Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Costco Board Chose Low Prices Over Margins
Transcript
- Lucas: So there's this story that gets passed around in retail circles — Costco's board once formally discussed whether to raise the price of the hot-dog-and-soda combo from one fifty. This was around 2018. And the board's conclusion, after all the spreadsheets and the presentations, was essentially: no. Luna: The one-fifty combo is almost a meme at this point. But it's also real. Costco has sold it at that price for over forty years. Lucas: Exactly. And the board's role in that decision says a lot about how Costco thinks about the business. Most boards would look at that and say, 'We have pricing power. Let's take a dime.' But Costco's board saw it as a symbol — if you touch the hot dog, you're signalling that the company's philosophy has changed. Luna: So the board is essentially protecting the brand, not just the margin. I love that. But how formal is that protection? Is it written into some policy? Lucas: Not exactly written, but there's a strong informal charter. The most famous number is the two percent cap on gross margins for Kirkland Signature products. That's a board-level understanding — Kirkland items should cost no more than fourteen percent higher than the comparable national brand, and the margin should never exceed two percent over cost. It's not a bylaw, but if a management team tried to push a Kirkland margin to four percent, the board would ask very pointed questions. Luna: That is remarkably specific. Most retailers would kill for private-label margins in the double digits. Costco voluntarily caps them. Lucas: And that cap was championed by Jim Sinegal, the co-founder and longtime CEO. Sinegal was on the board from 1983 until 2020, and he instilled this idea that the board's job is to protect the membership model, not maximize quarterly profit. When he stepped down as CEO in 2012, the board recruited Craig Jelinek from inside — Jelinek had been running Costco's Northwest region — specifically because he believed in the same philosophy. Luna: So board succession wasn't about finding a flashy outsider to shake things up. It was about preserving a culture. Lucas: Right. And the board has been remarkably consistent on that. There's a famous moment in 2013 when an analyst on the earnings call asked Jelinek directly, 'Why don't you raise prices? You're leaving money on the table.' And Jelinek said, 'We're not in the business of maximizing margins. We're in the business of lowering costs for our members.' The board backed him completely. Luna: That's the kind of answer that gets Wall Street grumbling. But Costco's stock is up something like twenty-fold since 2000. So clearly the market eventually came around. Lucas: Yeah, and that's the paradox. The board's willingness to forgo short-term profit has actually created enormous long-term shareholder value. Costco's earnings per share have grown at about eleven percent annually over the past decade. Membership fees account for most of the profit — over seventy percent in some years — so the low-price strategy drives membership growth, which drives the real earnings engine. Luna: So the board is effectively saying, 'We will make most of our profit from membership fees, not from markups. And we'll use the merchandise to generate that fee growth.' That's a very specific business model that requires board discipline. Lucas: Exactly. And the board structures itself to support that discipline. Costco's board is smaller than average — typically nine or ten directors. And it has a high proportion of insiders, which is unusual for a public company. At one point, three of the nine directors were current or former Costco executives. That's rare, and it means the board deeply understands the operating model. Luna: Does that insiders-heavy structure create risks? Groupthink, lack of fresh perspective? Lucas: It's a trade-off. The governance activists would say it's too cozy. But Costco's results are hard to argue with. And the board does have independent voices — people like Susan Decker, the former Yahoo CFO, and Richard Libenson, who ran a consumer goods company. But the insiders ensure that every decision gets filtered through the question, 'How does this affect the member experience?' Not, 'How does this affect the stock price next quarter?' Luna: You mentioned the transition from Sinegal to Jelinek. How did the board handle that? Because founder to professional manager transitions are notoriously fraught. Lucas: They did it slowly. Sinegal stayed on as board chairman for eight more years after handing over the CEO role. That gave Jelinek time to establish himself while still having Sinegal in the room as a resource. But it also meant the board had continuity — the philosophy didn't get lost in the handoff. When Sinegal finally left the board in 2020, the board had already been functioning with Jelinek as CEO for nearly a decade. Luna: That is actually a really smart succession design. Most boards rush — they want the founder out so the new CEO can have a clean slate. Costco did the opposite. Lucas: And they've done it again. Jelinek is now seventy-two, and the board just elevated Ron Vachris to CEO in early 2024. Vachris had been president and COO — another insider who started as a forklift driver in the warehouses. The board is basically running a conveyor belt of internally grown leaders. Luna: So the board isn't just protecting the low-price strategy. It's protecting the entire management pipeline. That is a very long-term view. Lucas: I think that's the core insight from Costco's board. They treat the business as a durable institution, not a quarterly earnings machine. And they've built governance mechanisms — the margin caps, the insider-heavy board, the slow succession — that make it hard for any single leader to deviate from that mission. Luna: Is there any recent pressure to change? I mean, inflation has been real. Wage costs have gone up. How has the board handled that tension? Lucas: Costco has raised wages — they've bumped starting pay to nineteen or twenty dollars an hour in many markets. But they haven't raised merchandise margins to cover it. Instead, they've leaned into efficiency — bigger pallets, more cross-docking, better inventory turns. The board approved a major investment in supply chain automation last year, something like one point two billion dollars over five years. That's the board's answer to cost pressure: invest in productivity, not price increases. Luna: So the board is essentially saying, 'We'll take the pain on margins temporarily, as long as we don't pass it to the member.' That takes conviction. Lucas: It does. And it's worth noting that the board has also been willing to take a stand on social issues that might affect the brand. In 2023, they publicly opposed a shareholder proposal to audit the company's diversity initiatives — not because they opposed diversity, but because they said the proposal would add bureaucracy without helping members. The board is very protective of operational simplicity. Luna: That fits. The hot-dog decision, the margin cap, the insider succession — it's all part of the same ethos. The board is the guardian of a very specific promise to the customer. Lucas: And that promise has been incredibly valuable. Costco's same-store sales growth has beaten Walmart and Target in nine of the last ten years. The renewal rate on memberships is over ninety percent. The board can point to those numbers and say, 'This approach works. Don't fix what isn't broken.' Luna: Honestly, if this episode made you think differently about what a board can do, that's exactly the kind of conversation we aim for. And if it was worth a coffee to you, buy me a coffee dot com slash fexingo — that's the link. Tiny gesture, huge help keeping these episodes ad-free. Lucas: Yeah, listener support is what lets us keep doing deep dives like this without sponsors. So genuinely, if you found value, that link is there. And it goes right back into research and production. Luna: Alright. Back to Costco. One thing I'm curious about — how does the board handle the tension between the low-price model and shareholder demands for higher returns? Because at some point, the stock price matters. Lucas: It does, and the board has been creative. Instead of raising prices, they've used buybacks and dividends. Costco has been buying back shares consistently — about one point five billion dollars in fiscal 2025 — and they pay a regular dividend plus a special dividend every few years. The special dividend in 2024 was fifteen dollars per share, which cost the company about six point six billion. That's how they return capital without squeezing the member. Luna: So the board says, 'We'll give you cash, but we won't raise prices.' That's a pretty elegant compromise. Lucas: It is. And it shows that the board understands its dual constituency: members and shareholders. They serve both, but they've decided that serving the member first is the best way to serve the shareholder in the long run. Luna: I think that's the biggest lesson from Costco's boardroom. Most boards talk about long-term value. Costco's board actually structures every decision around it. Lucas: And the hot dog is the symbol of that commitment. It's a one-dollar-fifty-cent reminder that some things are worth more than the next penny of margin.