Original Warehouse Pioneer: Sol Price
Here is an excerpt from our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses:
“I guess I’ve stolen—I actually prefer the word borrowed—as many ideas from Sol Price as from anyone else in the business.”
—Sam Walton, founder of Walmart, Made in America
“A newspaper reporter called me and said: ‘Gee, you knew him (Sol) that long, ya know, since 1954? You must have learned a lot.’ My response was: No, that’s inaccurate. I didn’t learn a lot. I learned everything, everything I know.”
—Jim Sinegal, cofounder and director of Costco, Retail Revolutionary & Social Innovator
In early 1980, under the tutelage of Paul Volcker and the Federal Reserve’s contractionary monetary policy, the US economy was showing signs of recession and stagflation. US GDP was contracting. Inflation was at historic highs. The federal funds rate had risen to 15%, and unemployment was at 7% and rising.1 In today’s market, such economic indicators likely would keep many investors on the sidelines, out of the market, to wait for better economic news. Unfortunately for those individuals, they would have missed out on finding another intelligent fanatic.
In 1976, Sol Price founded wholesale retailer Price Club. After losing $750,000 during its first year, Sol Price figured out the secret formula, and by 1979 revenues grew to $63 million, with $1.1 million in after-tax profits. In July 1980, Price Club went public with an initial public offering and was on track to double sales and profits from the previous year.
Price Club’s business model was to sell a limited assortment of items (generally 1,500 to 5,000 items, compared to 20,000+ items offered by discounters), at a small markup from wholesale, to a small group of members—government workers and credit union customers. The questions at that time would have been, Will it be possible for Price Club to maintain growth? Would a recession impact the business? By looking at Sol Price’s previous track record and Price Club’s total addressable market, investors could have invested early on with this intelligent fanatic.
Before founding Price Club, Sol Price founded and built FedMart into a dominant force in the retailing industry. He grew FedMart from one location in 1954 into a company that generated $361 million in revenues by 1975. FedMart began trading over the counter in 1959, and trading data is hard to come by. However, FedMart’s 28% compounded annual growth rate in revenues and 21.6% CAGR in net income over the twenty-one-year period from 1954 to 1975 suggests that the value of the business matched the underlying business performance.
Figure 3.1 shows FedMart’s underlying business performance from the time it became publicly traded until the year that Sol Price left the company. Sol Price’s successful track record in retailing with FedMart made it more plausible to believe that his success could be repeated. Thus, when Sol Price founded Price Club, other savvy retailers, familiar with this track record, were quick to pay close attention. These retailers made it their obligation to meet Price, to learn as much as possible, and to clone Price’s concept. They knew that the market opportunity was large and that Sol Price was an intelligent fanatic with a great idea. An astute investor could have done the same and partnered with Price early in 1980 by buying Price Club stock.
FedMart Annual Results (1959-1975)
One savvy retailer who found Sol Price early in the development of Price Club was Bernard Marcus, cofounder of Home Depot. After getting fired from the home improvement company Handy Dan, Marcus met with Price, in the late 1970s. Marcus was looking for some advice from Price about a potential legal battle with his former employer. Sol Price had a similar situation at FedMart. He told Marcus to forget about a protracted legal battle and to start his own business.
Bernard Marcus followed Price’s advice by cofounding Home Depot in 1978, and he borrowed many ideas from Price Club for use in the new operation. Today, we know the success that Home Depot has achieved. Ten thousand dollars invested in Home Depot on September 22, 1981, at the time of its initial public offering on the NASDAQ, would be worth $54.7 million today (see figure 3.2). Annual dividends would be $1.1 million. The same investment in the S&P 500 would have yielded only $180,000 (the line for the S&P is not even visible in the graph), or $410,000 with all dividends reinvested.
$10,000 Investment in Home Depot Compared to S&P 500 (1981-2015)
Later, Sam Walton, founder and CEO of Walmart, made a trip to see Price Club. Walton was familiar with Sol Price and his track record at FedMart. According to Walton, he had found Sol Price operating FedMart in San Diego, in the early 1960s, while touring the United States to find other quality retailing operations. After seeing the stores and meeting Price, Walton was so impressed with Sol Price and FedMart that he borrowed many of Price’s concepts in creating Walmart. In 1983, Walton made a trip to meet Price to learn more about the new Price Club concept. Walton said of the trip, “I didn’t tell him [Price] at the time that I was going to copy his program, but that’s what I did.”2 Once again, Walton learned as much as he could from Sol Price and opened the first Sam’s Club in Oklahoma, later in 1983. Sam’s Club was a direct clone of Price Club.
By 1983, Walmart had $2.4 billion in annual revenues and a market capitalization of roughly $3.5 billion. Ten thousand dollars invested in the now much larger Walmart, after Sam Walton opened the first Sam’s Club in 1983, and holding until October 2015, would have turned into $650,000 (see figure 3.3). Compare that with a yield of $125,000 through investment in the S&P 500.
$10,000 Investment in Walmart Compared to S&P 500 (1983-2015)
Another businessman, Bernie Brotman, was aware of Price Club’s early success and tried to set up a deal to franchise Price Clubs in the Northwest. Sol Price and his son, Richard Price, were reluctant to franchise Price Club, so they decided not to work with Brotman. Brotman’s son, Jeff Brotman, poached a long-time FedMart and Price Club employee, Jim Sinegal, and started a company called Costco, in 1983.
Brotman and Sinegal cloned Price Club’s business model and, in running Costco, copied many of Sol Price’s strategies. A decade later, Price Club merged with Costco, and many Price Club stores are still in operation today under the Costco name. A $10,000 investment in Costco in 1985 would have swelled to $50,000 nine years later (see figure 3.4). That is a 19.8% CAGR, compared to the S&P 500’s 8.3% CAGR.
$10,000 Investment in Costco Compared to S&P 500 (1985-1993)
Partnering with Sol Price in the Price Club venture in 1982, two years after Price Club became public, would have rewarded shareholders handsomely, turning a $10,000 investment into nearly $120,000 in 1993, the year that Costco acquired Price Club (see figure 3.5). That would have been a twelve-bagger over a twelve-year period that included some significant recessions. The same $10,000 investment in the S&P 500 would have grown into only $40,000 over the same period. Price Club’s return of 23% CAGR trumped the S&P 500’s total return of 12.8% CAGR, by a significant margin.
$10,000 Investment in Price Club Compared to S&P 500 (1982-1993)
You can read Sol Price’s story in our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. Become a Member and we’ll send you the eBook-Kindle version for Free.