The Price Company

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The Price Company

4649 Morena Boulevard
San Diego, California 92186
U.S.A.
(619) 581-4600

Public Company
Incorporated: 1976
Employees: 13,336
Sales: $2.65 billion
Stock Exchange: NASDAQ

The Price Company operates cash-and-carry membership-only merchandising warehouses in California, Arizona, New Mexico, Colorado, Virginia, Maryland, New York, Connecticut, New Jersey, and in three provinces of Canada: Quebec, Ontario, and British Columbia, all called Price Club. Membership card holders pay a fee of $25 for the privilege of buying any of a variety of about 3,000 different products marked up at generally less than 10% over cost. They each spend an average of $125 every time they shop. The first of the members-only discount warehouses, Price Clubs had to deal with increasing competition in the 1980s. Once the leader in sales for the industry, it had dropped behind Sam’s Clubs, a division of Wal-Mart. In the early 1990s, despite the competition, a slowing economy, and a drop in consumer confidence, Price Company had expanded aggressively, continuing to open new stores in the United States and Canada while examining prospects for penetrating other foreign markets. Early in 1991 there were 66 Price Club warehouses in operation.

In 1954 Sol Price started Fedmart, a mass-merchandise supermarket that helped to introduce the concept of one-stop discount shopping. Its customers were government employees, who paid a membership fee of $2 per family

Beginning with sales of $4.5 million in 1954—four times greater than expected—by 1974 Fedmart was a 45-store chain with sales exceeding $300 million. Price saw golden times ahead for Fedmart, but less than two years later he was ousted from the company, and his two sons resigned. Without Price, the company continued for seven more years until, after heavy losses, it was liquidated.

Out of a job, Sol and his son Robert walked around San Diego, California, talking to retail merchants in the area, such as restaurant owners and newstand operators. At that time small-business operators could acquire their products either from three or four regional wholesalers or high-priced cash-and-carry operations. This was the section of the marketplace that Price decided to cater to.

Price used $800,000 of his own money, $1 million invested by local business owners, and $500,000 he raised by selling stock to Fedmart employees to start the Price Company along with his two sons. When the first Price Club opened in 1976 on the outskirts of San Diego, the first members were limited to small-business operators or professionals who, while able to buy such items as office stationery, cigarettes, or toilet paper for their business, could also buy items for their personal use. Offsetting the membership fee was the prospect of finding bargains they could get nowhere else.

In its first year of operation, the Price Company lost $750,000 on sales of $16 million. While this may have been partially due to Price’s refusal to advertise, he was unable to explain the lack of success. A Price Club member suggested that they expand their membership base by allowing government employees to join. Price sold more stock to friends to keep the company afloat and also invited members of selected credit unions, savings and loan institutions, and employees of utility companies and hospitals to join the club. By restricting membership to these groups, financially secure and screened for the most part, Price minimized the risk of bad checks and reduced losses from shoplifting. This was also important because Price refused to accept credit cards in order to avoid encouraging customers into debt and because in this way he would not have to pay a credit card company 1.5% or more on each sale.

By 1978 the Price Company’s financial situation had improved enough to open a warehouse in Phoenix, Arizona. Price’s son Larry formed a new association with the company; using money borrowed from the Price Company, he bought leases from it to start up tire-mounting and battery installation centers next to the warehouses. Expansion continued in 1979 with two warehouses in Arizona and California, for a total of four.

In terms of its facilities, the typical Price Club outlet had little consumer appeal. Usually located in an out-of-the-way area on the fringe of a city, its nearest neighbors were body shops and small factories. Small red-lettered signs indicated the low warehouse buildings with an interior space of around 100,000 square feet, about the size of two football fields. Inside, fluorescent lighting illuminated 18-foot-high industrial steel shelves stocked by fork lifts with everything from tires to television sets to snowblowers. In 1988 the Burbank, California, Price Club had 35 check-out counters at which discarded cartons were loaded with purchases. Members paid a $25 annual fee.

Some observers were surprised that customers would pay for the privilege of shopping, but Price Clubs still succeeded, for two primary reasons. First, rising inflation in the late 1970s made consumers more value-conscious. With the growing influence of mass-marketing in the 1970s, people became more aware of what product they wanted to buy and no longer needed trained salespeople to help them make a decision; instead they wanted the lowest possible purchase price. Second, regular discounters were no longer the bargain centers they had been. Competing more directly with department stores, they had increased their advertising budgets and spent more on making their stores more attractive. As their costs went up, the markups on merchandise increased to the 15% to 35% range.

