Costco: Simplicity Built on Conviction - HBR Article
How Costco’s Code of Ethics and Five Convictions Created a Retailer That Endures
In the volatile world of retail, few companies endure with consistent excellence. Walmart has battled reputational issues, Starbucks lost its footing after Schultz’s first departure, and even Apple stumbled when Steve Jobs was pushed out in 1985. Yet Costco - the membership warehouse retailer - has defied this pattern. Since its legendary cofounder Jim Sinegal retired in 2012, Costco has not only maintained its identity but also expanded to become the third-largest retailer in the world by 2024, behind only Walmart and Amazon.
The numbers are remarkable (Ton Zeynep, 2025):
$250 billion in annual sales
333,000 employees worldwide
93% membership renewal rate in the U.S. and Canada
8% employee turnover, less than one-seventh the retail average
17% compounded annual stock returns over three decades versus 9% for the S&P 500
How has Costco sustained this rare balance of customer loyalty, employee commitment, supplier respect, and shareholder value? The answer lies in a simple but powerful framework: its Code of Ethics and five deeply held convictions that Sinegal embedded in the company’s DNA.
The Code of Ethics: A Social Contract
Sinegal and his cofounder Jeffrey Brotman didn’t aspire to build the biggest retailer, but the best. In 1983, when a state inspector subjected Costco to endless bureaucratic hurdles over its license application, Sinegal realized the company needed to inoculate itself against skeptics. The solution was to make Costco unimpeachable in integrity and value.
The result was a Code of Ethics, displayed in every warehouse (Ton Zeynep, 2025):
Obey the law
Take care of customers
Take care of employees
Respect suppliers
Reward shareholders
The order was deliberate. Shareholder value came last because Sinegal believed violating principles two and three - to cut wages or raise prices - would ultimately undermine principle five. In his words, “nobody’s going to be able to say that we’re making money off the backs of our employees.”
This hierarchy disciplined the company to resist Wall Street’s pressure for short-term gains and laid the foundation for Costco’s enduring trust.
Conviction 1: Don’t Blindly Imitate Others
Costco’s first conviction was to stay true to its value proposition instead of chasing fads.
The iconic “salmon story” illustrates this. When Costco first introduced salmon in 1987, it was $7.99/lb, skin-on, untrimmed, with pin bones. Over time, buyers eliminated belly fat, fins, bones, and even the lateral line, while cutting the price to $4.99/lb. Each improvement reinforced the core promise: better quality, lower cost.
Sinegal applied the same principle elsewhere:
Costco resisted credit cards until fees dropped below 0.5% (vs. the 2.2–2.5% industry norm).
It rejected the industry norm of low wages and high turnover, instead paying well and promoting from within.
Nearly all management roles are filled internally, creating careers, not just jobs.
Wall Street analysts scoffed. One quipped that Costco was better for employees and customers than shareholders. Sinegal’s response was blunt: “If you don’t like it, sell the stock.” The long-term returns vindicated him (Ton Zeynep, 2025).
Why it matters: This conviction created an organizational muscle to say “no.” Costco didn’t copy loyalty programs, same-day delivery, or other trends unless they directly improved its value proposition. This clarity protected the company from dilution and built consistency customers could rely on.
Conviction 2: Discipline Sustains Advantage
The warehouse model wasn’t Costco’s invention - it came from Sinegal’s mentor, Sol Price, who pioneered Price Club. But while others copied the model, Costco excelled because it stuck to it with discipline.
SKU discipline: Costco carried about 3,800 stock-keeping units (SKUs), compared to 8,000 at Sam’s Club. By avoiding assortment creep, Costco sustained efficiency and negotiating power.
“Intelligent loss of sales”: Costco walked away from products that didn’t fit the model. Slim-fit shirts were dropped because they complicated inventory and reduced labor productivity.
Markup discipline: No branded item marked up more than 14%, no Kirkland Signature more than 15%. Even when customers wouldn’t notice, Costco refused temptation.
Sinegal compared excessive markups to heroin: addictive and destructive. Discipline prevented Costco from chasing short-term margin at the cost of long-term trust (Ton Zeynep, 2025).
