Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:24} Could you share a bit about your background and your involvement at Costco throughout your career?

{audio:0:00:25} I was there for about 25 years and started off as Director of Marketing and I was involved in setting up an area in Canada that involved public relations, corporate communications and setting the environment and sustainability in Canada, which the company never even had. I then launched the Executive Membership Program in Canada, went into the operations side of the business for about 10 years and then came back as the Vice President of Marketing which was the last job I had there before I retired.

{audio:0:01:04} What drew you to the business?

{audio:0:01:05} To be honest, I can’t really say that anything drew me to the business. I spent most of my university and college years working in retail, so I always had a passion for it. This concept was interesting as I worked for a mass general merchandiser in the late 1980s and he had introduced me to Price Club. He talked about his approach to the business and how interesting it was, and how he was managing to build a culture which was very different from what any other retailer had done before. 

{audio:0:01:50} I left retail and went into banking for about 10 years. When I came back, I still remembered that story about Price Club which, by then, had merged with Costco to become Price Costco. It was always intriguing to me that a company that maintained it had a very high ethical standard, actually delivered on that promise internally. It’s pleasant to work in a place where you just do what is right every single day and if you have that guidance with you about what is doing what is right, it leads to sustained growth over an extremely long period of time. People know that; they see the value of what you’re providing, not only financially but also ethically and morally, and that leads to a level of satisfaction that is very difficult to match. You rarely hear poor stories about conduct. I say rarely because there are nearly 300,000 employees worldwide now, so there are bound to be some oddities that occur every once in a while, but you rarely hear a poor story about execution, conduct or morals coming from Costco which is really phenomenal. 

{audio:0:03:19} It comes back to the very beginning; people ‘walk the talk’. There is a code of ethics there and everybody lives by the code of ethics. It’s not just words on a wall in a meeting room, and if you hire like-minded people, then you will ensure success over the long-term.

{audio:0:03:49} There are a lot of great stories about Sol’s influence on Jim’s behavior over the years and the way in which he walked the talk. 

{audio:0:04:26} Sometime between 2010 and 2016, while he was still at the company, Jim sent out a copy of a letter that Sol Price wrote when he was at FedMart, about how he expected his employees and the teams to conduct themselves with their customers, their members, their suppliers; it was about a five or six page letter. Jim said that we needed to be the torch bearers, we needed to continue to express what Sol had expressed in this letter and how the most important thing was to keep on doing what was the right thing, to honor our customers, to exceed expectations, to honor commitments, to obey the law, to respect the employees and ensure that they had a good living wage. There were so many other things, but what fascinated me was that Jim had held on to a letter that was written maybe 40 years prior that he was still espousing. He was still saying, these are your company’s roots, this is the essence of why we do what we do, which fascinated me; he had held on to that torch and that thought process that Mr. Price had had. He was then able to keep on living by those elements, those truths.

{audio:0:06:26} What’s your sense of why Jim cared about these truths?

{audio:0:06:32} He had a very strong sense of ethical awareness. I think that he believed that we needed to do what was right and in doing so, things would work out in the long-term. He believed that you could run a business with a very high ethical standard and provide members, people, customers with an element of service that could not be matched, quite frankly. He believed that if you followed a specific set of standards, that in the long-term your business will surge and I think he believed that most businesses should be operated that way. I can’t speak for him of course, but I sense that that’s what may have been his driving force, a strong sense of ethics. 

{audio:0:07:21}  What was your sense of what was, and is, hardest to replicate [about these high levels of service]?

{audio:0:07:48} Over the years, it’s probably very easy to try to cheat on those principles. There are so many stories of opportunities that the company had to take advantage of and purchases that would have been still very advantageous. The easiest way to explain it is this: there’s a story that goes back to an opportunity 20 years ago to purchase jeans, I believe. They had bought some jeans in the US from a brand name, and the retail price at the time at other competitors – including Walmart – was somewhere between $39.99 and $79.99 for retail as a mass merchandiser. We had this opportunity to buy from this manufacturer, and they put them out at $19.99, making the full 14 points of margin. 