In contrast, the Price Clubs maintained markups of generally less than 10% by keeping their costs down, not only by using discarded boxes at the check-out counters, but also by refusing to take credit cards, to offer free delivery, to advertise in any way except to announce new warehouse openings, or to use direct marketing campaigns. At the stores there is just one worker shift to pay, since they stay open just eight and a half hours a day. Customers seemed to like the Price Club’s frugal image and they compensated for the lack of advertising by telling friends about available bargains.

In terms of selection, a Price Club outlet offers only 3,000 different products while the average discount store offers approximately 50,000. The goods offered at a Price Club include items with upscale appeal, such as Baccarat crystal and Courvoisier cognac. The company buys in large quantities, and it packages its lower-priced items in the same way. Rice is sold by the ten-pound bag and peanut butter by the 32-ounce jar. Items that come in smaller sizes are wrapped in groups whenever possible, such as 12 bottles of juice. Thus, the lowest-priced item in a Price Club store sells for $2. Inventory also turns over fast, around 20 times a year, roughly seven times the rate as at a Kmart outlet. This allows the stores to sell their inventory before having to pay for it in the 30 days usually allotted.

Having established a successful market strategy in the late 1970s, the Price Company entered a period of growth in the 1980s as it faced competition from other warehouse clubs. The company went public in 1980, and several stock splits followed. Four new stores opened in 1981 and 1982, three in California and one in Arizona.

The Price Company faced two major challenges in 1983, one from without and one from within. The external challenge was mounted by two new players in the membership warehouse industry. Costco, founded in Seattle, Washington, offered a challenge to the Price Company on the West Coast. Another competitor established that year was Sam’s Wholesale Clubs, later renamed Sam’s Clubs, spearheaded by Wal-Mart. The internal challenge was one that the Price Company set itself: the expansion of its operations into the eastern United States with the formation of a majority-owned subsidiary, Price Club East, Inc.

While in 1983 the Price Company had opened four stores, all in California, in 1984 it opened twice as many, five in California, one in New Mexico, and two in Richmond and Norfolk, Virginia. The eastern market presented the Price Company with problems both in finding suitably priced land zoned for commercial development as well as in appealing to consumers with less spacious homes and who might be reluctant to brave heavy traffic for substantial distances. To adequately capitalize itself for expansion, the Price Company sold $75 million of debentures in 1984.

Real estate acquisition has always been an important part of the Price Company’s corporate strategy, a wholly owned subsidiary, TPCR Corporation, having been formed to develop and operate any land bought in excess of Price Club needs. As Sol Price expanded operations he bought buildings or land in fringe locations on the outskirts of cities rather than in more desirable areas that would be more expensive. When purchasing land on which to construct new warehouses, the Price Company went into partnerships with land developers who would construct retail buildings on the excess land, lease it to other merchants, and split the rental income with the Price Company. As for the competition that these other retailers might pose for their own outlets, Price calculated that the traffic thus attracted would make up for any losses. In addition, the company garnered additional revenues from such rentals, $11.3 million in 1990.

On its sales of $1.9 billion in 1985, the Price Company made $46 million, giving it the leading position in what was then a $4.4 billion-a-year industry. Not only did the company continue to expand both in California, with three stores, and in Maryland, with one store, but it also went into a joint venture, Price Club Canada, with the Steinberg Corporation of Canada to operate Price Clubs in that country. That same year, through a stock-swapping arrangement, Price Club East was merged with its parent company.

As the Price Company opened new stores, Larry Price expanded his tire-mounting and battery installation business, doing $5.2 million in sales in 1985 at 20 centers. At this time, over Larry’s objections, the Price Company exercised its option to buy out the business. Larry Price filed for arbitration and received $3.7 million in 1986. After this decision he filed a $100 million lawsuit against the company.

Despite this family dispute, 1986 was a banner year for the Price Company. The company opened its first Canadian warehouse in Montreal, along with two more in California and a third in Virginia. Reflecting the increased confidence of financial analysts in the warehouse industry in general and the Price Company in particular, the company’s stock rose to an all-time high of $55.75 per share. Nevertheless, the business press predicted a shakeout in the industry, which was becoming crowded.

By 1986 Sam’s Wholesale Clubs had taken the number-one spot away from the Price Company, despite the earnings it had posted of about $95 million on sales of more than $4 billion. Another disappointment that same year was the company’s failure to acquire 12 TSS-Seedman stores in New York. Although the Price Company continued to expand, with five new stores in California and one in Arizona as well as one store each in Connecticut, Maryland, New Jersey, New York, and Montreal, its stock price suffered in the crash of 1987, falling to $23.50 per share. Strengthening its cash position, the Price Company made a $200 million debenture offering.

