Sol Price: Retail Revolutionary and Social Innovator by Robert Price

Key Takeaways

Sol's Business Philosophy & Practices

Sol's core business philosophy was simple: drive operational efficiencies to save on costs; pass these savings onto customers; provide the best possible value to customers; excellent quality products at the lowest possible prices; pay good wages and provide good benefits, including health insurance to employees; maintain honest business practices; treat suppliers better than anyone else; make money for investors.
Discount stores appeared in 1948 and FedMart followed the Fedco template in most every way including membership, concessionaires and a warehouse building. Perhaps the most significant difference between Fedco and FedMart was that Fedco was operated purely as a not for profit whereas FedMart was a not for profit combined with a separate corporation, Loma Supply, which operated as a for profit corporation. Customers would have to pay a minimal fee to become a member, hours were convenient for business owners, products were displayed and sold on makeshift fixtures rather than in display cases and most products, other than jewelry, were self-service, and the selection was limited. Most products were paid at a central register area in cash or with a check, no credit except for purchases of furniture or appliances. The products offered for sale included mattresses, clothing, luggage, furniture, power appliances, hardware, large and small appliances and liquor. Some of the departments were operated by concessionaires, while others were operated by FedMart. In addition, FedMart refused to stock products from manufacturers who enforced Fair Trade laws - companies such as Samsonite Luggage and Gillette Razor Blade Company.
20 years after founding FedMart, Sol sold control of FedMart to Hugo Mann in 1975 but the relationship quickly soured, inspiring Sol to later found Price Club. Happiest when challenged and new business was a clear slate - thought through all lessons learned and tried to wipe clean all assumptions. He settled on a wholesale business selling to a cross section of small businesses. The Price Club idea was finally conceived sometime in the middle of January 1976 - a wholesale business selling merchandise to small, independent businesses. The business owners would come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices. Instead of each business owner purchasing products from various suppliers who specialized in specific product categories, hundreds or even thousands of small businesses would pool their buying power by shopping at our wholesale warehouse. The warehouse would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices. In effect, we would be their warehouses. The wholesale warehouse would buy directly from manufacturers and pass along the savings generated from volume purchasing directly to the store owners
The word "club" was selected because customers would be required to purchase a membership. The customer would be a member of a club, a club that sold merchandise. Thus, the name Price Club was chosen. There were a number of reasons for charging a membership fee of $25, a significant amount of money compared to the rather nominal $2 membership fee that members at FedMart had paid. The most important reasons was to use the membership money to lower prices by including the fee in the calculation of merchandise gross margins. We assumed that, on average, each member would spend $1,000 a year in purchases at Price Club. The $25 membership fee was equivalent to 2.5% of $1,000. When included in gross margin, the prices of merchandise were reduced as shown in the following example:
1. Example 1 - no membership fee:
  1. Product from supplier: $10.00
  2. Product selling price: $11.12
  3. Margin: 10.5%
2. Example 2 - $25 membership charged
  1. Product from supplier: $10.00
  2. Product selling price: $10.86
  3. 8% markup plus 2.5% membership fee = $10.5%
3. The $25 membership fee also operated as an incentive for the member to purchase more as a way to leverage the membership fee as a percent of purchases. In addition, the membership concept helped reduce operating expenses for the business because the membership psychologically tied the member to Price Club and eliminated the need to advertise
Sol always said that teamwork is the key to success
Was a very tough negotiator. He was not afraid to be tough when he felt it was necessary. He was willing to fight for what was right, even if it meant potentially losing, although Sol rarely lost. People wanted Sol in their corner because they knew he had integrity, he was smart, and he was strong. Sol's experience as an attorney representing clients, and his own moral code, became a foundational feature of the FedMart business. Sol described his business approach as "the professional fiduciary relationship between us (the retailer) and the member (the customer). We felt we were representing the customer. 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 very best advertising is by our members, the unsolicited testimonial of the satisfied customer. This fiduciary relationship with the customer was similar to the Golden Rule; the way Sol put it - if you want to be successful in retail, just put yourself in the place of a cranky, demanding customer. In other words, see your business through the eyes of the customer.
Our first duty is to our customers. Our second duty is to our employees. Our third duty is to our stockholders
By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices - in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were underpricing small businesses.
Expert Fallacy - "Fortunately most of us had backgrounds that were alien to retailing. We didn't know what wouldn't work or what we couldn't do." If Sol had been an experienced traditional retail executive, he probably would have focused FedMart's expansion in Southern California and Arizona, thereby solidifying FedMart's market dominance in that region. Instead, Sol made his decisions from the point of view of his own experience: the fact that he was an attorney and not a retailer, and that he was an entrepreneur and not a chain store executive. He was never driven by the need to have the most stores or the most money, but by the desire to give the customer the best deal and to provide fair wages and benefits to FedMart's employees
