COSTCO

Shoppers have made Costco Wholesale a UK a success. Net sales in the UK have risen 83% from 2000 to 2003, compared with 46% growth for Wal-Mart, which owns the Asda store chain. Costco can grow faster because a quirk in UK laws excludes it from the classification given to Wal-Mart and Tesco when applying to open new stores. "Costco's had an easy ride because it's found a loophole in the UK planning system," said Tony Bowhill, a London-based planning consultant at CGMS Consulting Ltd. "It's amazing it calls itself a wholesaler rather than a retailer, because around 30% of its sales come from individual customers rather than businesses."

Costco generated $2.6 billion in sales outside the US and Canada in 2003 and 80% of it came from its 15 UK outlets. Bowhill said that because current UK rules have no category for warehouse-club stores, the company has found it easy to obtain permission for its 120,000-square-foot outlets. The "A1" rating planners attach to Costco's retail competitors has slowed their expansion plans as regulators curtail large-scale developments to preserve smaller city centre shops. Francis Ball, Costco UK managing director, confirmed that individual sales account for 30% of revenue, and said the company is well known as a warehouse club in the United States. "We are sui generis and we don't fall into existing classifications," he says.

In the United States, Costco competes for customers against Wal-Mart's Sam's Club and BJ's Wholesale Club Inc. In the United Kingdom, Costco is the only warehouse-club store chain also open to individuals. Costco still remains small compared with its main UK competitors. Tesco said its 1,878 UK stores collected one out of every eight pounds spent by shoppers in 2004, with a total of Ł31billion in sales. "Entering a new market is always a risk," said Patricia Edwards, fund manager at Seattle-based Wentworth, Hauser & Violich, "Costco takes its time going into new markets and researches them very well before entering."

Driven by UK growth, Costco's international sales grew 25% from 2002 to 2004, compared with 11% in the United States, according to data compiled by Bloomberg. Each UK store, which offers goods ranging from designer jeans to toilet paper, had average sales of Ł60.6million in 2003, said Bryan Roberts, an analyst at London-based consultant Planet Retail. Planet Retail's Roberts said that for most UK shoppers, Costco's appeal lies in the company's ability to sell a wide variety of products. "Customers range from high-earning barristers to cost-conscious single mothers," he said. "Costco is dangerous to Tesco and Wal-Mart because it appeals to shoppers across the board."

Costco's CEO Jim Sinegal has revealed plans to retire. Sinegal's not vanishing completely, He will seek reelection to the company's board next year, and will serve as an advisor until January 2013. Perhaps because of that gentle transition, investors have thus far taken the news in stride. Costco's 11% surge in same-store sales in the latest quarter, 6%, excluding fuel, might also have lessened the sting of Sinegal's pending goodbye. However, Sinegal's departure gives investors who value strong managers plenty of food for thought. Sinegal's been worth his weight in gold, a valuable intangible asset who's steered his company into a strong competitive position against discount rivals.

Sinegal also set a high standard for behaviour that more chief executives in corporate America should follow. His pay has never been outrageous, his base salary last year was $350,000. He has resisted Wall Street's short-term pressures and provided excellent benefits for Costco employees, recognizing that healthy, happy employees lessen worker turnover and help create a better customer experience. Furthermore, Sinegal has consistently defended his long-term approach to building his company, in defiance of Wall Street's frenetic quarter-by-quarter profit demands. His old-fashioned approach to leadership includes answering his own telephone and paying personal visits to every Costco warehouse.

In fact, Sinegal's exemplary 20-year leadership of Costco was a major reason this company has been a longtime favourite of many. Happily, fans of principled leadership have no reason to ditch Costco now. COO Craig Jelinek, a 28-year Costco veteran, is slated to succeed Sinegal in the CEO position. His lengthy tenure certainly implies that Jelinek's on board with Sinegal's vision. Costco without Sinegal could be a strange place indeed. But there's good reason to believe the strong foundation formed under Sinegal's stewardship remains reassuringly tough to crack. (Source: Motley Fool, Sep/11)