“[Sol Price] was an incredibly generous person, compassionate and a great teacher. One time a reporter found out how long I had worked for Sol. He said ‘you must have learned a lot.’ ‘That’s inaccurate,’ I said. I learned everything. I was a fly on the wall observing Sol. I had such a great admiration for him, and the things he stood for and his intellect.”

— Jim Sinegal

There is a fine line between researching a business from an investor’s point of view and delving into the recesses of history. How far back should we go when looking at a company’s financial data and overall track record?

If we do not dig deeply enough, we cannot complain when we are blindsided by future events. However, there comes a point where the investor transforms into a historian and newly uncovered details have little relevance for the future.

Earlier this month, I decided to research Costco Wholesale Corporation as a potential candidate for the business profile series. I have casually followed the company for many years, primarily due to Charlie Munger’s presence on the board, but have long been deterred by the seemingly sky-high valuation of the company. However, the approach I am taking with the business profile series is to examine outstanding businesses regardless of current valuation.

Who knows what the future holds? A company that is expensive today could be cheap next month or five years from now. It makes sense to acquaint yourself with as many high quality businesses as possible in order to be prepared to act in the future.

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It is impossible to research Costco in any depth without studying the career of co-founder Jim Sinegal, and it is equally impossible to read about Jim Sinegal without encountering Sol Price, the man who created the concepts that still drive the business model of membership-based discount warehouses today.

Mr. Sinegal began working at FedMart shortly after Mr. Price opened the first store in 1954. He was eighteen years old at the time and rose to Executive Vice President in charge of all merchandising and operations by the time he left the company in 1977. Sol Price’s influence on Mr. Sinegal cannot be overstated.

“He motivated us to do our very best, not just because he had a formidable presence, but we really did not want to let him down. We idolized the guy. We thought about him on a continual basis. What would he do? How would he handle this situation? And, it influenced our lives.”
— Jim Sinegal, eulogy at Sol Price’s memorial service

Since there is no doubt that Sol Price’s influence played a foundational role in the development of Costco, it seems important to be familiar with the man and his approach to business. Much material is available regarding FedMart, but one particular source stands out. Robert Price, Sol’s son, published a biography of his father. Unfortunately, the book appears to be out of print but is still available used.

While I await delivery of the book, I found an article written by Robert Price, Sol Price: Retail Revolutionary The FedMart Years—1954 to 1975. I suspect that this article is an excerpt from the book, and it covers the “genesis” of discount warehouse clubs.

When studying great entrepreneurs, you quickly begin to realize that very few had a grand “master plan” in mind when they embarked on their journey. This was certainly the case for Sol Price who got into discount retailing quite accidentally.

Mr. Price was working as a young attorney in the 1940s and early 1950s, a period in which he learned a great deal through exposure to the legal problems facing small businessmen. When his father-in-law died in 1949, Mr. Price was responsible for handling the financial affairs of his mother-in-law and advised her to purchase a warehouse in southeast San Diego as an investment property. In 1953, she purchased the building, and it was up to Mr. Price to find a tenant in order to generate income.

One of Mr. Price’s business associates advised him to visit Fedco, a membership-based department store in Los Angeles. The idea was that Fedco could expand to San Diego and rent the warehouse building. However, Fedco had no interest in the proposal, so Mr. Price decided that he would open a “Fedco-style store” himself.

Discount retailing was in its infancy in the early 1950s and most shopping was concentrated in central business districts. San Diego was no exception and Mr. Price’s warehouse was located far from the commercial district. The other major obstacle was the so-called “Fair Trade Laws” that allowed manufacturers to set minimum selling prices for their products, an arrangement that was inherently anti-competitive. Retail hours were short and inconvenient for customers, but in return for high prices and inconvenience, consumers expected to receive personal service.

With just $50,000, which is equivalent to $550,000 in today’s money, Mr. Price and his partners had sufficient capital to buy very basic equipment and inventory. By necessity, they had to make the first store operate on a shoestring.