Of course, everyone wanted to work at FedMart. The fact that Sol was concerned about giving decent wages to employees was one thing, but why would he require FedMart wages to be twice as much as the competitors? FedMart was paying industry-best wages per hour in San Diego and Phoenix. The wage decision in San Antonio was simple: employees in San Antonio worked just as hard and as well as other FedMart employees. FedMart had excellent profits in San Diego and Phoenix while paying good wages, why not apply the same wage philosophy in San Antonio?
Sol always believed real estate was a good investment and the financial characteristics of the business made it a cash flow machine, allowing for easy, fast expansion
Touching the medium - As The Price Company prospered, Sol focused much of his attention on the numbers, daily sales, and monthly financial operating results - the balance sheet and cash flow. He would ask someone from the Morena Price Club or a new Price Club to call him at home every night and tell him what the final sales were for the day. He was intrigued by the Price Club financials, especially how different they were from the financials at FedMart. Comparing FedMart's financial results for the fiscal year ending August 1969 with Price Club's financial results for the year ending August 1979, the first major difference was the cost of sales (merchandise markup). FedMart had a 30% markup compared to Price Club's 11.7% markup. FedMart's total operating expenses were 17% compared to Price Club's 9%. Moreover, Price Club's sales were approaching $1,000 per square foot, at least twice as much as a typical FedMart store. The FedMart/Price Club balance sheet comparison provided other interesting insights. In 1969 FedMart had $20m in inventory and accounts payable of $12m, a 60% payable to inventory ratio. Price Club had $8m in inventory and accounts payable of $7m, a nearly 90% payable to inventory ratio. By the end of the fiscal year in 1981, Price Club's accounts payable ratio had increased to over 120%. In short, Price Club's suppliers were financing The Price Company's business
FedMart developed a line of private label merchandise. It was usually sold with the label FM, or for liquor, with the names of company executives. FedMart purchased these products with specifications and standards as nearly equivalent to the national brands as possible and stocked the FM brand next to the national brand to demonstrate the savings. FedMart's low price merchandise, limited selection, yet breadth of product offerings had a major impact on the retail world. The challenge would be to operate a geographically widespread business successfully and respond to the competition that was sure to come
Sol really wanted all FedMart employees to think about and understand why their jobs were important to the success of FedMart. He was not a big fan of procedures and training manuals because he believed that manuals were a substitute for thinking
As the number of FedMart's grew, Sol concluded that FedMart would be well served with central merchandise distribution facilities.
Sol's emphasis on teaching was expressed in the phrase "alter ego," a rather simple concept He used the following example. If the owner of a store was able to do all the jobs himself - greet customers, order and receive merchandise, do the accounting, sweep the floors and clean the bathrooms - he would. But the reality is that normally the owner can't do all the work himself. Therefore, he must hire people to perform their jobs as well or better than he, the owner, would if he had the time. As a corollary, the owner of the store needs to use his time to do the highest-skilled work and to delegate less-skilled work to his "alter egos." In that way, the owner will devote his time to "managing" the business and making sure that his "alter egos" are doing their jobs and doing them well. The "alter ego" was the management component of a much more comprehensive philosophy that Sol taught to FedMart's management team and, in fact, to all employees. Sol taught by example and he taught by engaging people in challenging discussions, demanding that they use their brains. Many people, who would later become successful in their own right, learned by following in Sol's footsteps.
Sol believed in building a long-term relationship with customers. He described his business philosophy as the professional fiduciary relationship between the retailer and the customer. In his words, "If you recognize you're really a fiduciary for the customer, you shouldn't make too much money." The underpinnings of this fiduciary relationship were consistently high quality merchandise and consistently low prices. Sol infused FedMart's employees with the belief that they were representing the interests of the customer. Sol's sense of duty to FedMart members was punctuated by FedMart's return policy: "Everything we sell is guaranteed unconditionally. We will give an immediate cash refund to any customer not completely satisfied with a purchase made at FedMart. No questions asked."
Sol's approach to FedMart employees mirrored the relationship he had with FedMart members. He felt a responsibility - a fiduciary duty - to provide excellent wages, benefits, and working conditions for employees. In a bulletin to FedMart employees, Sol said: "You must feel confident that you are working for a fine and honest company. Somehow we must make this mean to each of you that you will be permitted, encouraged, and sometimes even coerced into growing with the company to the limit of your ability. We believe that you should be paid the best wages in your community for the job you perform. We believe that you should be provided with an opportunity to invest in the company so that you can prosper as it prospers. We believe that you should be encouraged to express yourself freely and without fear of recrimination or retaliation. We believe that you should be happy with your work so that your occupation becomes a source of satisfaction as well as a means of livelihood."
