Costco doesn’t engage in the traditional
advertising that you see. You’ll never see us on television or see us
in magazines or in the newspaper, so we count on word of mouth and we count on some of
these news agencies doing stories and of course we are easy to make fun of, the types of products
that we have so you’ll maybe get a kick out of some of that. But I’ll show you this film then I’ll give
you a little history of how we got ourselves started here. Warehouse shopping Costco announced that they
will be launching a new credit card, just what people who buy 5 gallons want a paper
trail. This is the place where you shop for the essentials
but end up with a whole lot more. When you come in for snacks and you leave
with a giant bear. Yep, a giant bear. That place is called Costco. Where you can buy almost anything, just be
sure to bring your visa card. Some one at Costco has to tell me how I’m
supposed to sample this toilet paper. Well who doesn’t love Costco, seriously! I want you to go by Costco. He’s also chair of the petroleum counsel, founders of an autism charity and
number 10 of Forbes list of top business women in the country, did I leave anything out? I’m also a member of Costco. I’ve never been to a Costco. What? I know. Costco’s the best. Well calm down, I mean is it really. But why would I want to go to a Costco? Because you can get everything supersized
and it will last so much longer and it’s so much cheaper. You save so much money, I guess I’m all about
Costco, and they treat their employee’s really well. Costco offers consumers a valuable proposition,
with a treasure hunt like a treasure hunt like shopping spears. By the way I think a Costco membership is
the greatest bargains known to man. Washington is home to some of the nations
best the best big companies that’s according to the Forbes list of the best employers of
2016. Forbes surveyed more than 30,000 of US workers
and for the second year in a row, Costco earned a top spot. It came in at number 3. Ya i just got back from the Costco Food Court
and it was actually really good. It’s kinda weird especially being in Brooklyn
where there’s like a hip cool restaurant every block most of which i ran past to run into
this Costco to wait and eat but look at these prices. This stuff is crazy cheap. I ended up getting the BBQ brisket sandwich,
the hot dog, something called a chicken bake a churro and a soda and it cost 12.05. 12.05? Look at all this food. Do you feel like you’re free now that you’re
18, like there’s things that you can chew tobacco now legally. Yes I can technically legally chew what ever
kind of tobacco I want to. You can donate blood. Oh wow, ya. You can get a Costco Membership. Uh huh. Do you have one? Ya know I’ve been trying to get a Costco membership
for years, and they denied me. Why did they deny you? You didn’t have 40 dollars? When I saw your tie this morning I immediately
say I like that tie. And what did I say? It’s a Kirkland tie, who is Kirkland? That’s Costco and Costco had them. I am a Costco member, my wife is an executive
Costco member and we are also amazon prime and they can co-exist David. This is not like the Soviet Union it is not
an evil empire. They can co-exist A Morgan family survey shows that Amazon is
not stealing Costco’s customers. Costco is for small business owners, retailers
they love Costco. You’re absolutely right. Anybody who needs pallet loads of stuff. How do you get into Costco, I’m sure we have
a lot of viewers who have products. I want to be on Costco’s shelves. How do you do it. It’s the Holy Grail of retailers. We’ve always said it gave us the platform,
the ability to grow our company and redo and reform our company strategy, and they want
the best value for their member and that’s why they have so many members. You just told me you signed up for Costco
recently, it’s something that is. Well I said I hadn’t been to one so I signed
up last week. The Costco business model is incredible and
that’s why people love it. The crazy coupon lady Joanie Demer, compared
prices on 170 popular items at Costco, Sam’s and Amazon. We found that Costco was still 12% less than the average price of those item’s when we compare it to amazon subscribe and save. Sam’s club takes second place on average their
stuff is 5% higher than Costco, it turns out Amazon was the most expensive in her test
even with the free shipping. For most of their lives Julie and Wayne do
what the rest of us do, when they needed a prescription filled they would head down to
their local pharmacy and got it filled. But, they told me that if they had continued
to operate that way they could no longer afford their home. We’d be bankrupt, cause it would either be
money to pay the mortgage and eat or buy the medicine because i have to have the medicine. But with this new discovery that was not the
choice they would have to make. Julia then called rite aid, Walgreen’s, Walmart and Costco to ask about a 180 count of 30 mg of Actose. The generic 753 dollars. Rite Aid, 1,529 dollars, Walgreen’s was the
highest at 1766 dollars. How are people supposed to do that. The Costco price was $51.28. Okay, this is a picture of Pittsburgh and
that’s only relevant to me I grew up there. I lived right within the triangle that you
see there with those rivers. And I moved to California when I was 15 years
old, I wound up staying out here. I thought I was coming out for a temporary
job. I had an uncle who owned a fishing boat, who
invited me to come out for the and for the summer. That was really my introduction to retail
because I wound up staying here. In 1954 I started working for a gentleman
by the name of Sol Price. Who was the CEO of Fedmart. It was a part time job I thought I was going
to do something else in a career, I thought I was going to be an attorney but I fell in
love with the retail business and stayed their with that business for 23 years as I say. Then eventually got into the very early
stages of the price club as well. And after having been there for a period of
time, I decided that I’d go out on my own and get started with my partner. And I think we are missing something here
but I guess we aren’t. So the price club was founded 1976 in San
Diego, the first unit was down on Morena Blvd. It was what you’re all familiar with. It was high quality goods, low prices, no
advertising, very low expense ratios and extraordinary sales productivity and they we’re very successful. In 1982, they decided to go public and the
