Price Club Proves a Boon, Bane to Other Stores : Competitors Keep Tabs on Burbank Warehouse, New to San Fernando Valley
After seeing the crowds at the new Price Club warehouse in Burbank, Steve Warkell decided he could make a fortune by opening a shoe store across the street.
Warkell figured that customers attracted to the Price Club, a cash-and-carry membership warehouse that sells brand-name merchandise and groceries at prices lower than other discount firms, would buy shoes at his store, which also would be a discount outlet.
Ten weeks after he set up shop, business has been so good that Warkell is almost doubling the size of his 3,000-square-foot store, and also is planning to open stores across from Price Club outlets in Azusa and Cerritos.
“Ninety-nine percent of my business is due to Price,” the exuberant Warkell said.
Different Effect on Zodys
But the Price Club has had a different effect on Zodys Quality Discount Stores, which has an outlet in North Hollywood.
Bob Mendes, vice president of marketing for Zodys, says his company monitors the Price Club regularly to compare prices. The process “has led us to cut prices” on certain items, he said. “We’re all watching the Price Club.”
That is a sentiment shared by more than a few merchants in the Burbank area. Ever since the San Diego-based Price Co. opened its first San Fernando Valley warehouse in November, the store has had a ripple effect felt throughout the Valley.
Customers regularly travel an hour or more to shop at the aircraft hangar-sized warehouse, which stocks such diverse fare as computers and tires, Dom Perignon champagne and frozen Australian lobster tails. The traffic, in turn, is prompting formation of an unofficial discount district. Two small discount stores have moved to the area near Vineland Avenue and Sherman Way, where Burbank meets Sun Valley, and Burbank officials say other discounters want to locate there.
Hit $240,000 Sales Record
On its first day of business, the Price Club warehouse posted a company record of $240,000 in sales, company officials said. The Valley store was the 16th for the publicly held firm, which has since opened four more warehouses.
The warehouse opened with a $1.6-million subsidy from Burbank, which contributed to the cost of the 11.2-acre site, figuring it would get its money back through sales-tax revenues.
Eight months later, the 116,000-square-foot warehouse is being touted as the city’s “most successful redevelopment project ever in dollars and cents,” according to Don Warner, real estate officer for the Burbank Redevelopment Agency.
The city collected almost $250,000 in state sales tax from warehouse sales during the first two quarters, according to Larry Kosmont, the city’s redevelopment director. Burbank receives 15% of the 6.5% state sales tax levied on all nonfood, retail items sold by the Price Club, which account for about 65% of sales.
Declined to Give Details
Other than to give their first-day sales figure, Price officials declined to discuss details of business at the new store. But the quarter-million-dollar tax payment to Burbank equates to about $39 million in sales for the six-month period, $1.5 million per week.
The store should reach more than $80 million in sales its first year, analysts say, close to the average for Price Club warehouses.
The Price Club came to Burbank under a deal approved in March, 1984, by the City Council.
The Burbank Redevelopment Agency bought the 11.2 acres from the airport authority and Lockheed Air Terminal for $5.8 million. The agency then sold the land to Price for $4.3 million. The agency also paid the City of Los Angeles about $100,000 for surrounding road repairs and improvements.
In return, the Price Club loaned Burbank $500,000 interest-free for 10 years. The company also agreed to pay the city whatever balance of the $1.6-million subsidy the city does not recoup in sales-tax revenues after four years, Warner said.
Additional Revenue Expected
City officials now expect that the tax revenue will easily cover the subsidy. And they may get more revenue from other businesses drawn to the area.
Besides Warkell’s shoe store, Famous Fashions, a clothing discount store, has opened across from the Price Club.
Kosmont said two other discount firms have approached Burbank officials for help in acquiring land in the city. One said it wants to locate across from the Price Club, he said.
In addition, HomeClub, a California chain of nine home-improvement stores, plans to open a 100,000-square-foot store in Burbank by the end of the year. The company’s president, Bob McNulty, said he would like to settle next to the Price Club, but that he has yet found an available site.
