The entrance to Price Co.'s corporate headquarters gives few hints of the retailing giant that lies within or the commotion that it is stirring in the industry.
Marked with only a hand-lettered paper sign that reads "Pull," the door opens into a lobby furnished with folding metal chairs, a bank of file cabinets and a drooping fern with its sales tag still dangling. Down the linoleum hallway in President Robert Price's office, corporate records and memorabilia are stored in shelves made of cinder blocks and wood planks.
"They help me maintain perspective," says Price, 42, chief executive of the 9-year-old company that is rapidly approaching $2 billion in annual sales. "Those shelves come from the days when we were struggling, and I don't ever want to get rid of them. We have to remember where we came from, because if we're not careful, we end up back there."
Welcome to Price Co., perhaps the only publicly held company that warns in its annual report, "Just as we in management are not allowing ourselves to be overwhelmed by our success, we suggest you, as stockholders, also do not become carried away."
Despite the odd warning, investors, retailers and shoppers seemed impressed by Price Co.
The 1976 opening of Price's first bare-bones, cash-and-carry store catering largely to small businesses spawned a new industry. Analysts and a growing number of participants estimate that the warehouse-membership store industry could approach $5 billion in sales this year and perhaps alter wholesale and retail distribution patterns. By the end of the decade, a Goldman, Sachs & Co. analyst predicts, annual sales of warehouse-membership stores could near $20 billion.
Since Chairman Sol Price, 68, and his son, Robert, opened their first aircraft-hangar-size Price Club in an industrial section of San Diego, there has been an explosion of copycat companies opening membership-required warehouse stores in cities from Anchorage, Alaska, to Tampa Bay, Fla. Currently eight companies operate 64 warehouse stores nationwide, and by year's end they plan to have 111 locations in operation.
Price Co. sales and earnings have almost doubled in nearly each of the past nine years, and the concern has grown to 20 locations in California, Arizona and Virginia, with four more scheduled to open by August in Inglewood, Oxnard, Pomona and Baltimore.
In the fiscal year ended Aug. 31, 1984, Price Co. reported net income of $28.6 million, contrasted with $14.7 million the year earlier and $7.9 million in 1982. Sales jumped to $1.14 billion from $632.9 million the prior year and $366.2 million in 1982.
'As Cheaply as I Can'
Some securities analysts estimate that Price Co.'s net income could hit $40 million in the current fiscal year, with sales climbing to $1.85 billion.
Asked about such estimates, the quiet and private Robert Price (he refused to be photographed for this article) said only, "Anything's possible."
And so it must appear to Price, having built a major corporation on a simple premise.
Founder Sol Price once confided that his "secret" was so simple that he was reluctant to speak openly about it for fear of appearing "stupid." Said the elder Price: "I sell things as cheaply as I can."
It is a formula he has used successfully since the early 1950s when he founded FedMart. The discount retailer was later sold to German industrialist Hugo Mann, who tinkered with Price's formula of discounting all products but not using any as loss leaders and was forced to shut down the loss-plagued public company in 1982.
The Price Co. formula--copied by competitors right down to the green paint selected for shopping carts--is based on offering brand-name, top-quality merchandise at an average gross margin of less than 9.5%. That markup compares with industry averages of 50% at department stores, 30% at discount stores and 20% at food retailers, and it allows Price to offer Pierre Cardin warm-up jackets for $24.99; one-gallon containers of Tree Top apple juice for $2.85; five pounds of Skippy peanut butter for $6.29; Sperry Topsider boat shoes for $32.99, and Prince Pro model tennis rackets for $54.99.
Price Clubs average 100,000 square feet in size, $85 million in annual sales and stock about 3,500 items ranging from cement mixers to Dom Perignon Champagne on the same plain metal racks that double in function as the store's own inventory storage area. Forklifts race about the broad aisles that, from time to time, include such diverse fare as sailboats, computers and spas, complete and with a working model churning away next to the book department.
Securities analyst Bo Cheadle, with San Francisco-based Montgomery Securities, said he spent $500 on his first shopping trip to a Northern California Price Club. "You go in for a carton of cigarettes, and end up buying $100 worth of stuff," Cheadle says. "It's like an expedition every time you go. That's what brings you back."
A bargain can easily be lost by delayed expeditions, he notes: Price Clubs turn over their inventory about 17 times annually, an average of every 21 days, contrasted with four times annually or every 91 days at discount stores such as K mart.
Sometimes the bargains are a bit unwieldy for consumers, such as four-pound cans of Starkist tuna for $9.29 and gallon containers of Kikkoman soy sauce for $4.49.
But 60% of Price Club's sales are to wholesale members, such as caterers, law offices, barbershops, bars and gas stations. These are the businesses that Robert Price said had been disenfranchised from the usual lines of distribution and that form a loyal constituency for the Price Club. The company is considering publishing a newsletter to deal in part with problems of small businesses and entrepreneurs, for distribution to its business members.