world found out how successful they were. At that time there were about 8 Costco’s and
they were doing about 500 million dollars. And as they say, because they were public
everybody knew that this was a profitable business. Walmart got involved and started Sam’s Club
about that time, there was an outfit on the East Coast that starter B.J.’s, there we’re
several other start ups as well and Costco was one of them. My partner and I, Jeff Brotman and I, we met,
we wound up getting started and starting our business in Seattle. This is a picture of one of our openings in
Anchorage Alaska. I didn’t know anything about the north west
or Alaska for that matter. So this was in December, it was about 4 below
zero and all I took with me was a sweater. So retailers aren’t all that smart. So, Jeff and I met as I say, we drew up plans
to start the business, the idea was to clone the price club. We didn’t want to do anything fancy in the
first instance just do what they’re doing and if we do that we’ll have time to innovate later And as I say the price club had been started
several years before that. We went out and raised the money ourselves,
we raised about 7 1/2 million dollars from friends and acquaintances. About half of it from southern California
and the other half from the north west part of the country. And we used that 7 1/2 million dollars to
hire our first 10 founding officers who came to work for us and we used that money also
to open our first 3 Costco’s. One is Seattle, one in Portland Oregon, and
one in Spokane Washington. The original business plan that we gave in
order to raise this money we told everybody we thought we could eventually grow to 12
Costco’s. We were going to be a Northwest company, you
see the cities there that we intended to open in. We thought that if we could average about
80 million dollars a business we could eventually become a billion dollar company and return
a profit of about 3%. This is a picture of our first Costco, in
Seattle. It’s made to look purposefully grim. For those of us who are from California, we
thought it was always gray and raining there. It’s actually not it’s actually a very pretty
city, and we’ve rebuilt that location on the same site we bought the piece of property
and we’ve added at this point some of the things we’ve added to our business over the
years, things like gas stations, pharmacies, fresh food and other new products. This is a picture of one of our really brilliant
merchandising displays. In the beginning as you can see we didn’t
have much imagination. As time went on with the help of our suppliers
as we learned things we became a lot more sophisticated and what we’re doing this is
kind of a typical Costco that you would see now. In 1985 we expanded and we expanded into Canada
and to California. Well you might say that I thought you we’re
going to be a North West company we concluded at that point, it became obvious to us that
there was a significantly bigger market that was available to us. And significantly more investors were interested
in coming along with us at that point. So this was our entry not only into a new
state but also a entry into a Canada and a new country. Of course we looked at Canada and we said,
it’s only 140 miles away how tough can it be. Well we found out, it was a different country,
they had different laws, they had different system of currency, they had different systems
of measurement. In other words they were an independent nation. Go figure.1986 we opened up in the Midwest
in Minneapolis and Milwaukee, 1987 we got out of the Midwest. It was pretty obvious that what we had done
was underwhelming. We were not doing well and we became, for
those of you who are studying business, it was the classic example of spending 80 % of
your time on 20% of the problem. We changed and decided to take the very tough
position of closing which was a very difficult decision. We had to admit that we failed, it was very
painful to us, but it was the right decision at that time. When we left we left on as good as terms as
we could, we refunded every single dollar of membership that we had collected we offered
every employee a chance to come with us to a another city or a severance package. We paid our supplier completely every dollar
that they were due. Because we knew at sometime we’d probably
be coming back to the Midwest. 1988 we started introducing fresh foods. Of course you don’t get to buy just one steak
there. You got to buy a package with four or five
steaks at a time. In 92 we opened up in Mexico. This is a neighborhood bedroom community
of Mexico city. Same thing in the UK. We opened up in the UK in a bedroom community
of London in 1993. In 93 we merged with the company that I mentioned
Price Club so we became for a very short period of time Price Costco and that eventually just
changed the name to Costco. Opened in South Korea in 1995, one of the
differences we found in Asia because land is so scarce and land is so expensive, you
have to build vertical. So instead of having a big warehouse with
700-800 cars of parking in front we had to build 2 floors of selling and 5 floors of
selling with people movers inside the building. Escalators to take the people up and down. We got into the eCommerce business in 1999,
one of the hallmarks of our eCommerce business is that it’s been profitable since the day
we opened it. And today it is a very important part of our
business plan and business strategy. We opened in Japan in 1999. That gray haired gentleman that you see on
the right there that’s Tom Foley who was the former speaker of the house of congress. My partner Jeff is standing next to him and
I’m in the center, and that young man who is hidden behind the hammer there next to
him is one of my sons who opened up that business for us in Japan. We’re breaking the traditional Sake Barrel
and there is no way you can do this without getting Sake all over yourself. You smell like a rummy huh. Costco today is the 2nd largest retailer in
the world. 15th largest fortune 500 company and has a
market cap of 77 billion dollars. You see the places we have warehouses. We have 727 warehouses the preponderance of
them in the US with 508 here, we have 94 in Canada, 36 in Mexico, 28 in the UK in England,
Scotland and Wales, 25 in Japan, 13 in Korea, 13 in Taiwan, and Australia and Spain are two of our new countries. This May we will open up in France. Some openings that we’ve had, this is in the
