Company Advisor & Director, Costco
Costco CEO: High wages, high volume drive results for Costco shareholders
"Mad Money" host Jim Cramer chats with Costco CEO Craig Jalenik about the membership warehouse retailer's business model has translated to higher stock prices.
Charging low prices, moving large amounts of volume and paying high wages are all components in Costco’s secret sauce to return value to shareholders, CEO Craig Jelinek told CNBC in an interview that aired Tuesday.
The stock has risen almost 110 points within the past year. An Oppenheimer analyst upgraded the stock earlier that day, assessing a double-digit rise ahead.
“One of the things about low prices, you generate a lot of volume...
About W. Jelinek
Costco CEO Craig Jelinek has stated that the company is seeing a significant increase in younger members signing up, though he noted that their initial purchasing power is lower than that of older generations. He has emphasized that Costco operates as a "volume company, not a margin company," a philosophy he said has guided the business for 40 years. Jelinek has also highlighted the company's strategy of offering high-quality goods at low prices, citing items like a $2,000 bottle of wine and giant plush teddy bears as examples of "exciting merchandise" that drives the brand. During the COVID-19 pandemic, Jelinek observed strong sales in food, electronics, and home goods, while travel and gasoline businesses declined. He expressed confidence that brick-and-mortar retail would remain important and noted that membership renewal rates remained around 91%. Jelinek has also discussed the company's approach to employee compensation, stating that Costco aims to pay high wages and offer good benefits while maintaining profitability.
Transcript (34 segments)
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Jim Cramer0:11
We left the west coast this week. We checked in with Costco at their flagship store in Issaquah, Washington. This longtime Cramer faith big-box chain has been a huge winner for shareholders, rallying about 50% over the past 12 months, and it just keeps climbing. Today it serves another 2.8% after Oppenheimer upgraded Costco, setting the company's bullish outlook and the fact that the stock has not run as much as others. Now could it have more room to go higher? On Friday we spoke to Craig Jelinek, Costco's bankable president and CEO, who does very little TV.
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W. Jelinek1:10
I think since the beginning, when our founder Jim Sinegal and Jeff Brotman started the company, we always wanted to have great prices, never do it on the back of your people, pay good wages. One of the things we always want to do is pay great wages. If you look at our employees that have been around for 10 years or more, they make almost $29 an hour. Our average wage is about almost $25 an hour. So it's just wages, and we think we're a good place to work. We pay benefits, we've got great people, we want people to stay for the long term. We have four in one case, and it's just great when you have great people who stay with us.
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Jim Cramer2:10
Profit margins. Jim told me the churn, the way that turnover in all the other stores makes it so that you can afford to have those low profit margins and still do better than everybody else.
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W. Jelinek2:22
Absolutely, absolutely. You want longevity, you want good employees. They know their jobs, maybe show you ways to become more efficient as a company. You're only as good as the employees that work with you.
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Jim Cramer2:38
Now you have a few more than 500 stores, 546 stores in America, total of 785, and yet you're the third largest. How can you have so few stores and be the third largest?
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W. Jelinek2:49
Well, you should probably know we're not a margin company, we're a volume company, and we need a lot of volume. We will continue to expand our Costcos, but we're not going to have one on every corner.
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Jim Cramer3:11
This is a beautiful story you have here. I am told that this is where you sold that $450,000 piece of jewelry. How can you have such a diverse clientele? It really kind of encompasses everyone in America.
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W. Jelinek3:32
Well, one of the things we do, no matter what your income level, everybody wants value, right? And that's what we've done from day one: we bring quality merchandise at the best possible price, and we do it everywhere that we sell merchandise.
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Jim Cramer4:10
But you're part of the reason why we don't have inflation in this country.
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W. Jelinek4:14
Well, that's certainly very nice of you to say. We have a responsibility to figure out how little we can make off of the product instead of how much we can make. We want to sell a lot. We're in the volume business, not the margin business.
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Jim Cramer4:34
That works worldwide as a concept, correct?
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W. Jelinek4:37
Absolutely. It even works in Shanghai, where you had been reluctant to do business in China, you personally, but it looks like you're almost too successful in Shanghai.
