James Sinegal, Costco

The Bargain Hunter

When 66-year-old Sinegal has a meeting with a visitor at the company's headquarters in Issaquah, Wash., he goes down to the lobby himself to escort the guest to his fourth-floor office. The head of the nation's top warehouse retailer doesn't go in for many corporate perks. He answers his own phone. He doesn't have an executive washroom or even an office with walls. His furniture is more than 20 years old. "We're low-cost operators, and it would be a little phony if we tried to pretend that we're not and had all the trappings," Sinegal says.

A lifelong retailer, Sinegal opened the first Costco (COST ) warehouse, in 1983 in Seattle, with Jeffrey H. Brotman, who is chairman. Their strategy was to offer lower prices and better value by stripping away everything they deemed unnecessary, including deluxe store fixtures, salespeople, even delivery and backup inventory. And it works. Over the past five years, sales have grown 11.7% annually as earnings climbed 13.2% a year.

Their original concept has led to some revolutionary behavior. One of Sinegal's rules, for example, is to strictly limit markups to 12% on national brand items and 14% for private-label, Kirkland Signature, goods. And he means strictly. Back in 1996, Costco was selling Calvin Klein jeans for $29.99 and got a better deal for another batch that would drop the price to $22.99. The pants were selling briskly at the higher price. "In theory, we could have kept selling them and pocketed the seven bucks and had a great quarter," recalls John McKay, senior vice-president for Costco. "But we didn't. The members count on us to deliver the best deal. Jim doesn't cheat on that."

Some on Wall Street wish he would. Analysts have pressured Sinegal to lift the markup ceiling, complaining that it limits profits. "We believe [it] places club member interests too far ahead of shareholder interests," says Bill Dreher, an analyst with W.R. Hambrecht & Co. Wall Street also takes issue with Costco's pay levels, the highest in the industry. A cashier with four years of experience can earn more than $40,000 with full benefits. "Paying good wages is not in opposition to good productivity," insists Sinegal. "If you hire good people, give them good jobs, and pay them good wages, generally something good is going to happen."

Sinegal doesn't much worry about complaints from Wall Street. As he's fond of saying, "you have to take the shit with the sugar." And can shareholders really complain? Someone who put $10,000 in the stock 10 years ago and held on would be looking at $43,564 today--a gain of 354%, compared with 237% for the Standard & Poor's 500-stock index.

By Nanette Byrnes, with John A. Byrne in NewYork, Cliff Edwards and Louise Lee in San Mateo, Calif., Stanley Holmes in Seattle, and Joann Muller in Milwaukee

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