Why it matters: In an environment of constant pressure to “do more,” Costco’s willingness to do less - and to do it better - preserved its competitive edge. Simplicity was not laziness, but rigor.
Conviction 3: The Shop Floor Is Where the Money Is Made
Most CEOs know they should stay close to the frontline, but few actually do. Research shows leaders spend only about 6% of their time with rank-and-file employees. Sinegal was different: he spent 200 days a year visiting warehouses (Ton Zeynep, 2025).
His visits were not symbolic. He inspected pricing, displays, morale, and quizzed managers. Even after retirement, he couldn’t stop - once spotting a $2 discrepancy on garden hoses and questioning why a store carried too many laptop models.
Frontline discipline extended beyond visits:
Daily customer feedback reports from every warehouse went all the way up to executives.
Support functions, like finance, were reminded they worked for the warehouse, not the other way around.
Why it matters: By institutionalizing customer and employee feedback loops, Costco ensured that its strategy and execution aligned. Every decision was anchored to the frontline reality.
Conviction 4: Ninety Percent of a Manager’s Job Is Teaching
With low turnover, Costco managers weren’t stuck in endless cycles of hiring and replacing. Instead, they could develop people into leaders.
Sinegal told MBA students: “If I could push every shopping cart and buy every item and ring every register, I would. But I can’t. So, I have to teach.”
Teaching happened by example (Ton Zeynep, 2025):
Executives personally walked customers to products.
They picked up trash from the floor.
They modeled “being the hardest worker in the room,” as one meat manager described.
Promotion from within reinforced this culture: nearly all executives, including Costco’s post-Sinegal CEOs, started in warehouses. Succession planning was constant, even at the warehouse level.
Why it matters: Teaching created a virtuous cycle. Leaders modeled behaviors, employees absorbed them, and in time became teachers themselves. This is why Costco has stability and continuity even across leadership transitions.
Conviction 5: Always Do the Right Thing (Because Everyone Is Watching)
Perhaps the most defining conviction: integrity was non-negotiable.
During the 2008 financial crisis, when competitors cut wages and laid off staff, Costco raised wages, pledged no layoffs, and cut prices. It was, Sinegal later reflected, “the smartest thing we ever did.”
Other examples:
Refunded membership fees when leaving the Midwest in 1987.
Guaranteed a full year of orders for a supplier to save 200 jobs.
Refunded employees millions when health insurance deductions exceeded the promised rate.
Paid a landlord $1M in back rent, even when the landlord hadn’t noticed.
For Sinegal, ethics weren’t situational. “We all know what the right thing to do is,” he often said. And because everyone was watching - employees, suppliers, customers — the standard had to be 100%.
Why it matters: Integrity built trust into every relationship. Customers believed they got fair value. Employees believed they were respected. Suppliers believed they’d be treated fairly. Shareholders believed the company would endure (Ton Zeynep, 2025).
Simplicity Built on Conviction
Retail is notoriously complex: thin margins, shifting customer tastes, and relentless competition. But Costco’s success reveals a paradox - complexity can be tamed by simplicity grounded in conviction.
The five convictions reinforced each other:
Paying employees well lowered turnover, which improved service, which reinforced customer loyalty.
Price discipline reinforced trust, which in turn supported long-term shareholder returns.
Teaching embedded culture, which ensured continuity across leadership transitions.
As Zeynep Ton concludes in her Harvard Business Review article, Costco’s enduring advantage wasn’t mission statements or flashy visions but the daily, disciplined embedding of values: “Simplicity built on conviction” (Ton Zeynep, 2025).
Lessons for Leaders Beyond Retail
Costco’s story isn’t just about retail. For leaders across industries, it offers three powerful takeaways:
Clarity beats imitation. Define your unique value proposition and resist chasing fads.
Discipline is freedom. Clear rules and boundaries protect you from short-term pressures and allow focus.
Trust compounds. Integrity across all stakeholders creates resilience that no marketing campaign can buy.
In an age where companies often stumble after their founders leave, Costco shows what it looks like to embed convictions so deeply that they endure for generations.
Reference:
Ton, Zeynep. Costco’s Jim Sinegal on Building a Company That Will Endure. Harvard Business Review, September 27, 2025. Read here.