{audio:0:09:04} There was a discussion, at the time, amongst senior executives saying, why don’t we put them at $29.99 or $24.99; we’ll still be way less expensive than everybody else? and Jim’s thought process back then was that that’s not the way we built this business. We have a code of ethics which requires us to take a reasonable margin to be able to cover our operating costs. In this case, the reasonable margin is 14% maximum – and 15% on private-label products – and we will not change that process because we have this one time buy. It was something like a $10 or $20 million buy, it was huge, so it had to go up to senior executives because it was a huge amount of dollars, but he had refused to change his position to make a quick buck; he was always looking at the longer term. 

{audio:0:10:15} He said so many times that he would manage this company not so it could have good results for a quarter or the next quarter, but so that it could have good results for many years to come. Keeping us on that path, I think, was the most challenging thing as the company grew. 

{audio:0:10:41} Here’s another interesting story from when I was first hired. This is an example of why you do the right thing and why it’s important for people to not assume that some roles are bigger than other roles. One of the things that Jim always said was that you have to spend 90% of your time teaching people, and if you don’t, you don’t understand your job. I remember when I was first hired, I went for a walk with our then Canadian CEO; we were walking across from the office into the warehouse and she bent down and picked up three or four pieces of paper that were in the parking lot. I remember being blown away and thinking I’d never see a bank CEO or another retailer CEO bend down and pick up some papers in the parking lot. 

{audio:0:11:39} She turned to me and said, “I know you’re surprised” and I said, “Yes, I’m really surprised”. She replied, “Why would I leave the papers there? Why would I let our customers look at a dirty parking lot for the next 15, 20 minutes, half an hour or an hour that it might take for some guy to come along who would probably pick it up, when I can just as easily on my way pick it up and throw it into the garbage can? I’m a double winner here; everybody’s a winner. The member sees a clean, clear, safe environment to shop and I don’t have to spend extra payroll, because if I don’t pick that up and it multiplies then, all of a sudden, I’m going to have three people cleaning the parking lots instead of just one. Now I can spend that additional payroll at the cash registers making sure the customers get out and the line ups are reasonable.” 

{audio:0:12:32} Ethically, it all came back to one thing, what’s the right thing to do? The right thing to do, when you see a piece of paper on the floor, whether it’s your store or somebody else’s store, is to pick it up and put it in the trash. It’s not to walk by it. What reasonable person is going to walk by a piece of trash? I’m not saying that people should walk around with a broom and a shovel when they’re going shopping, but why has it become unreasonable to pick up trash when it shouldn’t be. That’s how I think the company ethics is encapsulated in one story.

{audio:0:13:09} Can you talk about the immune system of the organization and how it dealt with the temptation to say, take a little bit of price here and there, let margins drift upwards in product categories where the business was just already extremely competitive as a result of scale? Or maybe leaning a little bit harder on suppliers, the temptation to squeeze people a little bit?

{audio:0:14:00} Here’s a direct response to your question about suppliers: you get fired if you don’t do the right thing. It’s not about having an axe swaying above your head, it’s understanding that what you do has repercussions on the reputation of the business. Here’s a story that I saw for myself. There was a person that was purchasing in a specific, seasonal category; the category had not sold well so he needed to clear out his merchandise at the end of the year. Rather than ‘take his medicine’, that person decided that they were going to go to their supplier and say, “I need X dollars from you to help me with my mark downs, to help me clear my season so I don’t look bad and, in return, I’ll ensure that whatever amount you give me this year, you can overcharge me by next year to compensate for it and make sure you make money.” This person thought they were doing a service to the vendors, saying I’m not going to take out X amount of dollars from your profits without making sure you get it back, but it’s unethical. 

{audio:0:15:27} People have to understand that there are consequences to their actions. So were they doing something good or something bad? You need to understand that it’s not right. You made a decision, you purchased some merchandise and that’s part of retail. As Jim said, you’ve got to pay for shit with the sugar or sugar with the shit. If you have a bad year, eat it, if you have a good year, you take responsibility for it. That person did not take responsibility for that season and that person was fired, because you can’t not be responsible for the actions that you take and try to take it out on your consumer, on your member. 