UK, another one in the New Jersey area very close to Princeton University, this is Louisville,
Kentucky recent openings, this is Nebraska this is near Omaha it’s the neighborhood, this
is Redmond Washington home of Microsoft and we just opened up this building here just
a few months ago. This is one of our new openings here in Taiwan
with the same type of plan having to go vertical as opposed to horizontal. And in Taiwan they have more motor scooters
than cars. it is absolutely astounding to see what people
can get on a motor scooter. Well you know how big the packages are at
Costco. Well this is somebody going home with one
of our bears. And this is another opening in South Korea. Costco today our sales for the last fiscal
year was 116 billion dollars. We have a 104 million square feet of what
we refer to as warehouses, we have 213 thousand employees on a worldwide basis and have about
2.5 million transactions per day. Our merchandising strategy is very simple
but quite unique we have a very limited selection. We carry something less than 4,000 items. To put that into perspective for you if you
were to go into a Walmart or into a Target that has essentially the same categories of
merchandise that we do, they have about 140 thousand items. So we really preselect the products that we
are selling, we try to get the best value that we can in every single category of goods
that we sell. They are generally high quality national brands,
augmented by our private label, which is our Kirkland Signature label. We have to be able to show a savings on everything
that we sell. If we can’t show a savings we don’t carry
it. We had a situation in Portland for about two years and we didn’t
carry sugar because every super market in the city was selling sugar below cost and
we couldn’t save our customers any money. Our attitude was if they come in and they
see that we can’t save them money on the sugar, they have every reason to believe that maybe
our pricing isn’t so hot. The Michelin tires and the Sony Television
set, it’s a chink in the armor and we won’t engage in that. We’ve gotten into a lot of package innovation
which we’ll discuss in a little bit and a lot of new products and services have been
added over the years. This probably is one of the examples that
illustrates best what part of our merchandising program is. If you were to go into a typical super market
you would probably find about 350 stock keeping units in the isle, various sizes and various
brands. We try to go out and find somebody who will
make the largest box of cereal in the world, put it on a pallet, and simply move it into
a position with either a paddle jack or a forklift. It’s a matter of seconds for us to move it
in there. If you think about the labor that’s involved
with cutting open cases and hand stacking merchandise on the shelf and ringing through
a lower ticket item, you start to see the scope of the savings. Now at Costco you’ll only have about 12 cereal
items compared to 350 so we really hope you’ll like cheerios. Costco’s strengths. We have 87 million people who are running
around with a Costco card in their wallet. They are very strong renewals, they are very
loyal to us. We’ve established what has been referred to
as absolute pricing authority, there was an analyst with Goldman-Sacks who a number of
years ago hung this tag on us and said, more than any other retailer in the world Costco
has established absolute pricing authority. If you see it at Costco you’re pretty sure
you’re getting a good deal and you’re getting the best price you’re going to find. And we of course like that description of
ourselves and we try to live up to it on a continual basis. We have great employees, fantastic employees,
great merchandise, we have created a treasure hunt atmosphere. When customers come in they may find one time
that we have a Coach handbag and they come back and we don’t have the coach handbag any
longer but perhaps we have some Levis that we are selling at a hot price or we have some
Waterford crystal. We try to create a sense of urgency that if
you see the product there you better buy it cause chances are they won’t be there next
time. We like to think that we are nimble. We like to think like a small company that’s
not easy when you have 213 thousand employees. But it’s very important for us, because that’s
the way we are able to navigate our way through the competitive situations. And of course value doesn’t mean cheap, it
means quality, we have established a quality reputation for everything that we sell. We’ve become, to our knowledge, we think we
have become the biggest wine merchant in the world. We don’t know of anyone who is selling more
wine than us. Costco is the number one buyer and resale
of wine on Earth. Period. Everything about selling wine in America is
known by their buying team. Which brands, which varietals, which price
point, what packaging, everything. They know everything. Everything. How would you like to be that guy? He got hammered pretty good, I hope he got
the money. We of course have apparel with name brands. Products, Kirkland Signature is one of our
products. This is a Kirkland Signature dress shirt,
we sell it for $ 17.99, stitch for stitch, button for button, it’s as good of a shirt
as you’re gonna find on the Nordstrom label or on the Brooksbrothers label those are shirts
that sell for 70 and 80 dollars a piece, 17.99. This is a Kirkland signature shirt that I
have on. I warned the group before that I spoke to
this morning, not to judge it by the way it looks on me, it’s a very good garment. Some diamonds, we sell lots of diamonds, we
had a sell recently of a $449,999 diamond. We’ve had last year we sold 159,000 Carats. The presentation that I did here not so long
ago, somebody asked me the question “What does that mean 159k Carats?” And I had to admit I had no idea what that
means, but its a very impressive number. Fresh foods as I had mentioned before, a big
department for us, we are the biggest seller of prime and USDA choice steak in the country. Seafood roadshows, this is an item here Alaskan
King Crab legs we were selling these for 19.99 and I think the price says 18.99 if I’m not
mistaken but every supermarket in town was selling them for over 29 and 30 dollars. Pumpkin pies, 12 inch, we’ve had this pumpkin
pie is 5.99 for 25 years. It’s a great pumpkin pie, if you walk in if
you go into a Costco the three days before Thanksgiving Monday, Tuesday and Wednesday
