At Costco, one of Mr. Sinegal’s cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.
“They could probably get more money for a lot of items they sell,” said Ed Weller, a retailing analyst at ThinkEquity.
But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.
Although there's more to Costco than its prices (the "treasure hunt" it engineers), having a firm limit on retail margins is part of its relationship with consumers. Consumers sometimes win big in this relationship. Where demand is extraordinarily high, Costco could break its 15 per cent rule and both raise profits and reduce out-of-stocks. This is commonly referred to as "good business".
But the unflappable Sinegal stands firm, in a sense allowing consumers to occasionally win a "shopping jackpot," further fulfilling its treasure hunt experience.
For casinos, their stream of revenue requires that they frequently hand over bags of money to random strangers. Any eight year old knows that this is their essential element (that and unnecessary sequins). Stop the jackpots and a casino wouldn't last a day.
Seems obvious. And it is obvious to Jim Sinegal. So why do other businesses subordinate their essential element to bottom line cost control?
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