Jim Sinegal's Conventional Logic

By Nick Slepko - September 6, 2012 | Tickers: BRK-B, BRK-A, BBY, COST | 0 Comments

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Costco (NASDAQ: COST) Co-Founder Jim Sinegal’s address to the Democratic Convention was interesting not so much for his endorsement of Obama (both of Costco’s co-founders are regular, high-dollar donors to the Democratic Party), but that his attack on crony capitalism, separate rules for elites, and “reaping and running” got the same (if not more) applause from the delegates at last week’s Republican Convention when Romney and Ryan proposed similar solutions.

Yet, even more popular with consumers and investors have been Costco’s successful battles against unions, lawyers, and state controls on the economy. Still, no organization is perfect, and even Costco, an icon to both sides of the aisle, has its failings. Like other corporations, Costco is only human, even Costco’s Chief Financial Officer has been known to run afoul of the byzantine Securities and Exchange Commission.

It’s the ’Conomy, stupid

This week the tiresome (and awkwardly unchantable) GOP slogan of “We Built It” met its Democratic rejoinder in placards emblazoned “Built to Last.” Assuming the Democrats were not invoking the title of the Grateful Dead’s thirteenth studio album (the cover of which depicts a house of cards), it is even more amusing that Democrats would associate their philosophy with a now thoroughly discredited (yet still popular) platitude-laden bestseller of the same name.

In 2007, Phil Rosenzweig’s The Halo Effect took Jim Collins’ Built to Last and other feel good business tomes to the woodshed and debunked their well-presented, but critically-flawed arguments. Rosenzweig also had time on his side as many of the examples cited by Collins had turned out to have less than sturdy foundations. Still, Rosenzweig did put the book’s appeal in perspective:

What’s going on here isn’t some vast right-wing conspiracy, or left-wing conspiracy or Wall Street conspiracy or Ivy League conspiracy, for that matter. In part it’s a marriage of convenience. Managers are busy people…They naturally search for ready made answers.

Similarly, another Democratic booster, Berkshire Hathaway’s (NYSE: BRK-A)(NYSE: BRK-B) Warren Buffett is popular because he is successful. Moreover, Buffett has been able to cement his celebrity status with his quirky charisma and an ability to communicate in ways that allow people to feel like they understand and can make sense of complex, incongruent, and illogical vagaries that underpin commerce – especially in sectors so close to fickle consumer tastes. Rosenzweig dubs media techniques used by people such as Sinegal and Buffett as delusional storytelling – and anyone that has interviewed captains of industry understands their increased value in light of how amazingly dull and media-challenged most corporate executives can be (relatively speaking, Mitt Romney is a veritable Robin Williams). However, buyers beware, just as Buffett’s public economic philosophy and private business actions have increasingly diverged in recent years, pundits and investors should speculate less on Sinegal’s words and pay more attention to his actions if they want to understand how Costco has been “Built to Last.”

To be sure, the warehouse giant has achieved its success by offering high-quality products at competitive prices – and while traditional service is not to be found, product reliability and liberal return policies more than compensate in most members’ minds for the deficiency. Conversely, Best Buy’s (NYSE: BBY) infamous no-service service has become a cautionary tale (and possibly why they recently brought in a hotelier to lead their turn around). As with Costco, Best Buy has an (effectively) similar lack of immediate, competent, on-the-floor assistance, yet this is rarely noted in the press or by consumers (who actually pony up annual fees for the experience) – chalk it up to the soft consumerism of lowered expectations. Still, there is more to retail than end caps, treasure hunts, and bargains. Execution, supply chains, and big shopping carts all contribute significantly to the industry’s razor thin margins. (The psychic benefits of subsidized Polish dogs don’t hurt either – especially since it deflects awareness from Costco’s increasingly less competitive pricing in other areas.)

