CEO Interview: Costco's James Sinegal

One of the best bargains Costco offers is the CEO himself. Though the stock is up 15% in the past year, his salary has remained at $350,000 with a maximum $200,000 bonus, putting him near the bottom of most corporate-salary surveys. At a time when investment-bank CEOs are resigning with huge payouts, this sort of frugality is refreshing. But instead of finding the charm in a thrifty CEO who's content to shove six Formica tables together in the conference room, many analysts have pleaded with him to cut costs elsewhere. Take salaries: Costco's average hourly pay, $18.15, is 68% more than the average pay at Wal-Mart. What's more, "he could raise prices a negligible amount and the stock would go through the roof," says Deutsche Bank analyst William Dreher. That advice falls on deaf ears. "That's where it starts, and before you know it, you've got Sears," whose decades-long decline is an American tragedy, in Sinegal's view.

These days Sinegal is gearing up for another potential tragedy: the American consumer. With unemployment up and home prices down, consumers are getting squeezed. The store that Sinegal cofounded in 1983 caters to the cost-conscious, whose ranks will certainly be growing in the coming year. Costco's goods are priced no more than 15% above cost, which explains why store sales amount to less than 1% of profits. (Costco's profit is largely driven by membership fees.) Senior writer Dyan Machan sat down with Sinegal on a rainy Monday morning in Issaquah, Wash., to talk with the energetic 72-year-old about how Costco's formula will fare in a recession, how it can eke out more profit without raising prices or cutting pay, and just a bit about one unfortunate shopping experience in Hackensack, N.J.

Costco's 2.7% profit margins don't indicate much progress toward your 2003-stated goal of 4%. Apparently, this is a thorn in your side. Want to take it back?

I will not take it back. Shareholders have a right to earn more. But when there is difficult competition, we have to respond.

You could raise the price of, say, a bottle of ketchup to $1.03 instead of $1, and no one would know. Raising prices just 3% per product would add 50% to your pretax income. Why not do it?

It's like heroin: You do a little and you want a little bit more. Raising prices is the easy way.

So how will you improve margins?

We will sell more of our private label — up to 25% of sales, instead of the 15% we sell now. But I don't want to confuse people. We realize people come for our Sony TV sets and Michelin tires, and we won't disappoint them. We are opening 35 new stores a year — any more would be tough on our management team. We'll buy smarter.

You're Costco — how much smarter can you possibly buy?

That's why it's called work. There are ways to cut expenses.

How about growth?

We have been experimenting with furniture, with two dedicated stores. They have made money, but I think it's more likely we would just devote another 25,000 square feet to certain stores. Our intention is not to start a furniture chain. And we have other ideas. If you look where we were 20 years ago, there's been a transformation. There was no meat, no pharmacy, no fresh produce, no gas or optical. If we are going to succeed, we'll have to be at least as creative.

Have you ever really blown it?

We tried the home-improvement business once in Seattle. We had power tools, lumber and paint. There are thousands of paint colors, of course. We decided we were going to carry four, and three of them were going to be white. The result was underwhelming.