Well, we're very early in the game. When we opened up in Shanghai, we opened up very strong, and we learned a lot. We opened up the next day and it's business as usual over there.
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Jim Cramer5:19
I have some great shirts, they're made in Indonesia. Is that a way to be able to avoid Chinese tariffs?
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W. Jelinek5:25
No, that's not it at all. We've had a factory over there. Well, when I say a factory, our supplier has made the shirts over there. We've been with this supplier, who's been making our Kirkland Signature shirts for 20 plus years, and they do a very good job. They're great quality shirts.
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Jim Cramer5:45
I'm big, you mention Kirkland. I have a Walton family and I'm proud to be a long-term shopper at Costco. I've walked and found that the Kirkland brand is superior to the branded items.
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W. Jelinek6:10
Kirkland wasn't that sophisticated a way to come up with a name, but we wanted it to be. We don't do any advertising, as you know. You can put the Kirkland Signature on toilet paper, you can put it on wine, you can put it on just about anything, and we're proud of that brand. If you do a good job and build a quality item, you're going to have trust with your members.
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Jim Cramer6:37
Let's talk about the stock, which has been an incredible performer. There's gotta be tension between a special dividend that you give and low prices as members. I mean, why are you giving special dividends and also charging what you do for membership? Because I've always tried to figure out what the market is.
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W. Jelinek7:10
The markets are at an all-time high. One of the things about low prices: you generate a lot of volume. When you generate a lot of volume, you generate cash, and you have a responsibility to your shareholders. The stock has appreciated. We've done special dividends in the past. We always think about when the right time might be to do another special dividend. We have no plans right at the moment, but we will always look at that.
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Jim Cramer7:46
You have a huge amount of money that comes in from subscription fees. How do you decide when it's time to take that price increase? Because it looks like nobody drops off when you do.
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W. Jelinek8:10
That on the bottom line, we turn around and lower prices and work off less margins.
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Jim Cramer8:17
I find that because of your low prices, you can pretty much defeat anyone, including someone who is located in town, Amazon. I find better buys here than I do on Amazon. Is that conceivable? You're not going to get some of these prices on Amazon.
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W. Jelinek8:36
Well, I don't worry about Amazon because it's a competitor, right? Really what we need to do is worry about what we can do well: figure out how to lower prices, lower our expenses. The lower the expenses we have, the more efficient we become, the more we can lower prices.
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Jim Cramer8:55
The word that comes to mind is the greatest retailer in our country.
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W. Jelinek9:13
Well, you're very kind about the greatest retailer in the country. As I said before, we don't really turn a lot of people. We've been very blessed as a company because even from our founders, it's a lot of hard work from our employees, and we don't take anything for granted. We feel good that we have a purpose to create lower prices for people where we do business. We have a responsibility to try to do that and make a little money for our shareholders.
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Jim Cramer9:48
You've mentioned the word responsibility many times, again very different from the way other retailers talk.
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W. Jelinek10:10
We do have a great membership base. We communicate to that membership base. I think they trust us when they come in to buy merchandise that this is going to be the best price they see for quality merchandise. I think that's just the way we run our business. I can't speak for everybody else, but I think our values on merchandise just tells the story.
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Jim Cramer10:35
Are you ever afraid that you give away too much? Mr. Galanti runs a fantastic conference call. You give away cannibalization numbers, you talk about 20 basis points in this, 138 points internationally. You're giving away information that is secret at other stores.
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W. Jelinek10:48
We try to be transparent. I mean, it is what it is. We're going to talk to you about it.
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Jim Cramer11:11
I'm a proud member. I've never seen you screw up, but maybe that's just the way we as consumers know you guys, and we appreciate that.
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W. Jelinek11:19
Absolutely. And it's a joy. It is still a treasure hunt. It's the best price. Thank you.
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Jim Cramer11:24
That's Craig Jelinek, he's the Costco CEO. Mr. Jelinek, thank you sir.
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W. Jelinek11:29
Thank you, and we appreciate you coming back. Thank you.
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Jim Cramer11:34
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