{audio:0:16:06} The vendor comes out clean because they could have said, yes, I’ll take these and put them in the bank for this year and I’ll overcharge you next year. But in the end, who pays? It’s the consumer, it’s the customer, it’s the member and that’s a no no, you can’t have that. You have to be forthright with your decisions to run the business. It’s a challenge, but these stories reverberate across the entire network in a positive way, because people know at that point, if I keep on doing the right thing, I’m going to be okay and if you’re not sure then you go to your boss, and if you don’t like the answer, you go to your boss’ boss. There’s no wriggle room when it comes to doing what the right thing is, there really isn’t.

{audio:0:17:00} Was there any change at all throughout your tenure in the way in which the very senior leadership team spoke about the code of ethics and, as you’re describing, the right thing to do?

{audio:0:17:16} No, as the company grew, it needed to be spoken about more because there were so many young, junior people that did not know or understand, and you needed to tell them these stories and to remind them. One of the things that the company always did was share success stories when we had meetings; it loved success stories. For example, we sold this particular item, look at how many units we bought and how many we sold and how many dollars we made. But one of the most critical elements to it was explaining we were able to make money selling it at less than everybody else. Selling it at less than everybody else is a team game; it’s not about the person in procurement who is making a deal with the supplier. The reason you’re able to sell it like that is because you have great operators who were being efficient in the way they run their business and you listen to their feedback.

{audio:0:18:22} One of the things that we talked about over and over again – and this may seem very banal but it’s rather important – is where the barcodes are placed. We used to have discussions about placing the item barcode because when you arrive at the cash register, you don’t want the cashier fumbling around looking for the barcode because that’s a waste of time and that costs money, and what costs money costs payroll, and when it costs payroll and money, you’re obligated to increase your prices. So the organization needed to work hand in hand with, and listen to, what the operators had to say. It was a really interesting team effort. People in the procurement areas needed to go out into the warehouses. Jim was often in the warehouses looking at the details of the items, how they were placed, how they were stacked and so on, to make sure there was cohesion between what the operators were saying and what procurement was providing. It was really very much of a team effort; it had to be.

{audio:0:19:30} At what point did the business get too big for Jim to be able to walk the floor in every store? 

{audio:0:19:38} I think that Jim walked the floor in every store, once a year, until he left. He was certainly at every single opening and that continued with Craig. I believe he’s left now so I don’t know what Ron’s going to do, but I’m sure he’ll do the same thing. Jim made it a point once a year, he’d come in and he’d spend time in the buildings; he wasn’t just there for 20 minutes and then gone. When he was travelling, his days were long; he’d start at 6.30 am or 7.00 am in the warehouse and go on until 10.00 pm or 11.00 pm. They were long days. He’d listen to the staff and to the stockers and the cashiers. 

{audio:0:20:22} It wasn’t only about the merchandise too, it was about their working conditions, benefits and how things could be improved. This was something that came from Sol because he insisted that all of his warehouses be unionized. He actually sought out the unions and invited them because that was the kind of environment he wanted. That changed over the years because the company runs its business within an Employee Agreement, which is not dissimilar from a union contract. It states all the working conditions and rights, everything that is involved in the business so there is no ambiguity about anything at any specific time; even the employees’ salary increases and the hours that are worked to reach the different plateaus are in the Employee Agreement.

{audio:0:21:23} What was it like, this experience? So many people that we speak to have shared just how important Jim’s floor visits were. Can you describe what exactly that translated to in terms of your behavior in the organization?

{audio:0:21:46} Not so much me because, aside from the eight or 10 years when I was on the operations side of the business, I didn’t see him too much directly. But it made a difference for the operators that ran the core side of the business. In French you’d say ‘un retour aux sources’ which means back to the basics, making sure that you’re not doing any silly things like putting a markdown on an end cap, because you don’t want an item that you’re selling at a loss as a feature item; you’d bury it in the middle of an aisle. Why would you bury it in the middle of an aisle? That’s because you want to be able to feature your new and exciting items on your end caps, as people are walking by. 