before Thanksgiving we are selling these pies so fast, and we try to keep them refrigerated. We take them out on the floor and the people
are following the pallet jack and buying them off the pallet jack there. And I’ll tell you it’s enough to bring a tear
to your eye. This is not an unusual order that we have
at that time of year. Fresh fruit and produce we buy produce from
44 different countries from around the world. Our chicken 4.99 chicken, it’s a 3 lb chicken,
for those of you who are students you have to all be buying this thing. It’s a way to feed 2 or 3 of you at a time. Our pharmacy. You saw the prescription clip that we showed
here. That type of story is one in about 35 major
cities, in the United States about the pricing of our prescriptions. It’s all tailored to the specific market where
there televising the program. And I abbreviated that, that story was about
x3 as long as you saw there. You can imagine getting that type of notoriety
on television night on the five o’clock news and eleven o’clock news, things that you couldn’t pay for. Our optical, over 5 million pairs of glasses dispensed
last year. We have had the reputation and rated the number
1 optical chain in the country for the past several years. Our food court. Our hearing aid station, our Kirkland Signature
which is our label and the label that we established. We used Kirkland because we could clear it
for every product in every category, every country where we are doing business. Kirkland was also where our home office was. And right after we settled on Kirkland we
moved our office to Issaquah and nobody could spell issaquah so we stayed with Kirkland. And it’s in a whole array of products, it’s
on everything. We put it on vodka, we put it on salmon, we
put it on clothing, nuts, cookware. Interesting fact, in Palm Springs the Kirkland
Signature brand of vodka is the number 1 item that we sale in that warehouse. The number 2 items, is another Kirkland Signature vodka. This is a chart that shows, and if you start
at the bottom you see Gillette there that they do about 7.9B dollars with their label
and it runs up the course there to coke which is 23B dollars with the coke label. Now look at this, the Kirkland Signature did
24B dollars in sales, we’ve established a very strong label in these products. Our Gasoline, we sell lots of Gasoline. I’ll show you this chart, it’s a little bit
dated but its interesting. Is she talking about the gas prices around
the valley that seem to be growing or the line of cars that keeps growing at Costco. This is the place to be today, while a lot
of gas stations are sporting prices in the $1.47 range, guzzling gas will cost you 20
cents less. 1.28 per gallon at Costco in Scottsdale. Costco says their cost structure helps keep
these prices low. But not everyone can get in on the deal. You must be a Costco member if you want to
buy gas here. For some members, it seems the Costco names
coupled with the long lines was enough to real them in. Apparently it’s go to be cheaper here, that’s
why I’m here. Oh so you haven’t even seem the prices yet? I have no idea what they are going to charge. As you can guess from the pricing, it’s a
dated film but I love it so much for that guy to say that and that again is a abbreviated
story and it appears on the 5 and 11 o’clock news, so part of we feel is so important about
word of mouth advertising. This is are our people, we have fantastic employees,
they are our best ambassadors, we provide good jobs and good careers for them, we promote
almost 100% from within our company that’s part of our strategy, everybody is included. if they want to build a career they have the
opportunity and this is not altruism, this is good business. Hiring good people and keeping them and having
them stay with you is simply good business. I mentioned the fact that 213k. Just someone who works on the floor or is
pushing shopping carts out in the parking lot or is stocking the floor is making over
$22 an hour, compared to our competitors that are paying just 11 and 12 dollars an hour. In addition they have a full benefit package,
it’s a very stable work force for us. If an employee stays with us for over a year
our turn over goes down to 7%. Which in our business is incredible, incredibly
low turn over. We’ve always felt that if you go out and hire
good people and provide good jobs and good benefits and good career opportunities, that
good things will happen in your business. Every year we graduate out of our workforce
about 1K employees and one of the new places that we recruit when we open a new Costco
is in the local University. We’re looking for Part time workers and many
of them decide to make and build careers with us at that time. Of all the money and all the dollars that
we spend on running our business 70 cents of every dollar that we spend is spent on
people. It is by far the most significant expense
ratio that we have. So our conclusion there is that if you are
going to spend 70 cents, 70% of all the money that you spend, you better do that well. It is clearly the most expensive process that
you have in your company. Our operating mission is very simple. Constantly strive to bring goods & services
to market at the lowest possible price. We look at every item and judge it in that
way. When you have less than 4k items you can spend
more time doing that. But where a typical retailer might “Gee I’m
selling this for about 29 bucks I wonder if I can get 31 for it.” We look at it and say I’m selling it for 20,
how do we get it to 18. And if we get it to 18 we want to see what
we can do to get it to 16, we really focus on that constantly. Everybody works on that and that’s through
all the efficiencies that we can bring to the market place. Costco is a top line company, we don’t do
very well if we aren’t doing a lot of volume. If we aren’t doing a lot of volume our expenses
get out of line, it’s a very tough business to run. But when we’re doing volume and we must have
top line, then we are successful. And that’s the key to our business. I tell this story because it happened at the
very beginning when we we’re starting our company. We applied for a beer and wine license in
the state of Washington at our first location in Seattle. We had all sorts of troubles, we had delays
where they wouldn’t come out and see us. They called and they didn’t like our name. Our name at that time was Costco Wholesale
