Costco Connection - October 2006

Kaohsiung, Taiwan

At left, downtown Kaohsiung. Below, the five-level warehouse with two levels of shopping and three levels of parking; the one underground doubles as a bomb shelter. At right, a typical weekend shopping day at the Seoul warehouse.

Seoul, Korea

GREG GIRARD/THE S TOCK MARKET

bit as aggressive as they are in the United States in terms of doing our comparative shopping surveys of competitors and taking advantage of every opportunity we can to give the member a better value,” comments Richard Chavez, Costco’s senior vice president and managing director in Asia.

Chavez is a veteran of both the merchandising and operational sides of the business, having been with Costco since 1984, taking assignments throughout the U.S. Today he is based in Tokyo.

“What makes this so exciting is that this is like the early days of Costco,” Chavez says. “No one knew who we were, and we had to be thinking on our feet every minute. Each person here has to wear more hats, get more involved in all aspects of the business.”

A good case in point is Don Burdick, assigned last May to be the country manager for Korea. Burdick has been handed a very big task converting the company’s Korean operations from a Korean management approach to the Costco approach. The change results from the recent creation of a joint venture between Costco and the Shinsegae department store chain, which previously had been operating the Korean warehouses under a licensing agreement. Under the new joint venture, Costco has management control.

So, what are the differences Burdick must contend with? “Mostly, it’s a cultural challenge,” Burdick notes. “We just have to find those places where Korean values intersect with the Costco concepts of value. It sounds simple, but it isn’t always that simple.”

To understand more fully, The Connection spoke with several of Burdick’s key managers in the Seoul headquarters office.

Hyun Soo Pae, general merchandising manager for non-foods, notes that in Korea, only 30 percent of women work outside the home. “There are many more housewives here

want to be able to sort through the potatoes and see each one they buy.” Burdick, acknowledging that sales had gone down, eventually relented—and the women are now back sorting through the potatoes. Although Burdick had agonized over changing his mind, lest he lose face as the new manager, Mr. Pae says the Koreans were impressed that Costco would take local customs into account.

Mr. Pae, who was part of a 13-empl oyee team that studied warehouse operations in the

U.S. before the Seoul warehouse opened, says, “The Korean people are even more interested in brand-name items than Americans.” Nevertheless, Costco’s Kirkland Signature products have been very popular. Unfortunately, along with other U.S. products, their sales rate has diminished since the Korean currency underwent a major devaluation last summer, making foreign imports much more expensive for Koreans.

The Kaohsiung warehouse

who like to spend their time shopping, taking great care what they buy for their families,” Mr. Pae says. The story of the potatoes is one he likes to recount, and it says much about what happens when two cultures come into contact.

When Don Burdick took over the reins from the Shinsegae managers, one of the first things he noticed that could improve efficiency in the warehouse was the bin where potatoes were being sold. Women would crowd around, examining each potato, much as in a fresh-produce market. Burdick immediately ordered that the potatoes should be sold in bags, as Costco sells them in the U.S. “Potato sales went down,” Mr. Pae says. “The women

Another member of the Korean task force which traveled to the U.S. to train at Costco’s headquarters is Noh Jae Ak, known to his coworkers as Dr. Noh.

MLYNARCZYK

Like Mr. Pae, Dr. Noh believes Costco has a great opportunity as it takes over management control from Shinsegae to demonstrate that it can be sensitive to Korean lifestyles and customs. He is confident that Costco will become a permanent fixture in Korea. He says he bases his confidence on an awareness of Costco’s basic principles, learned during that training session in the U.S. “We were learning everything we could about American merchandising, but especially about Costco’s way of doing things,” he says. The atmosphere was almost collegial: “Often we would be meeting until 10 p.m. because we all wanted to learn so much.”