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  • Writer's pictureDavid Miller

The Costco Story: A Word-of-Mouth Marketing Wonder Part One

James Sinegal, co-founder and former CEO, was born January 1st, 1936 into a working-class Catholic family in Pittsburgh, Pennsylvania. After an insignificant performance in grade school, in 1954, Jim began his work career as a bag boy at Fed-Mart, a local, discount department store. There, we can confidently assume, his passion for all things retail was born.

For 25 years Jim worked his way up through the ranks of that department store, to Executive Vice President. That’s 25 years of dedication to studying, observing and absorbing the art of selling anything and everything.

Of course, behind any good businessman, is a good businessman. Enter Jeff Brotman; most famously known as co-founder and chairman of Costco, and more importantly Jim’s friend, confidant, and business partner for over 35 years.

Jeffrey H. Brotman was born September 27th, 1942, to a Jewish family, in Tacoma, Washington. To his good fortune, he entered into a family already well versed in retail. Jeff’s father Bernie owned and operated a chain of retail stores in Washington and Oregon, aptly named ‘Bernie’ after its founder. It was said that the Brotman children “learned early and often that money was fleeting and work was the answer to your problems”. They grew up working in the family business which consumed every moment and every aspect of their lives.

Graduating in 1964 with a degree in Political Science, which was followed by a Law degree in 1967, Jeff practiced law for seven years before returning to his retail roots. Along with his brother, Jeff founded two different clothing stores: one for women and one for men.

From his ingrained sense of hard work and deeply rooted values, Jeff also grew a passion for people. He was known as someone who put people and principles before profit.

At this time, Jim, the other half of this great partnership, had been honing his managerial skills under the mentorship of Sol Price, the owner of Fed-Mart. Through Sol’s guidance, Jim developed the same respect for his employees as Sol had demonstrated to his young grasshopper.

These shared core principles of compassionate leadership were key in Jeff and Jim’s compatibility to become the co-founders of Costco.

After returning from a trip to France, and experiencing a discount grocery/department store, Jeff conceptualized bringing a European-style hypermarket to North America. With the business model ready, he needed a partner. He had heard of Jim Sinegal, and his penchant for consumer business and his employee centric management style. It was revealed that Jeff picked up the phone and called Jim, much like a cold-call. The call may have gone something like this: “Jim, would you like to be my lifelong business partner and open up a retail giant worth billions of dollars with 795 stores worldwide. And, by the way, we will do all this without ever spending a dime on advertising...”

In an interview on CNN in 2009 Jim recalled hitting it off with Jeff immediately.

“…looking for a business partner, you’re looking for intelligence, vision and persistence...”

Let’s pretend the decision to use word-of-mouth marketing exclusively to build their business was intentionally made from the outset. It could be assumed that growth would be slow and arduous, but with persistence, they would prevail. But unbeknownst to them, they had all the qualities and attributes necessary to capitalize on and create the greatest growth cycle in retail history. They had principles, values, and experience. This was the foundation for their processes, structure, and organization. Their consistency and congruence resonated with the employees and the consumer.

The Costco story was new and exciting enough to create a brand that people aspired to be a part of. You could easily tell someone why they did what they did, how they did it, the products you could purchase, and their pricing model. Their value was clear and precise. As well, their stores are all laid out in an identical fashion. Their checkouts are also laid out the same way and they always have two people there to serve you. Your membership card has to be shown when you enter the store, and when you are paying for your purchases. They also did not take credit cards (originally), which would cut into their razor-sharp pricing model. When you leave the store you have to show your receipt and someone checks the goods you had in your cart. This saves them millions in shoplifting but also adds exclusivity and a sense of membership. It is also part of the story customers tell to others. To top it off, they charge a yearly fee for that membership. And once a member, you are immediately engaged and want to share your newfound privilege with everyone you know.

At the end of year one, Costco had 250,000 paying members. At the end of the third year they had crossed over $1 billion in sales. Pause and think about those numbers and the fact it was all done by word-of-mouth. Within five years they had exceeded $7 billion in sales. In 2020 their reported revenue from membership fees alone was over $3.5 billion.

The struggle for most businesses is growth. The Costco success story makes us wonder, analyze, and discuss - how to start a business from scratch, and become so popular with consumers in a similarly short amount of time. Ultimately very few businesses focus on their brand versus their product. Contrary to the old saying ‘build a better mousetrap and the world will beat a path to your door’, your product is somewhat irrelevant. As already stated, this is a workbook that gives you the algorithm or formula, to create your compelling brand.

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