Club. They said you got to change the name. You can’t be a club and sell beer and wine
in the state of Washington. So we said OK, we’ll drop the word club. They came out and they did a significant audit,
they were checking to see what we were buying mayonnaise for and what we were buying watches
for. Things that had nothing to do with beer and
wine, but they were putting us through the ringer for a lot of those things. Then they came out and said you have to post
your intention to sell beer and wine which we did for 30 days as was required by law. They came out at the end of 30 days and said
we didn’t mean here. And they moved it over about 5 feet on the wall on the other side, so we had to re-post for
another 30 days. So it was pretty clear what was going on. Finally we went through the second thirty days and they came back to us and had one more request We don’t like the name Wholesale either so
you gotta drop wholesale from your name. Well that was my reply. Of course I know the report with the auditor
was slipping quickly after I said that. And so, somebody who was with our board of
directors Knew people in Washington, down in Olympia and went down and convinced them that I was temporarily
insane and got things back on target. But I’ll tell you something if we can find
that inspector that put us through the ringer on this stuff we would give them a big thank
you because it made us a different company. It made us focus on what we were going to
be and what we we’re going to stand for. We we’re determined at that point to overcome
any objections that anybody had for doing business with Costco. We said OK we are going to give a guarantee
on every single product that we sale. If you are unhappy with it you can get a refund. It will be easier to get a refund form Costco
than the finest department store in the country. We’ll have a 100% guarantee on membership
also, if someone is unhappy after 10,11,12 months we’ll give them all their money back. We’ll give them all their membership fee back. There’s be no misleading claims, no superlatives,
no advertising that was easy we didn’t intend to advertise. Be a minimum mark up and a maximum markup. Every deal that we bought, the customer was
going to get. If we made a good deal on something they we’re
going to be the beneficiaries. There’s as a matter of company policy, no seconds
or no irregulars that would ever be sold in our buildings. And lastly, we decided that no one would ever
be able to say that we are making money off of the backs of our employees because we are
going to pay them the best wages and benefits than any retailer in the country. So again, it really is a lucky break for us,
that it happened that way because it made us focus completely on how people were going
to say what’s the deal with these guys. This is a crazy deal, you have to pay to come
into this place whoever heard such a nutty thing. And you have these forklifts running around,
you have stuff stacked to the ceiling. It was imperative and if that had not happened,
then we might not have focused as much on the course of action that we wanted to take. Our code of ethics became a very simple thing,
this is the way it’s stated. We think we have 4 things that we have to
do, 4 things. We got to obey the law, we have to take care
of our customers, we have to take care of our people and respect our suppliers. Pretty much in that order. Obey the law, take care of our customers,
take care of our people and respect your suppliers. We think it is possible to succeed short term
by not paying attention to 4 those things. But long term, if you aren’t paying attention
to them you’re going to stub your toe pretty badly. And you’ve all seen examples of it. People who didn’t think the law was necessary
to obey. We’ve seen people who have had labor problems
all over the place, people who have lost total confidence from their consumers. And we think if you do those things, what
you have to do as a public company what will happen is you’ll reward your share holders. Why did Costco succeed? We never ever had an exit strategy, we didn’t
build this business to sell it, we had lots of opportunities early we could have sold
the company dozens of times. A lot of people wanted to buy it, that was
never our intention. We wanted to build an institution, we wanted
to build a company that would be here 40 and 50 years from now. We thought we owed that to all the stakeholders
of our business. That they had that type of security. We understand the disciplines, anybody can
sell merchandise for low prices the trick is to be able to make money while you’re doing
it. We’ve assembled a great team. We have great merchants, we know how to buy
and sell merchandise and it’s a fun place to work. But the last thing, you can take all those
others and say well okay never an exit strategy, discipline, great team, merchants but you
also have to have a break somewhere along the line. That often happens to businesses that they
don’t get that lucky break somewhere along the line. We had a lot of good fortune, and I guess
my comment would be that if you are in business and if you’re successful and if you don’t
recognize that you had some good fortune, you’re a fool. Because you have had. Since we went public in 1985 we’ve had our
sales have grown at a compounded rate of 12.6% annually. Our net income of 12.8% annually and of course
our stock price of 16.5% on an annual compounded rate. So we think that we’ve delivered on the promise
to reward our share holders. There were just a couple of other slides anyway
so I can just finish them, one of them, by the way I wanted to show you this. The Pope was visiting Juarez, Mexico and somebody
got a shot of him standing in the Pope Mobile blessing some people along the road right
in front of a Costco. Now, I’m not trying to suggest some sort of
spiritual significance here but has anybody seen a picture of Walmart like that. So i think the show is concluded here. Thank you very much. Jim thank you very much for a very informative
and outstanding presentation. My name is Joe Belch, I’m the interim Dean
of Fowler College of Business and I’ve had the honor to work with the provost and help
coordinate Jim’s visit not only for this event but also as an executive residence for the
next several days in the college. He already spoke to a class this morning and
they were just thrilled to have that. You can see by the crowd today that a lot
