How Costco Became the Anti-Wal-Mart:
At Costco, one of Mr. Sinegal’s cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.“They could probably get more money for a lot of items they sell,” said Ed Weller, a retailing analyst at ThinkEquity.
But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.
Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. “On Wall Street, they’re in the business of making money between now and next Thursday,” he said. “I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.”
IF shareholders mind Mr. Sinegal’s philosophy, it is not obvious: Costco’s stock price has risen more than 10 percent in the last 12 months, while Wal-Mart’s has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.Mr. Dreher said Costco’s share price was so high because so many people love the company. “It’s a cult stock,” he said.
This is an important — and surprising — element of Costco’s success:
Mr. Sinegal, who is 69 but looks a decade younger, also delights in not tilting Costco too far into cheap merchandise, even at his warehouse stores. He loves the idea of the “treasure hunt” — occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces — scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise.The treasure hunts, Mr. Sinegal says, create a sense of excitement and customer loyalty.