{audio:0:22:47} It was about understanding the basics of things; as an example with meat, it was making sure that you’re providing quality cuts of meat, not some end piece that you put together with three other little end pieces that you shrink wrap together and put out there labeled as a steak. You need to do the right things. Another example that we talk often about is samples and sample sizes. It’s very important, in the food area, to do samples because people, ideally, need to taste what they’re going to buy. We had no issues with people coming by three, four or five times and sampling that amount of pieces because they’re going to end up buying it. 

{audio:0:23:51} The company always looks at making the shopping experience a pleasant one; if somebody wants to come by to have a second piece because they thought the first one was good, the chances are they’re probably going to buy that particular item. If you’re going to give someone a sample, you need to make sure they can taste it all. You’re not going to have a sampling, for example, of half of a chicken nugget, or half a potato fritter, because it just doesn’t make any sense. Why are you going to cheat someone out of the whole experience because you want to save a buck on giving out your samples? Even if you want to purchase a piece of ham, you want to make sure it is a decent size and somebody can actually taste the ham.

{audio:0:24:51} All these little things end up helping enhancing the member experience. Jim initiated the double line parking lots at all the Costco locations; I’m not sure whether that’s in Europe yet probably because of land constraints there. In North America, with very few exceptions, we painted all the parking lots with double lines and they lost 12% of their parking spots because they thought it was more important to make sure that your shopping experience was pleasant from the moment that you drove in to the parking lot. You didn’t have to squeeze your way in-between two cars, you didn’t have to worry about your car being dinged or someone trying to pass between two cars with their shopping trolley, and if the trolley could actually make it between two cars. 

{audio:0:25:47} All these little things created a strengthened, hardened commitment to making sure that you’re doing the right thing all the time, and it was like that on those warehouse visits. Making sure that employees are treated right, that they’re well protected and, ultimately, that you’re able to speak to them. That’s why their name tags only had their first name on, so everybody could be approachable. That’s a barrier that was interesting; it was very common for employees to greet the CEO as he was walking into the building, they loved to take pictures of him because they knew he had their backs, he had the employees’ backs, he had the members backs, he had the shareholders’ backs and the suppliers backs too. That’s a phenomenal achievement for an individual to be able to have the confidence of those four groups.

{audio:0:27:00} It is. So you have this vantage point where you’re involved with this business for 25 odd years. The business now in the US has 600 or so warehouses, there are over 100 in Canada. Jim left the business 2012; what you’ve just described, to reiterate, is a leadership team which is really connected to the intimate details of the business. As the business got so much bigger how did that evolve and how has Craig approached that question?

{audio:0:27:40} The business got bigger in the sense of volume, but the business has remained a simple one, and that is a key element to how everything is run. I think one of the complications of retail is SKU management. Where you have huge SKUs – as Costco has – it’s about keeping the business simple, keeping the rules simple and keeping the exceptions to a minimum. When you’re running a regular retail business, for example, a hardware business, you can walk into a hardware business and find 10 types of brooms, so when the procurement people want to act on a specific part of the business, are you paying attention to the brooms? Probably not, and if they’re not paying attention to the brooms then why aren’t they paying attention to the brooms? Is there a reason? Is there an exception as to why they’re managing this broom and not that broom? So you end up putting in a lot of effort in areas of the business that don’t necessarily pay, for want of a better word, but that’s their model; it’s to have an abundance of choice, to have 10 brooms out there so you can meet the needs of the market place.

{audio:0:29:19} At Costco, we had brooms, and sometimes we didn’t have brooms, so that keeps the business simple. You’re looking at it really from a perspective of volume as opposed to the depth or assortment. If you look at what we’re selling today versus the company 25 years ago; if you take between the east and west of Canada, there were less than 50 locations. There are 106, 107 now – since I left – but it’s still at the same number of products more or less. It’s a little bit more because the square footage has changed over the course of the years. It’s still a relatively simple business to run, and from an operators’ perspective, it’s also still a fairly simple business to run. You shouldn’t handle the merchandise; every time we handle it, it costs money, so everybody needs to be aware of that. 