“When we didn’t know what we were doing, it only took $50,000 to start a business and five years later, when we were really experienced at running FedMart, it took $5 million to open.”
— Sol Price

FedMart was initially founded to serve federal government workers and their families.1 To shop at FedMart, one had to purchase a lifetime membership for $2. Hours were limited but tilted toward evening hours when working people would have more time to shop. The lack of capital made it necessary to display products on improvised fixtures or pallets. Customers could only purchase a couple versions of a product rather than dozens, and the store was self-service rather than having the personalized service that many had come to expect. Due to “Fair Trade” laws, the assortment was limited to suppliers who did not impose minimum pricing.

The first FedMart location in San Diego, California

The response to FedMart’s opening was far greater than Mr. Price anticipated, and the store posted $3 million in sales in its first year. This generated immediate opposition from established retailers who correctly observed a major threat to their previously comfortable existence. This opposition led Mr. Price to insist on establishing a lofty moral code that would put the business above any suspicion of unfair or unethical dealings. Part of this involved very limited advertising:

“You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the best advertising is by our members...the unsolicited testimonial of the satisfied customer.”
— Sol Price

It is critical to understand that Sol Price’s approach to retailing was not similar to other “discount retailers” operating in the 1950s and 1960s. Discounters would sell at prices that were lower than traditional retailers but still marked up as much as possible. Mr. Price had a different approach. He wanted to mark up products as little as possible. Products would be priced at a level where the gross margin covers selling costs and a small profit. Rather than referring to his strategy as “discount retailing”, Mr. Price insisted on describing FedMart as a “low margin retailer”.

We can already see the outline of the membership warehouse club forming from the earliest days of FedMart. Like Costco today, FedMart had an obsessive focus on offering its customers a limited array of high quality products selling at the lowest possible prices. In the decades to come, FedMart stores pioneered many of the features of today’s Costco locations including a private label brand, large package sizes, and pharmacy departments.2

The membership club business model relies on long-term relationships with members which are built on trust. Customers began to view FedMart as a retailer sure to sell products at the lowest possible price without sacrificing quality. Similarly, employees were treated exceptionally well with high wages and benefits in exchange for hard work and loyalty. This is exactly the same approach taken by Costco to this day.

Sol Price’s success did not escape the notice of other retailers including Sam Walton:

“I learned a lot from Sol Price, a great operator who had started FedMart out in San Diego in 1955. I guess I’ve stolen—I actually prefer the word ’borrowed’ as many ideas from Sol Price as from anybody else in the business...I really liked Sol’s FedMart name so I latched right on to Walmart.”
— Sam Walton

By 1975, FedMart had 44 locations in California, Arizona, New Mexico, and Texas. After the company was purchased by German retailers in 1975, Sol Price was fired which was the genesis of his next venture. The first Price Club opened in July 1976.

Many aspects of Costco’s business model are not immediately intuitive. For example, why not try to boost gross margins on product lines where the next cheapest competitor is charging far more? Why leave money on the table?

Costco’s approach of reducing prices as much as possible goes back to Sol Price’s business philosophy. Mr. Price knew that offering the lowest possible price on a limited assortment of high quality products would build extraordinary member loyalty over time. The membership model itself builds loyalty by making customers feel like they are part of the organization which is working on their behalf.

Costco will be the subject of a business profile later this month that will explore the business model in much more detail. For now, I thought that this brief article on Sol Price would be interesting for readers.

The video below is an interview of Jim Sinegal that took place in 2019. For a good introduction to warehouse retailing, I would suggest reading Robert Price’s article on his father and then listening to Mr. Sinegal. I suggest skipping the rather lengthy introduction and going to the 8 minute mark when Mr. Sinegal starts to speak.

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1

In 1963, the requirement to work for the Federal government was dropped and FedMart was opened to all customers.

2

Incumbent pharmacists were outraged, and the company’s first pharmacist even received death threats and a rock was thrown through his living room window.

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The Story of FedMart