Why Costco’s Co-Founder Said ‘No’ to Kirkland Gas 8 Times

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Anybody who is successful and doesn't understand that they had some good fortune somewhere along the way is a fool.
Jim Sinegal, one of Costco's co-founders, has had a lifetime of good fortune. It started in 1954 when he showed up to work at the discount store FedMart as a college kid. It was a part-time job, only supposed to last one day, but he ended up staying for 23 years.

Sinegal learned the retail market directly from industry pioneer Saul Price. In an interview with the Wall Street Journal, he discussed why he left Price after nearly three decades, what led him to start Costco in 1983 with co-founder Jeff Brotman, and how all of it eventually created the $86 billion Kirkland Signature label.

Starting Costco

"You set off on your own to some extent with Jeff to start Costco in the early '80s. Where did you see the opportunity?"

Sinegal explained:
"I went from FedMart to the Price Club. I saw how successful the business was becoming, and I was contacted by Jeff. We had a conversation, and I thought to myself, ‘I’m not going to be happy just doing what I’m doing here.’ I was only working 6 to 10 hours a week and had to force myself to stay motivated. I decided to give this new venture a shot. We put a plan together, raised the money, and opened our first Costco in 1983."

When asked how those early years went, he said:
"Fortunately, when we were getting started, the Price Club was very successful. Showing it as a model helped us raise funds. But it wasn't an overnight success. We had to fight to convince people to pay a membership fee to shop."

Reluctance in Private Label

Early on, Sinegal had to make a call about how Costco would approach private-label products.

"Our biggest customers at the time—both at the Price Club and when we started Costco—were businesses. We didn’t think about private label at first. But we started reading about brand costs and how commodity prices were falling while finished goods were getting more expensive. It made the case for private label obvious.

We started dabbling, but there was reluctance within the company. People were asking, ‘Are we going adrift here?’"

When asked why, he said:
"At FedMart, we were very successful with our private label—the FM label. But later, supermarkets and others started using multiple private-label tiers. There was a top-tier, a mid-tier, and then a bottom-tier product—like rations in a can. That cheapened the idea and hurt enthusiasm. Some of our colleagues feared we were going down the wrong path."

Sinegal and his team studied companies in Canada, like Loblaws, and in the UK, such as Tesco and Sainsbury's, and saw that they were investing heavily in quality private-label products.

"So we decided, if we’re going to do this, we’ll set high standards. We looked at products we could start with—ketchup, mayonnaise, mustard. But ironically, those weren’t the most successful. Best Foods mayonnaise, for example, was so dominant that customers didn’t want anything else."

Creating a Kirkland Product

"It's one thing to buy men’s jeans, and another entirely to buy ladies’ jeans. My wife only buys certain jeans that fit her well. If I tried to get her to wear Kirkland Signature jeans, she wouldn’t do it."

Sinegal said, “But me—I wear everything Kirkland. My shoes, socks, underwear, shirt, glasses—Kirkland Signature. I’m a bit of an exception.”

Today, Costco carries over 350 Kirkland products, which make up about one-third of its total sales. When asked what role Kirkland plays in Costco’s overall strategy, Sinegal said:

"It’s very important. Is it the most important thing? I’d say it’s in the top three or four. Our company culture is key. Our logistics are fantastic. Another major one was gasoline."

He added, "We were very reluctant to get into the gas business. Two guys kept coming to me asking to test it. I resisted—it was a vertical business, and oil companies controlled the whole chain. They had to pitch it to me eight times. Eventually, I gave in and let them try it once. They were right. It was successful immediately. But I had turned them down so many times, I couldn’t take any credit for it."

Similarly, Kirkland products often take years to develop, going through multiple iterations before final approval.

Maintaining Quality in Kirkland Products

"The whole idea behind Kirkland was to make a private label that was high-quality. But with so many people involved over the years, how do you maintain that quality?"

"You work on it constantly," said Sinegal. "It’s like people. You can’t say ‘people are our most important asset’ and hang signs everywhere if you treat them badly. The same applies to product quality—if you don’t mean it, your customers and suppliers will know.

We had something called the green ink process. I always had a green pen. Final product approvals would come to me, and I’d sign off with green ink. Those meetings were called ‘green ink meetings.’ That was the final step to move forward."

Competitors Like Trader Joe’s

Kirkland is one of the most successful private labels in retail, but it’s not alone. Competitors like Trader Joe’s have their own strong house brands and loyal customer base.

"Trader Joe’s is a great company," Sinegal said. "Do I shop there? I try not to. I go in to see how many Costco customers are shopping there. But they’re fantastic with private label. Their company culture is strong—you can see why they’re successful."

Work-Life Balance

Asked whether he ever thought about work-life balance, Sinegal responded:
"There are three things you have to worry about: your livelihood, your health, and your family. Anything else is a bonus. To be successful, you have to be focused."

"Was Costco your hobby?"
"Absolutely. So was FedMart and so was the Price Club. I always loved what I was doing."

Although Sinegal stepped down as CEO over a decade ago, at 89 years old, he still comes into the office some Tuesdays—a work ethic inspired by his mentor, Saul Price.

Having a Mentor in Saul Price

"If you can find a mentor like I had in Saul Price, it can change your life."

Sinegal recalled having a falling out with Saul and his son Robert when he left to start Costco.

"He wasn’t happy about it. I did offer to partner to some extent, but it was clear it wouldn’t work. We’d never have the freedom to do what we wanted. He would always interject. It didn’t take more than a day to realize that."

Still, they reconciled. "I had dinner with Saul three nights before he died. I’ve described him as probably the smartest person I’ve ever known. And I’ve met a lot of smart people."