The Price Club’s effect has not been limited to attracting other businesses.
Competitors such as Zodys and K mart say they have lowered some prices because of the warehouse. And the warehouse has taken business from a number of stores, including supermarkets, other discounters and specialized stores such as home-improvement and appliance centers.
One nearby supermarket says business is down 15% since Price opened its Burbank warehouse, which devotes 25% to 30% of its space to groceries.
But, because Price carries such a broad range of goods and draws its customers from a wide area, most of the competing businesses say their net loss has been minimal. Industry analysts say the success of Price and other discounters illustrates a trend.
“Shoppers who used to go to department stores and grocery stores are now shopping at discount warehouses,” said Bert Rosenbloom, a professor at Philadelphia’s Drexel University who has written college textbooks about retailing and marketing channels. “Additionally, customers who shop at upscale stores now also shop at Price.”
Real Estate Values Up
Several local real estate brokers said Price has increased property values 5% to 10% in the surrounding light-industrial area. Lack of available land, however, may pose a problem for companies wanting to locate near Price, brokers said.
Meanwhile, the 10-year-old company rolls relentlessly forward with a discounting and merchandising formula that it says accounts for about $85 million in annual sales at each of its 20 stores. The firm says 60% of its sales are to retailers and 40% to consumers.
The secret, according to founder Sol Price, 68, and his son and chief executive Robert, 42, is to sell things as cheaply as possible. This means buying and moving a huge inventory to realize strong profits.
The strategy pays off. In the fiscal year ended Aug. 31, 1984, Price Co. reported net income of $28.6 million on sales of $1.14 billion. Income was up 94% and sales 80% from the year before.
Price requires customers to buy in multiples and large sizes, such as four-pound cans of Geisha Tuna for $5.25 each or 50-pound bags of Gold Medal Flour for $7.79.
Prices Up to 40% Lower
Industry analysts say prices at the warehouses are 10% to 40% lower than at other discount stores. Although it doesn’t advertise, the warehouse turns over its 3,500-item inventory on the average of once every 21 days. Most discount stores take 91 days.
On Saturdays, the 500-car parking lot overflows and traffic is backed up onto Sherman Way. On a recent afternoon, customers outside the store said they had had traveled from Palmdale, Saugus, West Los Angeles and Studio City.
Inside the sparse, high-ceiling store, boxes are stacked everywhere--on the floor, and high above plain metal shelves that double as storage areas. Forklifts cruise the cement floors, unloading newly arrived goods.
Price Club customers must have resale licenses, be employees of federal, state or local governments, utilities, financial institutions or be members of certain credit unions. Group members pay a 5% surcharge over the wholesale prices posted in the warehouse and pay membership fees of $15 a year. Wholesale memberships are $25 annually.
Because Price Co. limits sales to small businesses and group buyers and offers none of the amenities found at traditional consumer stores, it is uniquely positioned in the marketplace, analysts say. By contrast, Fedco and Gemco membership department stores sell mainly to consumers and encourage a much broader customer base.
‘We’re in a Different Niche’
“We recognize them as a force in the marketplace, but we’re in a different niche than they are,” said David Werts, vice president of marketing for SFI Corp., which owns Smart and Final Iris food wholesale stores.
Robert Price said that, although the Price Club may take some business away from local stores, the net effect is to stimulate the local economy. The Burbank warehouse has about 250 employees.
“In a particular community, we might be competing against certain retailers or wholesalers but we also attract business from such a wide geographic range that we’re increasing business,” he said.
The company does not appear to have generated any ill will among Burbank retailers.
Larry Maher, owner of California Sales Co., a nearby office supply store, said he doesn’t worry about the Price Club taking away business despite the fact that it also sells office supplies.
Maher said he lost several big accounts when the warehouse first opened, but that customers have since returned because they did not like waiting in long lines to pay. He’s also picked up some new customers. The Price Club’s office staff shops at his store occasionally for products the warehouse doesn’t carry, he said.