of people appreciated the opportunity to hear from you today. We’re going to open it up to questions, there
are mics on each side so if you’d just like to line up behind the mics we can let you
ask Jim any particular questions you have an I’m sure he’ll be happy to give you some
insightful answers. And we’ll start on this side. Hey Jim, Cody over here how’s it going. I saw you give this talk about 4 years ago
over in the Athletic Center, and I just wanted to thank you for inspiring me and my co-founders
we started a tech company and I raised about 2.5 million dollars and I now employ over 20
people including 11 Aztecs so I just wanted to start with a thank you. The first is if you can kind of expand on
the culture of Costco and the employees, because I think it’s one of the most important things
you need in building a business is a culture that fosters growth and success. We just had lunch with a group of Dean’s and
they asked the same question, the question was about culture. And our attitude at Costco is that, Culture
is not the most important thing in a company. It’s the only thing, it dictates every action
that you take. If your culture is how you are going to respond
to any situation so we can sit here, it is primary importance to us. And maintaining that culture we feel that
we have to work continually not to lose that aspect of our culture, it’s very important
to us it’s something that is our culture the way our employees describe it is do the right
thing. And the way we try to run the business so
we’ve been successful like that and we will continue doing that. Yes well I’d like to know what happened in
Minneapolis and Milwaukee, what were that you learned from those two stores not working
out when you decided to put them there well I could have dealt with a lot of things that
we didn’t do well on but we are on a time limit here, we have lots of mistakes that
we could go through. That was an area, one of the things that we
discovered and we think that it’s probably true to a certain extend that often times
you find new concepts like the Price Club or any type of retailing, online purchasing
or anything else that starts and is very successful on the two coast then moved to the center
of the country. No that’s kind of an alabi for the fact that
we didn’t do well there. But I think probably that there is some of
that is that we probably didn’t do a very good job of selecting our sites and we should
have stuck with it longer. I think one of the regrets is that we got
out of there we eliminated, we were talking at that time about whether or not we should
add fresh food and see if that would make a difference to our business. But then we determined that no we aren’t going
to do that we’re going to be spending more money on and like I said it’s the classic
example of spending 80% of your time on 20% of the problem and we exited. It was painful, it was very very tough for
us. We didn’t like to admit that we had failed
there. But I think it’s that simple, we are back
in the Midwest right now and it is very successful in the Midwest. But we are a better and different company
today. Hi I’m Bey-Ling Sha, and I’ve been a member of Costco
for more than 20 years. I just wanted to say thank you for speaking
here today my whole entire family loves the Costco food court hot dog and soda combo but
we do have one question. Which is will you ever get rid of Pepsi and
bring back Coco-cola. We’ll take that under advisement. As you can imagine we’ve had a few comments
like that over the years. We also would get comments if we discontinue
Pepsi and we got comments going the other way but at the moment it was a business decision
and the best decision that we could make for the Pepsi and the hotdog. I told you there would be some tough questions. Hi Jim. Thank you so much. Could you talk about how you are able to do
all the philanthropic things that you do by donating to the military, food banks, hospitals,
and so on and incorporate that into your business plan and still provide a great product at
a great price. The question is about philanthropy and we
try to participate in all the communities where we do business. Our biggest entries into philanthropy are
in areas where we think we can effect all of our warehouses as opposed to individual
warehouses. So as an example Children’s Hospital is one
of the things because they’re 27 or 28 Children’s Hospitals throughout North America and supporting
them touches almost all our warehouses here somewhere in the country. The same thing is true about the United Way
Campaign, the same thing is true of education there is a need for subsidy of education in
a lot of places in our country. So we try to try to engage in those things
so we are not just giving money in the state of Washington, we are giving money that will also help other parts of the country and North America where we do business The idea is very simple we think we have a
obligation to give back to the communities where we do business. We’ve been very lucky to be successful and
profitable. We budget the amount of money that we are
going to give. So it’s not without some trepidation because
we recognize that when we are being generous, we are being generous with the shareholders
money. And we have a very deep and profound obligation
to do that sensibly because it is the shareholders money. We’re also like those aspects of philanthropy
where our employees get involved, where they not only contribute themselves but they also
participate. So for Children’s Hospital, as an example,
our employees run all kinds of bake sales and BBQ’s and everything else they put in
a lot of heavy lifting to get the money. That’s the thought process behind it and we’ll
continue to do it on that basis we think it is the most sensible thing and the most pragmatic
thing and we owe it to our share holders to be that thoughtful. Hi my name is Congcong Zheng, I am a associate professor of entrepreneurship
thank you for recognizing the factor of good fortune in your business because it is rarely
recognized. So my question is this, there is a saying
“to every great leader there’s great seasons” So without WW2 Winston Churchill wouldn’t
be the great leader that he was. So I think it also applies to business, which
is Costco has been successful for 30/40 years in the previous time, but now time maybe has
changed. The new millennial’s demand customization,
they demand individualization, they demand small packaging. So my question is has the season changed for
