Getting a lesson in retail inside world's busiest Costco

HONOLULU — Papa, which has been around longer, Wal-Mart or Costco?

Cooper McGill's head barely skims the top of the seat. He's riding shotgun in a Cadillac sedan.

Wal-Mart, answers Jim Sinegal. He's driving west along Kamehameha Highway to the second of three locations they'll visit that day. Cooper, 10, has but one thought about the matter: Curses.

Sinegal chuckles at his grandson's response, a hint of pride in his voice.

Curses, he says, is right.

The chief executive of Costco — the Issaquah warehouse-club chain that conditioned Americans to buy toilet paper in packs of 36 and Baccarat crystal off wooden crates — has no reason to curse the company's status in the retailing world.

Often held up as the antithesis of Wal-Mart for its generous pay packages among retailers, it holds the distinction as the country's fifth-largest retailer and is No. 32 on the Fortune 500. Wal-Mart, the world's largest retailer, is No. 1 on the list; another competitor, Target, is No. 33.

While the average Costco warehouse rings up a staggering $129 million annually, one stands out for its sheer volume of business:

The Iwilei (pronounced ee-VEE-lay) Costco — the largest among the company's three Oahu locations — posted $300 million in sales last year.

On this day, store manager Robert Loomis paces near the entrance awaiting Sinegal's arrival, a wall of Mauna Loa nuts behind him. While the chain boasts other high-octane warehouses, this site has been No. 1 for the last 19 months.

Nearly one in every four island residents — more than 190,000 — joined the club at this store. Tack on the other two locations — Waipio and Hawaii Kai — and half the residents carry a Costco card.

Iwilei is so busy, in fact, that it turns its entire inventory every two-and-a-half to three weeks — a logistical wonder considering most everything comes in by water. "My responsibility," Loomis says, "is to make you leave with something you didn't know about."

Minutes later, a tanned Sinegal strides into the warehouse, wearing an aloha shirt and slacks, his grandson at his side.

"It's never too early," he quips, referring to his surprise companion.

Never too early, to be sure.

A $1.50 hot dog, Sprite, two warehouse tours and a Very Berry sundae later, Cooper will find himself deep in enemy territory, staring at a rack of men's aloha shirts inside Costco's chief competitor, Sam's Club.

But more on that later.

The treasure hunt

Costco's approach to retail is deceptively simple and it goes far toward explaining why shoppers here (and around the world) leave its warehouses with appreciably lighter wallets.

For an annual fee, members buy the right to purchase items in bulk at steep discounts. But beyond the 1-gallon jugs of canola oil and 30-pound bags of rice, at the heart of this model is the treasure hunt — the discovery of that thingamajig that you never knew you needed until just now.

Each warehouse carries roughly 4,000 SKUs, or stock keeping units. Each SKU represents an item at the most granular level of style, color and size.

A pair of Burberry Ladies Golf Slacks, size 8 in Surfer Blue, is one SKU. The same pair, in size 10, is another.

Of the 4,000 SKUs at a typical store, 3,000 are staple items that never change, from eggs to bread to milk. The other 1,000 represent the treasure hunt for which Costco has become known.

Pass on the muffins for now, but not on the natural stone pond and waterfall kit. And what of the Minnesota Fats Professional Billiard Table? Here today (for $899.99), gone tomorrow.

In Hawaii the demand is more pronounced because of the value it offers residents. James Wills Jr., a marketing professor at the University of Hawaii Shidler College of Business, says land and manufacturing here is so scarce that it drives up the cost for everything from milk to cars to shoes. Costco was the first retailer to fill that vacuum, offering goods at prices locals hadn't known before. The company caps its markups at 14 percent regardless of product or location, although freight is added to the prices in Hawaii.

Wall Street has punished the company by holding down its stock price for much of the last year as investors favor companies with fatter profits.

Wills remembers buying so much on his first visit that he had to call his son to bring a pickup. "We still laugh at that," Wills says. "We bought some things that we'd never seen in such large quantities."

Business from tourists

Sinegal moves around the Iwilei warehouse quickly, stopping only to greet front-line employees, usually by first name. Loomis and a small group of managers follow behind him, pointing out items that have either sold well or tapered off.

Sinegal zeros in on prices, looking to see whether an item is right for the market, of value and in stock. "How's it doing?" he asks, walking up to a Sharp-brand TV. "Eleven thousand [dollars worth] last week, boss," Loomis says, "and 20,000 [dollars] on Thursday."

It's common, employees say, for Sinegal to know prices by heart. He stops at a table of Anne Lanvin ladies short-sleeve shirts. The price is $14.49; he thinks the correct price is 50 cents higher.

While managers scramble to clarify the discrepancy, he's already moved on to a table of LizWear V-neck tees.

After digging through a pile of tees, Sinegal jots down in a leather-bound notebook that he couldn't find a size large. "Our customer is a more mature customer, about 30 to 50" years old, Sinegal explains later of the sizes.

If Iwilei has challenges keeping V-neck tees in stock, it's busy for other reasons, the most obvious of which is tourism and the businesses that serve the island's queen industry.

Of the 7.5 million visitors to Hawaii in 2005, three-quarters were from the U.S., according to the Hawaii Department of Business, Economic Development and Tourism.

Costco's Iwilei club is positioned between the airport and Waikiki for that reason. With roughly 380 warehouses across the U.S. and nearly 50 million members, "if they're coming here and have a time share," Sinegal says, "they'll drop by Costco."

They go the other way, too. Visitors stop here on the way to the airport to pick up local souvenirs. That wall of Mauna Loa nuts gets replenished often.

Family-focused culture

The warehouses don't survive on tourism dollars alone. (Those flat-panel TVs at the entrance aren't for lugging back to the mainland.)