Nothing demonstrated FedMart's commitment to business integrity more than the pricing of products. According to Sol, FedMart was not a discount store. He described FedMart as a "low margin retailer." Discount stores set their prices in relationship to a percentage off the manufacturer's suggested retail price. FedMart priced merchandise starting with the cost of the product and taking as small a markup as possible - consistent with covering expenses and a small profit while giving the customer the best price. Sol also had a rule against pricing any product below cost, the traditional "loss leader." His reasoning: if some products are sold below cost, other products must be sold at very high margins to make up for the losses. In fact, when grocery stores were selling items such as sugar or coffee below cost, Sol told FedMart managers to place signs next to FedMart's display of sugar or coffee advising customers to purchase these products at those grocery stores.
The trusting relationship with members was reinforced by FedMart's unique merchandise selection - limited selection and large pack sizes. Sol proved that it was possible to do more sales with fewer merchandise items (stock keeping units – SKUs). He pioneered large package sizes as a way of lowering prices. One of the more intriguing questions is: why does limited selection result in higher sales? Part of the answer lies in what Sol called "the intelligent loss of sales." Conventional wisdom in retailing is to stock as many items as possible in order to satisfy every customer's needs and wants. The "intelligent loss of sales" turns that theory on its head, postulating that the customer demand is most sensitive to price, not selection. And low prices are possible only if there is integrity in the pricing combined with being the most efficient operator. What does limited selection have to do with efficiency? Because payroll and benefits represent approximately 80% of a retailer's cost of operations, pricing advantage follows labor productivity. Fewer items result in reduced labor hours throughout all of the product supply channels: ordering from suppliers; receiving at the distribution center; stocking at the store; checking out the merchandise; and paying vendor invoices. Put simply, the cost to deal with 4,500 items is a lot less than the cost to deal with 50,000 items
The reality of Sol's FedMart/Price Club compensation approach was more complicated that simple generosity. Sol was committed to the idea that paying good wages and befits would attract better employees who would remain loyal to FedMart. Providing excellent compensation and treating all employees as part of the team would also result in better job performance, loyalty and honesty. The success of FedMart and later Price Club had a lot to do with being the lowest-cost operator but low operating expenses were never achieved by short changing employees. Because such a large portion of the expense structure in retailing is employee compensation, how is it possible to provide excellent compensation and still be the lost cost operator? Employees who are paid well and treated fairly perform better. In addition, paying high wages puts a focus on continued improvement in labor productivity. As productivity improves, the resulting expense savings are reflected in lower merchandise prices. In return for providing a great workplace for FedMart employees, Sol asked only two things of his employees: that they work hard and that they think. In order to assist employees in thinking about their work, he created a management tool that he called "the Six Rights." He summarized his ideas as follows: I believed the business broke down into three categories - personnel, product and facilities - and that the same six rules applied to them all. You've got to have the right kind, in the right place, at the right time, in the right quantity, in the right condition, at the right price. Along with The Six Rights, Sol insisted that FedMart stores have low displays and wide aisles. Sol had two inviolable rules: the 54-inch height rule and the six-foot aisle rule. His reason for these rules was to make shopping more comfortable for the FedMart member by giving the shopper the feeling of an open and uncluttered shopping environment. When Sol toured the stores, he would quickly spot any infractions.
Nearly everything was wrong with Price Club when first opened - "The Six Rights are all wrong." For the most part the product selection was based on the incorrect assumption that hardware and variety stores would be major purchasers when, in fact, there weren’t many independent hardware and variety stores left in San Diego. Most products were sold by the case, but the mom-and-pop store owners wanted to purchase in less than case-load quantities. The assumption that most members would want to shop early in the morning was wrong. The choice of Morena Boulevard for a merchandise business was wrong too. The site was difficult to get to and was located away from traditional shopping areas. And, many business owners were just not willing to give up the convenience of sales people calling on them, delivery, and credit in exchange for lower prices. Eventually decided to open up to Credit Union members. They were not charged a fee but had a 5% markup on all items. This turned the business around quickly
Sol had an inner compass that steered him to honest business practices. Obeying the law was foremost in Sol's mind. Nevertheless, when he thought the law was wrong - Fair Trade laws, separate bathrooms based on race - he had the courage to find a way to get what he knew was the right answer. He was courageous and tenacious
Sol would not permit FedMart buyers to knowingly do business with suppliers who treated their employees unfairly
Sol placed the highest priority on delivering the best possible deal to the consumer and providing excellent wages and benefits to employees. He said that the customer comes first, the employees second and the shareholders third. Yet, throughout his business career, Sol was remarkably successful in making money for people who invested in his business deals. Sol's concern for investors played out in the success of the publicly traded stock of companies he launched, and in the private business partnerships he created for his friends and family. Sol developed a reputation for making good business decisions.