Costco, what’s your thought on this. Well everything is changing. We have to be mindful of changes. I told the business class this morning that
if you were to go back to 1999 Kodak, the Kodak company had 170K employees. Where are they today? That business went away completely. Uber is the biggest taxi cab company in the
world and they don’t own a car. People are saying that by the year 2020 electric
cars are going to be mainstreamed in our country. What does that do to our gas stations, how
are we going to be able to support those. We have to be thinking about those things
all the time. There is always going to be change. I wish I could show you more photos about
how it looked and what we had 35 and what we have today cause you would see the type
of evolution we have. And if we are going to be successful in the
future, then the management that we have now, Craig and his team are going to have to be
as innovative in the next 15 years as we’ve been in the last 15. It will be imperative or we won’t survive. The customers vote at the check out stand. And if we aren’t doing our job they aren’t
going to buy the products. And I have complete confidence in Craig and
the team, that they are going to do that and they going to take the steps that are necessary
to keep us moving forward and evolving into something better in the future. My name is Victor, I am a student here at
San Diego State. I wanted to ask what was your mindset when you were a young adult Around your 20’s, 20-24. How did you, what was your thought process
on life in general. When you were in your 20’s what was your mindset and your thought process. When I was in my 20’s, ten years ago, I thought maybe if
I really worked hard maybe some day I could make 30k a year. Honestly, I didn’t have any great goals just
a lot of good luck. I’m not trying to minimize the fact that we
all work very hard in this business but I’ve always been very lucky. I never ever thought that, I don’t know how
else to say it. I was lucky, I had somebody. One of the slides that was left out of here
was a picture that I had of Sol Price, who was my mentor. A reported asked me one time, I said Gee you
worked for Sol for so many years you must have learned a lot. I said no I learned everything. He was my mentor, he as I told a group earlier
today, he was the smartest man I ever knew. He was also tough as shoe leather. And a strong tough business person. If I ever said to Sol you’re my mentor, he
would have probably said something very eloquent like cut the crap kid and get back to work. He was a guy when they asked him one time,
as so many people had copied the price club, they ask Sol how does it feel to be a father
of an industry and his comment was he thought he pondered it for a second and he said “I
should have worn a condom.” And I am telling that story because he was
I mean how fortunate was I to learn somebody like that to learn business from. If I hadn’t met him I wouldn’t be in the position
that I am in today, and I mean that sincerely. Good afternoon, my name is Michael Camera
so just a quick little thing, right when I had moved into my apartment after I moved
all my furniture, the first thing I did with my apartment we got our Costco card. Also my fraternity loves Costco, great deals
on red cups so thank you again. But, anyways, my question is as I’m a 19 year
old and a lot of us here are young, what piece of advise would you offer us to help us succeed
in life? Well I guess there is two things. If you have the opportunity to find a mentor,
take advantage of it. All of us know somebody in life who we respect
who we think always have the right answers and always knows how to handle things they
don’t get flustered they are quick on their feet, if you have a mentor if you have that
opportunity take advantage of it. A guy like Sol well you’re not going to find
them on every street corner, but there are people out there who are strong mentors on
campus so the first thing is if you have a mentor take advantage of that. Second thing is, if you get yourself involved
in a business and it’s drudgery, run don’t walk to the fastest exit. Get your butt out of there as fast as you
can because you aren’t doing yourself any good, and you aren’t doing the organization
any good. And the longer you stay the more unhappy you
will become. If you can find something that you truly love
and they you’re passionate about, you’ll never have to work another day in your life. Great advise. Thank you, hello. It’s a pleasure to be here and in the presence
of such a leader in not only business I’d say but in society because you’ve built a
company that from bottom up is an example of the future of the present and of the future
so thank you for that. One of the biggest questions that I have for
someone like yourself is what was that point where you realized, at the beginning of Costco,
that you realized there was something special here? That sign that you said “you know what we
got to follow through with this because this is something that is going to take us very
very far?” Well, you know there’s probably a lot of moments
where we thought like that we didn’t have better sense, we thought that we had something
good going from the beginning but of course there were moments when we were wondering
whether or not we were going to make payroll. But we, you know if I could point to one specific
moment. I remember that we had opened up our first
place in Seattle and we had gone down about a month in a half later to Portland and we
are opening the second place down there and we always got the sale midway through the
day and we had stopped in Centralia, any of you know the geography Centralia is about
half way between Portland and Seattle. So I got on a payphone right away because
I wanted to know how well we did in Seattle in the first half of the day. And the first half of the day we had done
$35,000 which was twice as much as we had ever done at that time. And I said that at that point in time we made
it, we’re gonna do well. The business is catching on. I mean it you know why would I remember that
specific moment. I mean $35K that’s nothing compared to what
we do at the moment in business. But it was a very, it was a significant highlight
at that point. Seems crazy that I would remember that type
of thing but I remember it very distinctively I can remember the pay booth because you had
