Photo: Unsplash
October 30, 2023
What Is Craig Jelinek’s Legacy at Costco?
Last week’s announcement that Craig Jelinek, the second CEO in Costco’s 40-year history, plans to retire in early 2024 led to articles highlighting his commitment to low prices (and margins) and treating employees well.
Costco’s commitment to low prices is best exemplified by the warehouse club’s $1.50 hot-dog-and-fountain-drink combo, the same price since its introduction in 1985. Also called out was Costco’s popular $4.99 rotisserie chicken, supported by the 2019 opening of a $450 million poultry complex in Nebraska.
Costco’s corporate staff also has a reputation for frugalness across operations, including paying executives well below their peers. Coupled with buying bulk in fewer quantities and the benefit of membership fees, an emphasis on passing down expense savings has helped keep prices low.
Jelinek told Yahoo Finance last December that he believes Costco is the low-price leader across most essential categories. He said, “Our markup’s about 13%. So any rebate money we get, we pass right on to the consumer. We’re a top-line company. We drive sales. We’re not a margin company.”
One area where Costco doesn’t skimp is employees, where the warehouse club has built a reputation for above-average pay and benefits.
“I just think people need to make a living wage with health benefits,” Jelinek told Bloomberg in 2013. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”
Jelinek has been a contrarian among retail execs as a strong advocate for raising the federal minimum wage.
Since taking over in January 2012, Costco has grown from 592 clubs to 861, including entering China, Spain, France, Iceland, New Zealand, and Sweden.
Earning less attention as part of Jelinek’s 11-year CEO tenure has been Costco’s continued commitment to quality, its opportunistic buying approach that supports the club’s treasure hunt experience, and the further development of the Kirkland Signature brand.
His successor, Ron Vachris, a 40-plus-year Costco vet and current COO, will continue to face questions over margins, Costco’s slow approach to e-commerce, and a likely membership fee hike in 2024.
William Blair & Co. analyst Phillip Blee wrote in a note, according to Winsight Grocery, that the promotion was expected and Vachris is well-prepped for the job. He said, “We believe the long tenure of Vachris and the broader executive management team, coupled with the company’s lean, consistent operating model, should ease investor concerns about a potentially bumpy transition on the retirement of Jelinek.”
Discussion Questions
What lessons should be taken from Craig Jelinek’s success at Costco? What advice would you have for Ron Vachris in guiding Costco’s next phase of growth?
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Bob Amster
Principal, Retail Technology Group
Gary Sankary
Retail Industry Strategy, Esri
Lisa Taylor
Retail Consultant, JL Buchanan
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The Costco culture is ingrained in its employees. The fact that the only-second CEO is followed by an executive with over 20 years in the company almost ensures that there will be continuity of culture and of thought. Not many businesses can boast that. Costco management knows what makes them successful. The question that has to be continuously answered is how does the same-and-future Costco respond to changes in the marketplace. I am confident.
There are several lessons to take away from Craig Jelinek’s remarkable tenure as CEO of Costco including, staying true to their low-cost model, commitment to product quality and not jumping on the latest fads in the industry. Under Jelinek’s leadership, Costco has successfully navigated some of the most dramatic and challenging times ever faced by retailers. The in-coming CEO, who has a depth of experience at Costco, should continue to execute the success playbook that has delivered the exceptional outcomes Costco has experienced, and then slowly and carefully bring new initiatives to move the business to new heights. Mr. Vachris has big shoes to fill and I’m hopeful that he will.
The most important number in the whole Costco story is the 13% margin number, not $1.50 hot dogs or $4.99 rotisserie chickens. The hot dogs and chickens make for clever PR, but it is Costco’s ongoing commitment to razor thin margins that is the foundation to their business. It’s the margin number that is the mechanism that allows Costco to offer such incredible value to their members. The commitment to that number is the story for both the outgoing and incoming CEO. The temptation to raise that number must be enormous. Even just a couple of points on Costco’s sales volume would mean an enormous boost in profitability. But…it could also mean potential erosion in the value they provide and potential erosion in the trust in their brand promise. The membership fee is maybe the best value in all of retail, even if they raise it a couple of bucks. Let’s keep things in perspective here.
The lesson that I’ll take away is that you can be successful in the retail space AND you can value your employees and be responsible corporate citizens. The number of retailers who are able to succeed on all three of these metrics is very rare indeed. Congrats to Mr. Jelinek and to Costo.
Great way to put it. And all on 13% margin. Pretty amazing the leverage that is gained from BIG sales (total and per square foot) numbers.
Costco has had a lengthy track record of success. The retail brand has even permeated popular culture with the ” Costco Run” . When you say that phrase, everyone knows what that means, and most of the time they want to go. Mr Jelinek and the Coscto team were likely most tested in the past few years during Covid. The team adapted where it needed to but stuck to its’ strengths of great prices, excellent people, and discovery at retail. Mr. Vachris and the team at Costco have years of experience and will likely be able to stay on the same successful path as long as they respond appropriately to the ongoing changes in consumer needs and the marketplace.
Costco is the gold standard of customer and employee experience top to bottom. They care about their employees and in turn, their employees care about their customers. Their customer centricity is unwavering and customers return that dedication with true Brand Love. Kind of simple when you think about it, but if you don’t have customers there will be no business. All too often, retailers will say they are customer centric, but then take actions that are “for the business” that fly in the face of the customer experience. It may not damage the brand in the short term, but when “for the business” decisions begin to outstrip customer centricity, Brand Love slowly disappears. If the new CEO stays true to the culture and keeps listening and evolving with their customers and continue driving a positive employee experience Costco will continue to outperform the market.
My advice: don’t change a thing.
Well, actually, that’s probably not very smart: the world changes, and smart retailers have to change with it (taken literally, the advice would be terrible). So let’s revise that to : don’t change the processes that are in place, they seem to be working just fine.