On Charity & Giving Back

An underlying theme of Sol's life was his generosity and concern for others

A good businessman has to find the time to take care of being involved with his family and charity; it gives him balance. If you're lucky, you have the obligation to put a lot back into the pot.
He believed that people give charity for one or more of three reasons: ego, guilt or emotion. Sol said that his main motivators were guilt and emotion, not ego. Sol's "guilt" was related to his realization of the capriciousness of his life, his having such good fortune compared to those who were not so fortunate. For Sol, sharing his advice and financial resources with someone in need was his way of trying to right a wrong and even out the playing field. With regard to ego, Sol maintained a low profile in everything he did. He never sought publicity or recognition. His and Helen's names were not usually attached to the gifts they made. Sol did have an ego, and a strong one at that. His ego was defined by his existential sense of the meaning of life - the idea that he always had to be thinking and doing, functioning at the highest performance level to find the right answers, whether in business, in making someone's life better, or in improving society
As a point of reference, he often cited Andrew Carnegie: "The man who dies rich...dies disgraced."
The logic for rich people to give back personally and through taxes took two paths - fairness and political pragmatism. Sol believed that fairness was a moral imperative. He would say that rich people often think that they gained their wealth on their own when, in fact, their success was the product of their teachers, along with government workers, service providers, and the employees in their companies. He believed that a just and fair society provides good wages and benefits to the working people who are, fundamentally, partners in wealthy people's success.
It is much easier to make money than deciding how to best give it away
Through his philanthropy, Sol became social innovator, especially in San Diego

Sol's Legacy

The remarkable thing about Sol was not just that he knew what was right. Most people know the right thing to do. But he was able to be creative and had the courage to do what was right in the face of a lot of opposition. It's not easy to stick to your guns if you are swimming against the current of traditional thought when it comes to wage and compensation plans for employees. His lessons and philosophy - that business is about more than making money and that a company also has an obligation to serve society - are still valuable reminders for many of us in business today. The fact that he instilled these concepts in so many who were around him is, in my mind, his greatest legacy.
What greater legacy could there be from a father to son than leaving the gift of life skills necessary to carry on?
Unlike many people who retreat into themselves as they age, Sol continued to engage with a broad range of friends, young and old. Sol's conversations with friends were rarely retrospective. They talked about politics, ethics, the latest books they had read; they told stories and shared jokes. Sol seldom talked about his past accomplishments
Even more than his willingness to fight for what he believed in, Sol never compromised his values. Sol's retail success was grounded in an absolute commitment to bringing the best value to his customers. Just as importantly, he insisted on paying high wages and good benefits, including health care, to his employees. He had a real conscience satisfied only by giving the best deal he could to just about everyone
Whatever I [Robert] have learned about business I learned from my father - everything - from how to read a financial statement to management to good judgment and fair dealings. My father taught me how to think and how to question and not to fall into the trap of assuming rather than checking things out for myself. He also taught me to be humble, to appreciate the unpredictability of life, to care for people, to remain hopeful, and always to be there for people who are in need.
Many people who worked for my father were afraid to speak up, although, in truth, he always listened carefully to what other people said
What really made our relationship special was the trust that we had in each other and the knowledge that, beyond the arguing, there were shared values and a loyalty and love that would endure
People often have good ideas. Sol was inspired to make his good ideas happen. Sol's actions were rooted in a value system that he learned early in life and from which he never strayed, a belief that life can and should be lived with purpose, and lived in the right way. Sol's life was a testament to the truth that success can be achieved by acting in the right way.