to get into the pay booth. It was one of those days where you had to
actually ring the number. So that’s it that’s the best I can do on that. Hi, my name is Rico and I am an exchange student
from Germany. My question to you is what advice would you
give to the CEO of Sears in order to survive in today’s world. Oh boy, well I can’t give advice. Listen, we have enough trouble running our
own business and it’s big. I’m going to ask Craig that when I get back,
“what advice you want to give Sears” he’ll probably say are you crazy. I’ll tell you something. It is a classic example for all of us in business
to recognize how, you’re all too young well most of you are too young to remember, when
I was a boy Sears and Roebuck was the Costco of the country. I mean they were fantastic, all of middle
America shopped at Sears and Roebuck. Quality was great, but I mean somewhere along
the line they lost their way. So rather than giving them advice I would
suggest they probably gave us some advice when we study the history of the company and
where they went wrong. And we want to make sure we don’t fall into
that same trap. It’s a tough, I showed you the example, the
top line is so very important. You’re sales have been falling off for the
last 4 or 5 years and that is a very difficult spiral to stop. Maybe we will get some people who are good
and do it, they were at one time a great company not a good company a great company. And they have a lot of history at their side
maybe they can find some people that will help them dig out. You want to go back to that Coco-Cola question
that might have been easier. Hi Jim, you’ve mentioned that you mentored
under Sol Price for a number of years and how big of an influence that he had on you. I’m curious if you’ve had any other mentors
along the years that have made similar impacts ya. I had similar mentors? Ya sure when I was in college I had a history
professor that I just thought was fantastic, I would rate him still today to be the best
professor that I have ever had in my life. And I remember him and I’m mean everybody
used to line up to go to his class. So ya I mean that was a different type of
mentoring. My dad, my dad was a very simple person he
was an immigrant he worked in the coal mines and the steel mills in the Pittsburgh area. He had to work very hard all his life to support
his family when his father died. And he was my mentor also, the courage that
it took to do what he had to do. Good afternoon, my name is Rick Di Santiago
as an environmental scientist I was delighted to see in the January edition of Digital Journal
that Costco had pushed its suppliers to stop using pesticides that kill bee’s. Is that a practice that is only used in the
United States or is Costco push these environmentally friendly regulations into the other 10 countries
you conduct business in. We are going to try to do it in all the countries. I mean there are specific problems that we
have to get passed because as you know the laws are different country by country so some
of the substitute products are not easy to get there. We’ve been able to solve that problem here
and in Canada generally as well. But we are going to try to be as sensitive
to the environment in every place that we do business. And we will continue to do that, we work pretty
hard on that too. That’s an imperative of business today, you
don’t get to just say some fancy words about it you have to do it because the customers
are looking at you every minute of the way. So we will be doing that. Hey Jim, this is Alex Gamboa and I just want
to thank you for coming out and one question is what would be some advice that you would
give to someone who was trying to go into a wholesale such as Costco, you have so many
products what’s some advice that you would give to someone trying to go into a retailer
or a wholesaler such like yourself. I’m sorry I have a hearing problem so I didn’t
hear. What advice would you give to someone trying
to get a product into a wholesaler. Oh into Costco? Keep trying, keep knocking on the door constantly,
there is nothing like persistence. All the other things are really dwarfed by
persistence if you are persistent and you’re going to keep fighting and if you think you’re
right and you have the right product.Don’t give up because the reward can be great if
you succeed. But also a little self examination is in order
as well. You have to look at your product and your
pricing and your presentation and where it’s supposed to be. But assuming you’re satisfying yourself there,
don’t give up. And we have time for one more question. Thank you for your time, my name is Alex Percel,
my question for you many of us here have hear that a chain is only as strong as it’s weakest
link, what would identify as Costco’s weakest link. Well we got rid of them. Listen, what’s the weakest it might be technology
although we’ve made some strides and we’ve spent a lot of money and do a lot of things
and we are very cautious in terms of not over spending. Our company is staying on technology because
it is changing so rapidly. Just about the time you invest $100M in something,
it’s obsolete. So we’re all in business we are all challenged with
that, we’re probably as challenged as anyone in trying to be sensible about that and how
we spend money and to be as prudent as we can be without being frugal and not spending
anything. Not doing enough. That’s probably, and you know I guess one
of the things people have criticized us about is the fact that we don’t hire from outside
our company. We very seldom hire from outside our company. And there
have been a lot of people maybe suggesting that we have become too internally focused. And so we are always mindful of that, I don’t
think Craig is going to change the attitude of the company relative from promoting from within
the company. But we are mindful that we have a need to
continue to innovate and continue to change. And we talked about that a little earlier
in the presentation. You got to stay on top of what is happening
and I think that we are criticized for that more than anything else from analyst. Okay thanks to all of you for your great questions
and to Jim for his great answers, and the president will be making a presentation and
the provost. Just wanted to thank Jim for a truly inspiring
and entertaining presentation, and we have two small tokens of our appreciation. Thank you Jim for joining us. Thank you guys

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