“You’ve gotta love the business.”*

Posted by jlubans on July 25, 2012

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A new book by Captain Chesley “Sully” Sullenberger (with Douglas Century), Making a Difference: Stories of Vision and Courage from America’s Leaders, includes a chapter on Costco’s co-founder, Jim Sinegal. (Sinegal shuns interviews because of the media’s tendency to glorify the boss, but he willingly spoke with Sullenberger.) I was drawn to the interview because I like Costco's quality and prices and have heard, from time to time, that theirs is a different kind of organization, one that genuinely values customers and employees. As a Costco regular I have noticed over the years, just like Captain Sullenberger, that there is minimal staff turn-over. For some reason, the staff tends to stay; something highly unusual for the retail industry. Indeed, it was seeing the same staff over fifteen years of shopping at Zabar’s, the NYC food emporium, that triggered my interest in finding out why that was. (Chapter 14: A Zabarian Experience in Leading from the Middle.)

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Caption: Jim Sinegal
Sinegal, who retired from Costco in 2011, spoke candidly with Sullenberger about his way of leading and how the Costco culture came into being.
Besides the tiny staff turnover – Costco has less than 10% while Wal-Mart has over 60% - there are other similarities to Zabar’s. Sinegal on pricing: “In traditional retail the thinking is, Gee, I’m selling this thing for ten bucks, I wonder if I can get eleven for it? The customer is never going to know the difference. We look at it and we say, Selling this thing for ten bucks, how do I get it to nine? And if nine, how get it to 8? We want a big gulf between Costco and other retailers.”

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Caption: Murray Klein (1923-2007)
Murray Klein (a partner with Saul and Stanley Zabar and operations manager) was a driving force for taking Zabar’s from a small kosher-only establishment to a world-class food emporium. In the New York Times obituary one colleague said: “Where other vendors would look at a jar of mustard and think, ‘How much can I sell this for?’ Murray would think, ‘How little?’”
Quoting from my Zabar’s chapter, Mr. Klein’s “legend includes the celebrated caviar price war with Macy’s and his riding roughshod over sales reps during the Wild West era of kitchenware surpluses. More important was Mr. Klein’s being a stickler for quality – something never to be taken for granted, it was everyone’s job. He helped instill high standards – the same one’s Saul’s father valued. While no longer a partner (now deceased) his name is the organization’s shorthand for keeping high standards alive. When Saul and Stanley recently refused to sell lobster salad for four days because it did not taste right, that was like Mr. Klein. Scott Goldshine, a Zabar's floor manager, admiringly terms Mr. Klein, “one tough s.o.b” in demanding and getting the best quality and price from suppliers.”

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Caption: Sol Price (1916-2009)
Jim Sinegal has his own Mr. Klein; in his case the legendary Sol Price, the heralded (by most) founder of the big box store concept. For Sinegal, Sol was the gold standard in running a business. Mr. Sinegal, who says he learned everything from Mr. Price, is clear about what it takes to make a business a success: “We have four things to do: “You’ve got to obey the law, you’ve got to take care of your customers, you’ve got to take care of your people, and respect your suppliers.”

Another similarity between Zabar’s and Costco is found in this quote from Mr. Sinegal: “Why should people in retail not be able to have health care for their kids and buy homes and send them to good schools?” Both businesses pay more and provide extensive benefits. In fact, “Costco’s pay is $17 per hour, 42% higher than its fiercest rival, Sam’s Club.” Stock analysts take Costco to task for paying more; one critic went so far as to say that it was better to be a Costco employee than a Costco stockholder! His analysis misses the obvious: there is higher productivity in an organization like Costco than in one like Sam’s Club. One study** found that “When turnover costs and productivity were reckoned, it was cheaper for Costco to pay people more.” At the time of that study 68,000 staff at Costco did the same number of sales as 103,000 staff at Sam’s. As Sinegal said to Sullenberger: “If you hire good people and provide them with good wages and good jobs and an opportunity for a career, then good things will happen in your business.“

There is at least one other similarity between the two retailers: Mr. Price, the boss, was known to pick up trash off the floor of the story; Sullenberger observes that Mr. Sinegal picks up trash off the floor, and I saw Saul Zabar picking up litter on the sidewalk outside Zabar’s at 80th and Broadway. On the upper west side of NYC where Saul’s brother, Eli, runs several high end stores, guess what I saw Eli doing when I came by to interview him? Picking up trash at the store’s entrance! When followers see leaders doing something like this, they are apt to model the behavior. The boss values (and acts!) a clean store. If you respect the boss, you probably will share that value.

The O’Toole and Lawler** study, mentioned above, was about two kinds of firms: Low Cost Operators (LCOs) and High Involvement Companies (HICs). LCOs shift the burden for health care, retirement, and education to others, pay low, and espouse Theory X leadership (Managers make all decisions. Workers cannot be trusted to do what is right). High Involvement Company managers share decision making with staff; they train staff for the big picture and expect understanding of the bottom line; HICs give workers decision making power in their responsibilities; and, HICs, in hard times, look for alternatives to layoffs; they retain staff as a resource in good times and in bad. (Costco, unlike many other retailers) has not lain off any full-time staff during the current economic depression.)

While both of these organizations do an outstanding job, neither Costco nor Zabar’s is a democracy. They are not perfect (e.g. I wish Costco had more American-made stuff) but they are far better than any of their competitors. Why is that so? When you consider how they are organized to get the job done and when you identify the cultural characteristics shared by Costco and by Zabar’s, you begin to define a superior service model for any organization.

NOTES:
* Jim Sinegal’s stated passion for the job (p.301) When he talks to student groups about career choices he emphasizes never take a job you dislike; it’ll do you harm.
** James O’Toole and Edward E. Lawler III, “The Choices Managers Make – Or Don’t.” The Conference Board Review, September/October 2006, v. 44 #5 pp 24-29.


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