Costco has achieved its success in part through busting unions (politely and legally), providing good healthcare (relatively speaking), and not only currying targeted tax breaks (especially at the municipal level), but then also spending its own money to build the infrastructure (roads, etc.) around their warehouses to satisfy community demands (but really to facilitate ease of access to their products and services). These activities shouldn’t be shocking to anyone that follows local zoning disputes or observed Costco’s priorities after its merger with Price Club which involved closing, re-opening, and restructuring its new acquisitions in order to squelch the union activity it had inherited (and which had been a major factor in Price Club’s decline). More important however is that Costco avoided Henry Ford Derangement Syndrome by creating conditions (like any good company does) that made even the most fantastical claims of community organizers unattractive to its workers. (Yet with union membership at historic lows, it would appear that Costco is not the only one treating its employees fairly – though it is telling that public sector union membership has exploded in recent years.)

Moreover, scanning the annual report's list of lawsuits and other litigation against Costco for slips and falls, sexual harassment, discrimination, and a litany of other ambulance chasing wet dreams, the potential liabilities accumulate into the millions of dollars. Costco would definitely benefit materially from tort and other legal reforms (anathema to unions and the Democrats' second largest contributors, lawyers). Knowing this, the company quietly outsources this task to business associations and other representatives.

Also, Sinegal’s affirmation of Costco’s commitment to helping out its suppliers and other small business that stock its shelves is notable, and has made many entrepreneurs incredibly wealthy – that is until Costco devises ways to supplant its suppliers (many of whom are unionized) with the company’s own Kirkland Signature brand (good luck looking for the union label, though “Made in America” turns out to be not as elusive). Still, while (ware)house toilet paper is the company’s best selling item, they still find it necessary to make space for a few other brands more amenable to certain sensitive end users.

As a consumer, these activities are ultimately beneficial, but worth noting for investors that may be given over to the unPR-PR that is the Costco hallmark, is that the retailer has been exceptional in shrewdly managing its public image while others that engage in similar practices are lambasted and scrutinized by the media and other litigious entrepreneurs. Still, Costco is not a grand conspiracy, but neither is it a bulky Pollyanna that simply relies on its members’ word of mouth to tell tales of its good deeds.

Additionally, while awesome by many measures, Jim Sinegal has never been mistaken for a political mastermind. In another incongruity with his statements at the Democratic Convention, he disparaged, “some of my friends in Corporate America [that say] all they need is a government that gets off the back of businesses,” and bemoaned the “hundreds of thousands of dollars” they were donating to the opposition. Yet, he failed to share his own motivations that recently led him to drop millions of Costco’s hard wiped dollars on his second crusade to privatize Washington State’s liquor sales. During that campaign he regularly cited the private sector’s superior abilities in meeting consumer demands – and asserted that the massive spending on the initiative was about principle not profit.

Even more confusing is Costco’s mantra about its superior employee insurance and other benefits which will likely end up forfeit by decade’s end should the Unaffordable Healthcare Act be fully implemented over the next four years. Meanwhile, Sinegal aggressively backs a candidate whose signature accomplishment is a mandate that will turn America’s healthcare system into a Post Office run by Amtrak and whose policies as a whole have reduced the number of those insured (and raised prices on those that still cling to their guns and jobs).

Of course, Costco is no stranger to the public relations game. Most observers seize upon the company’s often repeated refrain that they reduce costs and pass on savings to their members by eliminating unnecessary expenditures like a PR department. While it is true that the company has no formal PR representatives, the functions of that role (and the associated expenses) are still carried out by other personnel added to their marketing, investor relations, and other divisions. At this point, the no PR myth has gone on so long, even long-time employees of Costco don’t see their massive publishing division for what it is (and what it has become).

Upon reflection, it also appears that Jim Sinegal’s conservative blue collar upbringing has clouded his ability to fully appreciate his quintessentially conservative Republican experience – an experience that has formed the core of Costco’s culture and success. So, while partisans on either side are unlikely to emulate Barbra Streisand fans’ reaction to her hypocrisy by shouting, “Shut up and sing,” to the accomplished and revered Sinegal, pundits and investors would do well to consider what Jerry Garcia meant when he sang about things “Built to Last”:

There are times when you can beckon
There are times when you must call
You can shake a lot of wrecking
But you can't take it all

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