{audio:0:30:25} If you’re preparing people, you need to make sure it arrives in a manner that is safe, it won’t be damaged, it’s able to be quickly displayed. The operations people need to make sure that when they take it off the trucks, it goes directly out to the floor and it’s not handled three times. There’s very little pegging business, shelving business because you don’t handle the merchandise. There are categories where we do some shelving, the privacy area is one area now with OTC and all these products where items are more individually handled; there are a couple of peg-board items in the middle of the floor that deals with some restaurants/amusement parks/lift tickets or movie tickets etc. but that is minimal. The business remains pretty much the same; you just don’t handle the merchandise and that I think is what’s ensured its success, that it’s remained a simple business to manage. Internally, they strive on saying that all the time. Keep it simple, don’t complicate things.

{audio:0:31:38} In your experience, is the senior leadership team as visible on the shop floor as it used to be?

{audio:0:31:44} Yes, absolutely. I don’t think that has changed, not to a great extent anyway. It’s changed a bit because we used to have, for example in Canada, 50 or so warehouses when I joined and on the operations side, three or four Vice Presidents and now there are seven or eight Vice Presidents so that has changed. But as a ratio, it’s kept the same numbers as it was 25 years ago.

{audio:0:32:17} How does the business think about technology and the role of technology? Can you describe your experience around, philosophically, how the leadership team thought about the role of technology in the business?

{audio:0:32:35} I think there was much written over the years about the fact that the company was behind from a technological perspective. They’ve invested a tremendous amount of money, billions of dollars, over the last five or 10 years, on the IT side of the business. I think simply to be able to understand that each of the different categories or departments had to speak to one another and there were opportunities in terms of understanding the member base a little bit better as well. I think security is the number one issue that all companies have so I don’t think that’s any different from any retailer, quite frankly. Other than that, I agree, I think.

{audio:0:33:26} How did you get better at understanding the member base with the application of technology?

{audio:0:33:31} In Canada, privacy laws are very strict so you can’t go into the membership base and do what you want to do with it; you had to be cognizant of what the laws say. I think that if you do some data mining in a very ambiguous manner, then there are opportunities to look at in terms of being a predictor of behavior and that’s what we were beginning to look at. It was also interesting to see the difference in shopping habits between inline shoppers and people who bought more online, and looking at what some of the opportunities were in terms of trying to predict behavior.

{audio:0:34:33} What kind of shift would you say, internally, has happened in the way the business thinks about data, the technology stack that powers the business, the extent to which technology is used as a tool to support decision-making in the organisation?

{audio:0:34:50} We had meetings with some IT people before I left; there were some very interesting initiatives that were being worked on. I don’t know where those initiatives are right now; it wouldn’t be fair for me to comment on that.

{audio:0:35:10} How is this idea of doing the right thing ingrained at the front lines of the business? 

{audio:0:35:42} There wasn’t training about how to do your job, or how to do your job better. The official training sessions dealt with human resources rules and laws, operational rules and laws, operational improvements, innovations. Those were pretty standard, but there was nobody with you to hold your hand and watch you do your job; that wasn’t part of the culture. It was more, here it is, figure it out, if you’ve got issues come and see me and I won’t be too far away. I think some of the bigger differences may be – and it’s an assumption that I’m making – the time spent talking about culture, history, what makes us tick, the recent successes and so on. 

{audio:0:36:48} Another example was the famous salmon story at Costco. The first salmon we sold used to be at $18.99 a pound; I’m making up a number because I can’t quite remember. They then made some improvements on the salmon; they cut the head and some of the tail off and they started to sell more, so they were able to reduce the price to say, $17.99. Then they trimmed some more of the fat off and all of a sudden they started to sell more so the price went down to $16.99. There are a countless number of stories of items that have gone on price reductions because there have been operational efficiencies, and that kind of cultural thinking is what is being taught on an ongoing basis. 