Other

Sol had a knack for putting together seemingly unrelated facts to form clever solutions
Sol was more creative, enjoying the brainstorming and conceptual part of starting businesses whereas his son, Robert, was more operations-focused
My father expected to be informed, fully, openly and honestly, even if he didn't like what he heard
Sol was a really smart man but what set him apart was his exceptional wisdom. A wise person is someone who knows what's important. Moral reasoning, that is, the ability to judge right from wrong; compassion; kindness and empathy; humility; altruism; patience; successfully dealing with uncertainty. My dad's life encompassed all these qualities
Sol's social conscience was molded by his parents' beliefs and by their actions. He would later apply the lessons he had learned at home to all aspects of his life, the practice of law, the operation of his businesses, and his personal generosity to family, friends, and society.
"I'm not a great student of the Bible. I can't rationalize giving God credit for mercy and all the good things that happen - who takes the responsibility for the bad things?...It would be very easy for me to be an atheist except for two things: No. 1 - I'm unable to understand or cope with infinity, and No. 2 - over the years there have been many smart people - much smarter than I - who have wrestled with the concerns I have stated above and who end up - in spite of that - believing. What am I missing?"
Learned the value of reputation and trusting relationships as a lawyer. Did a lot of pro-bono work for Jewish charities when he was a lawyer
Incredible work ethic - taking advantage of every hour
Exemplars - Always had an older person as a mentor
Balance - Although Sol was intense when he was dealing with FedMart businesses, he always found time during his business trips and other travels to have fun
Throughout his legal and business careers, Sol believed that he was given too much credit for his success because he felt that people did not always recognize the role luck played in his life. "Most of life is luck [and] much of what is referred to as genius...is luck."
Skin in the game - Sol personally invested in Loma Supply because he believed that FedMart would be successful. He would never ask anyone else to invest unless he invested, and Sol was willing to take some risks. This willingness to take risks was to be an important factor in his life.
Sol and his companies changed consumer habits, especially with respect to pharmaceuticals and gasoline
Wasn't afraid to fire people and act boldly if he thought the company was headed in the wrong direction
Influenced by Dutch chain Makro - pallets, "passport" membership, massive warehouses
Sol felt that before investing a lot of money and hiring people, it would be a good idea to do some market research contacting as many small store owners, restaurant operators, and professionals as possible to confirm that the concept would work. Contacts were made with liquor store operators who sold cigarettes and candy, convenience store owners, hardware and houseware store owners, restaurant owners, and lawyers and accountants. The questions were always the same: Where do you buy your merchandise? Which products do you spend the most money on? How much are you paying? What do you like about the way you are purchasing? What don't you like? There were some consistent threads in their answers: a few of their products represented a large proportion of total purchases; and they preferred the traditional wholesale system; which involved salesman calling for orders, truck delivery, credit and billing; and they thought that the prices they were paying were high. When asked whether they would be willing to give up some conveniences in exchange for lower prices, most seemed mildly interested but some were not interested at all. Even though the market survey was not all that encouraging, we made a decision to give the wholesale idea a try
Rick was the head buyer and little by little created what would become the opening product assortment. He asked: How do we secure a location? Where to begin? Where should the warehouse be located? How big should it be? How much parking area?
Sol was averse to debt for financing his business, for his customers and personally
Respected velocity - Sol's motto - "Do it now."
Sol always said he was lucky and that luck was a huge part of his success
Sampling of products was a major hit. The buyers would showcase new products they liked and human's inclination for reciprocity when they receive something free made them buy more
Even though Price Club had tried to stay under the radar, people in the retail industry were taking notice. In 1978 Bernard Marcus, soon to be the founder of Home Depot, came to see the Price Club and to visit Sol. Sol inspired dozens of similar concepts - Costco, WalMart, Home Depot, Target, etc.
True believer in competition because lead to better results for the consumer - gave away many secrets and best practices
Having pioneered the warehouse club concept, The Price Company had lost the initiative to competitors. Rather than sticking to a well-planned business strategy, many decisions were being made reactively in response to what the competition was doing. The Price Club was like a sports team that comes into the game with a pre-planned, well thought out strategy, but once the game starts the other team has its own strategy, so the first team gets confused and does not stick with its game plan. Sol admitted he made mistakes in not franchising fast enough and being reluctant to add fresh food departments, allowing Costco and Sam's Club to rise and expand quickly
Price Club and Costco merged in 1993. Price Enterprises later spun off which Robert, Sol's son, ran

What I got out of it

An inspiring man! Sol was so innovative and caring – his intentions seemed pure as he truly wanted to help the customer. He revolutionized shopping and inspired a new era of retailing. Be as efficient as possible and pass those savings on quality products to customers; no advertising, no superlatives, everyday low pricing, honest and fair dealing, win/win decisions, pay employees well and treat suppliers a step up. Good advice for any business!

Summary