By 1988 the Price Company had grown sufficiently to necessitate some corporate restructuring. Having added photo processing services, packaging of ground meat, eyeglass dispensing, automotive servicing, and pharmacy sales, the Price Company established a new division, Price Club Industries, to manage its growth. For this division, the company made use of part of its latest acquisition, A.M. Lewis, Inc., a wholesale grocer operating in Arizona and southern California, which had been purchased for $52 million. This purchase meshed well with food operations, a part of the business that had grown to contribute 25% of revenues by the late 1980s. After selling the cash-and-carry operations of A.M. Lewis, the Price Company converted one of its facilities to a Price Club warehouse, using another center for its manufacturing business.

The company opened six new stores in 1988, a slower rate of expansion than in previous years. For the first time, however, this number represented fewer stores being opened in the western United States than in the East and Quebec. In a move to create a corporate structure that could manage a business increasingly located on two coasts, the company created two new positions, chief operating officers for each coast, both of whom would report to a three-person committee made up of President Robert Price, Vice Chairman Richard M. Libenson, and Chief Financial Officer Giles H. Bateman.

In 1988 Sol Price resigned as chairman of the board. The company he had founded posted sales that year of more than $4 billion with revenues of $110 million per store. Earnings had grown at 32% annually over the past four years. With Sol Price’s departure, his son Robert became chairman of the board in 1989. As chairman, Robert Price authorized in 1989 the first cash dividend in the company’s history, a special onetime payment of $1.50 per common share, for a total outlay of $75 million. Along with eight new warehouses, two in Arizona, three in California, one in New York, and two in Quebec, the Price Company launched two new pilot operations in southern California, stand-alone businesses offering home and office furniture. Both of these, however, were closed in 1990. This disappointment along with the shuffling of personnel out of and into the position of the chief of operations for the West Coast were problems for the company.

In the first two years of the 1990s, the Price Company had grown with 13 stores launched in 1990 and 10 projected for 1991, with plans to continue growth in the eastern United States and Canada and to explore opportunities in other countries. The Price Company’s interest in foreign investment is shown by the company’s purchase in 1990 of the remaining 50% of Price Club Canada for about $54 million. The company also picked up an independent distribution system, allowing it to move supplies for its own stores for the first time. Its venture into food retailing made it the fifth-largest grocer in the United States, by sales, in 1990. Moving into a new field in 1990, the company entered into a joint venture with Atlas Hotels, Inc., enabling it to design and market exclusive travel packages to Price Club members. The Price Company also had an option to purchase a 50% interest in certain hotel properties while guaranteeing a $41 million line of credit for Atlas. On this guarantee, which ran for four years, Atlas had already drawn $39 million by August 31, 1990. Also that year, Mitchell Lynn, an 11-year veteran of the Price Company, was appointed president.

For the first time in its history, the company announced in 1991 that it would close a warehouse, founded in 1990 in Cheektowaga, New York, near Buffalo, but expressions of support from its members influenced the Price Company to reverse the decision. The warehouse remained while the company kept close track of its sales.

During the early 1990s the Price Company’s real estate holdings, worth roughly $400 million, gave it a strong financial standing, and analysts continued to cite the company as a good investment prospect. The Price Company in 1991 made a $250 million debenture offering to buy up land for expansion as well as to ward off a possible takeover. Sol Price, still very much involved in his company’s future, planned to buy approximately $15 million of the debentures. Meanwhile the company had bought back its own shares for the first time, buying 500,000 of the 49.9 million outstanding shares at $39 per share. Holding the number-two spot in a $22 billion industry, the Price Company continued to grow, ready to seek profits in good times and bad.

Principal Subsidiaries

Alfred M. Lewis, Inc.; Alfred M. Lewis Properties, Inc.; TPRC Corporation; Price Club Canada, Inc.; Priceus Holdings, Inc.; Price Club Properties, Inc.; Club Distribution, Inc.; Lewis Retail Food, Inc.; Orange Empire Finance, Inc.; Price Club Canada Holdings, Inc.; Price Club Distribution, Inc.; Price Sub, Inc.; Number Company (148623 Canada, Inc.); Club Price St. Laurent, Inc.; Club Price Laval, Inc.; Club Price Quebec, Inc.; Club Price St. Hebert, Inc.; Club Price Anjou, Inc.