{audio:0:37:41} It was a very interesting company to work for because they didn’t look at how much more can we sell an item at or what’s the most I can I get out of this item, maybe $39.99? They would be worrying about maybe selling it at $29.99 instead. It was always looking at how the item could be sold at $29.99 and making sure that the costs are taken out of the item. When I say taken out of this item, I don’t mean going to the vendor and asking them to sell the item at X dollars; it means overall, as a company, what do we do to make sure we’re reducing our costs on an ongoing basis by increasing our efficiencies. One of the things that needs to be understood is that reducing inefficiencies didn’t mean cutting payroll. Reducing inefficiencies meant that you needed to think better about how you could do your job so that you could do other things at the same time, enhance the member experience. 

{audio:0:38:50} In the warehouses today, many of the people who are stockers end their day working on the cash registers to understand their flow of merchandise from beginning to end. It isn’t about doing a better job stocking the warehouse so we can cut more payroll; it’s about doing a better job so we can use less hours stocking and bring these people out to the front end so they can help the cashiers and the cashier’s assistants, to get more people out of the warehouse and enhance the experience. Once the experience is enhanced, they come back more. It takes a long time to build that kind of mentality; it doesn’t happen overnight. 

{audio:0:39:32} You can’t just tell people. You can’t just tell people to work on the cash, pump things out and sales will increase tomorrow morning. This happens over years, you have to have a commitment to your approach. You can’t run your business by what this quarter’s results are going to be. Jim said business over the long-term was right, so going back to that stocker who works on the front end, that’s not going to pay off tomorrow morning, it’s not going to pay off this quarter. It’s going to pay off maybe the week after, the week after that, the year after that, because every time the member comes back, he’s going say he got out of there fast. 

{audio:0:40:35} One of the most frequently asked questions of the Customer Service department is why we don’t have any express lines; it’s not the right thing to do. First of all, the longest part of a transaction is the payment, it’s not the scanning of the items, and more importantly, why do I want to serve someone that has three items faster than someone who has a full basket and $400 worth of items? Why do I want to give you preferential treatment? There’s somebody here who wants to spend $400; I want them to leave fast. That’s about changing your mindset and your culture. We need to take care of the good and big customers and not worry about the exceptions, for lack of a better word.

{audio:0:41:25} It’s the same thing at the returns counter; the company sometimes got ridiculed for its liberal returns policy. You know what? There are very few abusers out there, so why would we want to make life a living hell for 99% of the returns that occur when only less than 1% of them were abusers? If they are abusers, if we’ve done our job right, there’s a membership system and employees have the ability to put a comment in there, such as, the member ate half of her steak, and to tell the member that next time, if there’s an issue, perhaps we can look at it differently. We’ve had a discussion with the member. So if the member has returned four times with steaks, we can say we had a discussion with the member so stop buying steaks because they’re clearly not up to your expectations. Again, it’s doing what’s right to help the member see that maybe they’re wrong. Common sense prevails; the goodness of people prevails in the end.

{audio:0:42:34} If Jim would be remembered for things like ‘taking the shit with the sugar’, this almost religious obsession with customer satisfaction, selling more for less, the code of ethics, what do you think Craig will be remembered for?

{audio:0:42:58} The challenge of sustaining that mentality as he has navigated through the second generation.

Costco: Culture & Operating Principles at Costco Canada

Former VP at Costco Canada

inpractise.com/articles/costco-canada-culture-and-operating-principles

Executive Bio

Former VP at Costco Canada

Interview Transcript

Related Content

Costco's Changing Philosophy

26 years at Costco Canada

Former Assistant General Merchandise Manager, Costco Canada

Costco Wholesale: Management, Philosophy, & Culture

Former Senior Manager at Costco

Costco's International Growth Opportunity

Former Senior Manager at Costco

Audio

Costco: Culture & Operating Principles at Costco Canada(January 22, 2023)

PARTNER

Speak to Executive