Dolly Omiya, a spokeswoman for the University of Hawaii at Manoa and a third-generation native, says the model works here because the local culture centers on the outdoors, family and food.

Omiya prepares a potluck dish twice weekly for her daughter's sporting events or family gatherings and hers is a rather small family of three. At work, her department has "Costco potlucks."

"I don't know anyone who doesn't have a Costco card in my office," she says.

The clubs are crowded for other reasons. On Oahu, the median sales price for a single-family home is $620,000, so it's common for multiple generations to live in the same household, including adult siblings, grandparents and cousins, making it worthwhile to buy in bulk.

The demand for multigenerational housing was such that the Hawaii state legislature enacted Ohana (or family) zoning in the early 1980s, giving counties the ability to permit second dwellings on residential lots.

In certain areas, it's not unusual to find 10 extended family members living in the same home, Omiya says. "There are more people building homes jointly or they buy it together," she says.

And then there's the occasional rush for supplies. Still fresh in their collective consciousness: the monthslong West Coast dock strike in the early '70s that dragged on long enough for the island to run out of toilet paper.

"As soon as we hear 'a hurricane is coming' or 'there's a labor dispute among union dock workers,' we immediately go and buy several things — toilet paper, rice and water," Omiya says. "That's only because we live on an island; things cannot just be driven in."

Sinegal's maverick ways

Sinegal has been visiting the islands with his family for nearly 40 years. They often travel to Maui the day after Christmas and stay about eight days. "That gives me an opportunity to visit all our buildings," Sinegal says.

Sinegal founded Costco in 1983 with Jeff Brotman. They envisioned a chain of stores modeled after the hypermarkets Brotman had seen in Europe — stores that sold huge volumes of food and other merchandise — and the pioneering Price Club warehouses, where Sinegal had been an executive. Costco and Price Club merged 10 years later.

Costco is so big now that it's difficult to visit every store yearly, although he's inside the Issaquah flagship store "just about every day." The company plans to open 30 stores in the next 12 months.

Before traveling to Hawaii, Sinegal had just finished visiting Costco's 15 Asian warehouses in five days — no small feat considering they're spread throughout Korea, Taiwan and Japan.

When asked about his work ethic, the anti-celebrity CEO gets uncomfortable. "You're all of a sudden coming over to ... " Sinegal begins. In all his years, he's never consented to a personal profile.

His oft-cited mantra: The media turns CEOs into superheroes, when in reality, it takes more than one talented person to run a company. Even so, the public fascination with Costco — and Sinegal — stems partly from his maverick ways. At the company's Issaquah headquarters, Sinegal's office is an open space with no door. His desk is pushed up against the wall so that, at first glance, he appears to be someone else's secretary.

Behind his desk is a montage of employee photos. (On one occasion, his annual financial goals were push-pinned to the wall like a grocery list.)

The company, with $59 billion in sales last year, has no public-relations manager, let alone a PR machine. Whereas far smaller public companies surround the CEO with layers of impenetrability, Sinegal answers his own phone, usually on the first ring.

Kelly Taylor, a Costco foods manager, says employees genuinely feel Sinegal is sincere. "We know he works as hard as we do," she says. "I don't feel he's some big CEO in a corporate office in the sky."

Ivan Ogoshi, an assistant manager at another Costco warehouse on the island, explains it's one of the reasons he's remained with the company — this tendency to do things quietly without the expectation of applause.

A decade ago, his son Lance was born with a growth hormone deficiency; at 3, his growth flatlined. Ogoshi's insurance wouldn't cover the $1,000-a-month prescription. "I was ready to sell my house," he says.

Word traveled upward and Costco quietly paid for his son's medication for several years. Ogoshi's part was a $100-a-month co-pay. "Right now, he's five-foot-eight. He's 13," Ogoshi says of his son. "He goes to one of the best private schools on the island."

When asked later about the incident, Sinegal seems surprised that Ogoshi shared such a personal story. "He said that?"

Sinegal doesn't say anything more; he seems touched.

A young trainee

At 71, Sinegal says he has no plans of retiring soon. "I'm enjoying the job," he says. "I think the board of directors will determine when it's time for me to quit."

He doesn't think it would be difficult to identify a successor; one perhaps is sitting in the passenger seat of his car.

After visiting two of its three Oahu warehouses, Sinegal makes a surprising side stop. "This is a very bad corner," he says, turning the Cadillac into a covered parking garage. "It has a Home Depot, Wal-Mart and a Sam's."

Sinegal strolls inside the doors of Costco's chief competitor, Sam's Club, Cooper's hand in his. They draw little attention; they linger near Two Paddles brand men's aloha shirts. Sinegal stops to jot notes inside his leather binder.

The shirts go for $16.86. See, Cooper says, pointing to the display. The prices are higher.

Sinegal lingers over the USA Today Best Books display. Sam's has leaning bookshelves, whereas Costco's books are displayed flat. There's not very many people here, Cooper says helpfully.

Sinegal presses on, hovering over the display of Ahi tuna halves, never frozen. They move onto the wine display. (Costco is the largest retailer of wine in the country. Last fiscal year it sold $390 million in wine, or nearly half of its total wine sales in the United States.)

Cooper continues to press his point about higher prices. One bottle of wine here costs 98 dollars and 83 cents, he says, his blue eyes now wide as saucers. He points for emphasis. See.

The final stop is the food court, which looks exactly like Costco's, down to the $1.50 hot dog and drink. Cooper is not fooled. They have a Very Berry Sundae, too, he says, wrinkling his nose.

Later, when told about Cooper's comments, Sinegal chuckled.

"He's a smart boy," Sinegal would say.

Back in the Cadillac, Sinegal presses this point further on a call with his assistant. "He's holding up better than his grandpa," he says. "He's up for vice president."