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Fascinating piece in Fortune looking at the ways in which Costco has proven to be a formidable competitor to Wal-Mart and is, in fact, one of the few companies that Wal-Mart fears.

"During the past ten years Wal-Mart has gone through five CEOs and countless stratagems at Sam's Club trying to assume its customary command," Fortune reports. "All have been thwarted by Costco Wholesale, the master of the cavernous space.

"Consider some figures. Sam's Club has 71% more U.S. stores than Costco (532 to 312), yet for the year ended Aug. 31, Costco had 5% more sales ($34.4 billion vs. an estimated $32.9 billion). The average Costco store generates nearly double the revenue of a Sam's Club ($112 million vs. $63 million)."

One big difference between the two companies, according to the magazine: Costco CEO James D. Sinegal, who has created the culture that makes the company unique. "He caps Costco's markups at 14% (department store markups can reach 40%). He offers the best wages and benefits in retail (full time hourly workers make $40,000 after four years). He gives customers blanket permission for returns: no receipts; no questions; no time limits, except for computers - and even then the grace period is six months."

Fortune notes that Sinegal and Costco recently have been criticized by analysts for not sufficiently reducing labor costs and trimming health care costs, with one analyst suggesting that Costco is better at taking care of customers than shareholders. Sinegal's response: "We think when you take care of your customer and your employees, your shareholders are going to be rewarded in the long run. And I'm one of them [the shareholders]; I care about the stock price. But we're not going to do something for the sake of one quarter that's going to destroy the fabric of our company and what we stand for."

Another thing that makes Sinegal unique: "Sinegal has also kept himself in the good graces of subordinates by limiting his pay. His $350,000 salary last year was practically cause for drumming him out of the Fortune 500 CEO club; and at his own request, he took no bonus for the third consecutive year. He does have $16.5 million worth of options, but he's intent on capping his salary and bonus at about twice the level of a Costco store manager."

While Wal-Mart's Sam's Club division is trying hard to be more competitive with Costco, Fortune notes that Sinegal thrives on the competition. "We've succeeded by being a moving target, by hitting them where they ain't," says Sinegal. "We need constant reminders to keep us on our game. I say at our management conferences that the amount Wal-Mart grows in just one year is the equivalent of Costco's size."
KC's View:
The thing that makes Costco such an interesting place to shop is that it seems to speak eloquently to possibility, to surprise, to aspiration. There's always the sense that there might be some surprise around the corner, something unexpected to spark the imagination. That is an enormously valuable component that has nothing to do with margins or efficiency, and it is something that too many retailers forget.

Besides that, Costco has an progressive attitude toward its employees, and believes that customers are more important than shareholders.

An enlightened company with enlightened management. That's refreshing.

And speaking of enlightened companies…