Thursday, 20 September 2012

Low-Frills Success

Co-founder of Costco Jim Sinegal
On the plane I watched a CNBC segment on the success of Costco Wholesale Corporation.

The concept of the store goes against most retail rules in that it's in a giant warehouse, there are no signs in the aisles to tell you where things are, you must pay a membership fee to get in, and there isn't much selection to choose from.

But it works and people come in droves, usually paying much more than they intend to.

The show interviewed many people who love going aisle by aisle because you never know what you can find -- at a deal, and it is great for large families, getting a lot of food at reasonable prices.

Costco sells everything from toilet paper to ketchup, lasagne, detergent, clothing and toys, and even diamond rings, Bordeaux wines and flat screen TVs.

It is the second-largest retailer behind Wal-Mart, making $93 billion annually in sales in its 600 locations.

Apparently Costco only stocks 4,000 items, whereas the average supermarket has 50,000 and 100,000 at Walmart.

However, for many consumers, the lack of choice helps make choosing easier as shopping experts say that the more choice there is, the person gets more confused and could eventually give up on trying to decide on something.

But at Costco, the choice is basically made for you and the company will only mark up the price by 15 percent.

That's why Costco works hard to push for the best price, but also for companies that want to be stocked in the warehouse store, that means they have to be competitive in terms of price and be flexible in meeting Costco's demands.

Costco also develops its own Kirkland Signature brand and one of its biggest selling items is toilet paper. It's interesting to note the company takes it TP seriously -- with a lab that tests out all its own products, including toilet paper for its strength and softness among other things.

And when it comes to wines, high end wineries are keen to be stocked in Costco and invite the buyers for exclusive tastings in the hopes of being carried by the retailer.

Items like toys and clothing make up 25 percent of Costco sales, and so they are mostly impulse buys.

What's most impressive is that Jim Sinegal, who was Costco's co-founder and CEO up until April this year, has retail in his blood.

When he was a teen he started as a bagger in a supermarket called FedMart and was hooked on retail. He worked his way up the company to executive vice president of merchandising and operations.

He also learned from his mentor Sol Price about the warehouse retail concept and Singeal is known for treating employees well.

Employees are paid very well and have good benefits. And it pays off -- there's less turnover and staff proud to be working for Costco.

In the segment Sinegal was seeing touring numerous Costco stores on what employees endearingly call "death marches". He walks around the store with managers trailing behind him and he asks how stock is moving, why are things placed in certain areas of the store, or questioning them on the price of items.

What's also interesting is that he had no entourage either -- it's just him -- though he did travel by corporate jet.

Would Hong Kong ever have a CEO like Sinegal or a Costco?

The city will never have a Costco -- there is no space big enough to house so much stuff, but also most households average one to three people. We don't need giant tubs of mayonnaise or 360 Advil pills in one bottle.

But at the same time we need something like Costco to break the tycoons' hold over us with the limited choices of Wellcome and Park n Shop, Broadway and Fortress, Mannings and Watson's.

We're tired of paying much more than we should.






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