"The timing is right for dealing with small businesses," said Walter Teninga, founder of Chicago-based Wholesale Club Inc., an admitted Price Club copy. "Regular distributors can't afford to stop their trucks for sales of less than $500. So where else can a guy go when he needs just two No. 10 cans of whatever," referring to industrial-size food containers.
Membership, another ingredient in the formula, is limited, with few exceptions, to businesses holding resale licenses and individuals working for the federal, state or local governments, utilities, financial institutions and members of certain credit unions.
Robert Price won't discuss the rationale behind the tight membership rules. But Sol Price, in earlier interviews, said, "Our members are better than the general public" because their employment is stable, they write fewer bad checks and don't steal.
Henry Haimsohn, president of the Denver-based Price Club look-alike Pace Membership Warehouse with six stores in operation, says customer theft and bad checks are less than 10% the amount he has found in other types of retailing.
Price and the look-alikes cater to their small-business members, but it is the individual member, or group member, who made the Price Club possible.
"Allowing group membership was the turning point," Robert Price says. "We opened in July (1976), allowed group members in September. If we hadn't done it that soon, we wouldn't have been around in December." The additional members increased word-of-mouth knowledge of Price Club, which is important for a company that does no advertising once a store is open.
"There's no question that it works," said James Sinegal, a former Price Co. executive who co-founded Costco Wholesale Corp. in Seattle two years ago and already has 12 warehouses in operation that, he says, "you'd think were Price Clubs."
Competition Heats Up
But practitioners and analysts are now pondering what will happen as competition heats up for both customers and management capable of profitably mixing the ingredients in the formula.
"Price Co.'s (future) success may be out of its control," said Ronald Rotter, securities analyst with Los Angeles-based Bateman Eichler, Hill Richards Inc. "They can still do everything right, but what if the competition does well too?"
Rotter also questions Price's ability to develop enough management talent to continue its growth. "The two times (Price) went outside the company for management, they were not terribly successful," he said. In fact, the management initially secured for the Northern California and East Coast expansion of Price Club left within months.
Walter Teninga, former vice chairman of K mart Corp., was tapped to spearhead Price's 1982 drive into Northern California. He stayed long enough to learn the business but had a falling out with the Prices that neither side wants to discuss.
He then moved back to Chicago where he opened a Price Club look-alike called Warehouse Club in July, 1983. The company now has five stores in Illinois, Ohio and Pennsylvania and is 50% owned by W. R. Grace & Co.
"I don't mind being a clone," said Teninga, adding that he thinks there will be a shakeout in the fledgling industry. "With a 9% gross margin, there's not much margin for error," he said. "We'll see some consolidation."
Sinegal, of the Costco chain, said, "We are working to get established in certain markets, to preempt those markets. That's why we expanded as fast as we did (12 stores in 18 months and six more scheduled this year), and that's the posture you'll see taken by most of the other companies" in the industry.
"Competition will happen," said Sinegal, who already faces rivals in the Puget Sound and Salt Lake City markets. "But we want to call our shots," he added.
The two companies he wants to avoid head-to-head competition with are Price Co. and Wal-Mart, which started a chain of 12 Sam's Wholesale Clubs in the Southeast in 1983. To go against them, he said, "you'd have to have brain damage."
Price Club will meet face-to-face competition for the first time in the Baltimore market with the Pace chain.
And while the industry and Wall Street will watch that market closely, Robert Price said the competitiveness may be overstated. "In merchandising," he said, "no one has a lock on anything. You can't stake out turf in this business."
Price Co.'s East Coast stores haven't had the growth rates of its recently opened California stores, though Robert Price conceded that "once there is an existing base, it will get a lot easier." He said that, even in the new markets, the company will continue to "do the same things we've always done."
Price, perhaps more than anyone, knows the advantage of not messing with the formula. The company has made minor forays into real estate leasing and opened the Price Bazaar, a flea market-like arrangement next to a Price Club in Chula Vista, which is a marginal operation at best.
But since the first year of operation the only significant change to the warehouse formula has been the introduction last year of a $15 annual charge for group members. (Wholesale members always paid a $25 annual fee.)
The copycat companies are still waiting to see the ramifications of that development. Otherwise, changes are few, despite the blistering growth rate.
That's apparent even in the headquarters office. As visitors leave Robert Price's office, they pass by chief financial officer Giles H. Bateman's cubicle-like office, replete with a familiar-looking set of low-budget bookshelves.
PRICE CO. AT A GLANCE
Fiscal year ended Aug. 31 1979 '80 '81 '82 '83 '84 Sales (in millions) $62.7 146.5 226.8 366.2 632.9 1,141.4 Net income (in millions) $1.1 2.5 5.1 7.9 14.7 28.6