Costco's Changing Philosophy

In Practise Weekly Analysis

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We recently interviewed a Former Costco (COST) executive who spent over 30 years at the company with experience working under Jim Sinegal, founder and former CEO, and Craig Jelinek, the current CEO of Costco.

One key takeaway from the interview is that there are signs of Costco’s operating philosophy changing under Craig’s leadership.

One example contrasts Jim Sinegal's response to the 2008 crisis to Craig's response during the recent pandemic. During the 2008 GFC, Sinegal cut the gross margin for core SKU’s like butter, milk, and chicken breasts well below the 14% target margin. Some products were even cut to cost. With Jim, the customer always came first.

[In 2008], when everyone started realizing this was a longer situation than originally thought, after about 90 days, he came back and said, I know we’ve done 10 items and then 20 items; I want 300 items. Granted, we are a limited SKU environment with 3,000 items. He wanted 10% of the items cut down to 5% margin or less. Before, it was reduced by 5%. Some of the items made 12% or 13% margin but, for that period, nothing could be over 5%. Some of them even went down to 2%. It got to the point where he wanted some of them to be at cost and he wanted us calling our vendors, to find out about their solvency to see if they can lower their prices to us, so we can lower them even more. He wanted everybody working on this; it was our main mission, at that point, because the people needed it - Former Executive at COST

Under Craig’s management, during the COVID pandemic, Costco’s response was different.

If you read the reports during the pandemic periods, no prices were reduced for the members. Craig was very late to let employees work from home, even though there was no travel happening. Everybody was perfectly capable of working from home, doing well, being productive, feeling safer and reducing fear, stress and anxiety; all those things that have diminishing returns on people’s performance and their health and well-being. - Former Executive at COST

In fact, COST reported record dollar and percentage EBIT margins in 2020.

This potential shift in philosophy suggests Costco is transitioning from a relentless focus on members and employees towards a greater emphasis on shareholder return.

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