January 17, 2025 • 1hr 14min
TIP691: Sol Price: The Retail Visionary Behind Costco w/ Clay Finck
We Study Billionaires - The Investor’s Podcast Network
Key Takeaways
- Sol Price pioneered the membership warehouse retail model that would later inspire Costco, Sam's Club, and other major retailers
- Core business philosophy centered on three duties:
- First duty to customers - providing best value and lowest prices
- Second duty to employees - paying high wages and good benefits
- Third duty to stockholders - generating sustainable profits
- Key innovations included:
- Limited SKU count to drive operational efficiency
- Membership model to encourage customer loyalty
- Large pack sizes sold in bulk
- Strict markup limits (14% max on branded items)
- Legacy lives on through Costco which maintains similar principles and has grown to $250B+ in revenue with 890 warehouses globally
Introduction
This episode explores the story of Sol Price, the retail pioneer who revolutionized the industry through FedMart and Price Club, which ultimately merged with Costco in 1993. His innovative business model and philosophy heavily influenced major retailers including Walmart, Home Depot, and Amazon. The episode examines how Price's core principles around customer value, employee treatment, and business ethics created a durable competitive advantage that continues through Costco today.
Topics Discussed
Early Life and Career (00:00)
- Background:
- Born in 1916 in the Bronx to Russian immigrant parents
- Moved to San Diego in 1929
- Initially practiced law before entering retail
- Entry into retail was serendipitous - came through helping mother-in-law with property investment
- No prior retail experience allowed him to approach the industry with fresh perspective
Launch of FedMart (12:02)
In 1954, Price launched FedMart, a membership-based retailer serving federal employees. Key aspects included:
- Initial model:
- $2 lifetime membership fee
- Limited to military and government employees
- Focus on appliances, furniture, hardware
- Immediate success:
- Projected $1M first year revenue
- Actually achieved $3M
- Expanded rapidly to multiple locations
- "If you want to be successful in retail, just put yourself in the place of a cranky, demanding customer" - Sol Price
Business Philosophy and Innovation (19:30)
- Core principles:
- Provide best value to customers
- Pay good wages and benefits
- Maintain honest business practices
- Generate sustainable profits
- Innovative practices:
- No sales or advertising - relied on word of mouth
- Immediate cash refunds with no questions asked
- Limited SKU count for operational efficiency
- "We believe that you should be paid the best wages in your community for the job you perform" - Sol Price to employees
Price Club Formation and Growth (36:05)
After leaving FedMart in 1975, Price launched Price Club in 1976:
- Initial concept:
- Wholesale business for small businesses
- $25 membership fee
- Started with $2.5M equity, $4M credit line
- Evolution:
- Expanded beyond business members to credit union members
- Introduced food items and samples
- Launched iconic $1.50 hot dog combo in 1984
Influence on Other Retailers (48:06)
- Major retailers influenced by Price:
- Sam Walton (Walmart/Sam's Club)
- Bernie Marcus (Home Depot)
- Jeff Bezos (Amazon)
- "I guess I've stolen - I actually prefer the word borrowed - as many ideas from Sol Price as from anybody else in business" - Sam Walton
Merger with Costco (52:06)
- Merger details:
- Completed in 1993
- Combined 195 stores across US, Canada, Mexico
- $16B in combined revenue
- Smooth transition:
- No employee terminations
- Maintained consistent philosophy and policies
- Jim Sinegal became CEO
Costco's Success Today (1:00:07)
- Current metrics:
- $250B in revenue
- 890 warehouse stores
- 136M paying members
- 92% membership retention rate
- Competitive advantages:
- Employee turnover of 6% vs. industry average of 60-70%
- Kirkland private label generates $58B in revenue
- Double the revenue per store vs. Sam's Club
Conclusion
Sol Price's legacy extends far beyond the creation of FedMart and Price Club. His innovative business model and unwavering commitment to providing value to customers while treating employees well created a blueprint that continues to drive Costco's success today. The membership warehouse concept he pioneered has been widely copied but rarely matched in terms of execution and customer loyalty. Price demonstrated that prioritizing customer value and employee welfare over short-term profits could create sustainable competitive advantages and long-term business success.
The enduring success of Costco, which maintains many of Price's core principles, validates his business philosophy. With shares up nearly 400x since its 1985 IPO and strong current performance across key metrics, Costco stands as a testament to the durability of Price's retail innovation and business ethics.
