Price Co., Costco Warehouse Stores to Merge

Moving to strengthen its struggling operation, the owner of the pioneering Price Club chain on Wednesday agreed to merge with Costco Wholesale Corp., forming a $14-billion-a-year company that could emerge as the leader in the cutthroat warehouse retailing market.

The new company--called Price/Costco--will have nearly 200 stores, with 78 in California. Company executives said no layoffs or store closures will result from the merger.

In Orange County, the three Costco warehouses are in Garden Grove, Tustin and Laguna Niguel. Price Clubs are located in Fountain Valley, Fullerton, Irvine, San Juan Capistrano and Yorba Linda.

Sales at the 94 Price Club stores currently rank second to Sam’s Club, a division of giant Wal-Mart. Costco, a 103-store chain based in Kirkland, Wash., ranks third in sales among warehouse retailers. K mart’s Pace Membership stores rank fourth.

Executives at the merging membership warehouse chains have not yet indicated whether the stores’ names will change.

Price Co. founder Sol Price invented the discount warehouse concept when he opened the first Price Club in San Diego in 1976. His idea was to offer a relatively small selection of goods but to sell in bulk at a discount. To do that, overhead was cut to the bone and merchandise was sold at no-frills warehouses without any advertising or marketing.

Price Clubs became a retail phenomenon in Southern California--especially with small-business owners who initially accounted for the great bulk of sales. But Price Co. later was criticized for not expanding rapidly enough into other states, leaving the field open to Costco, Pace and a host of other competitors.

Price Co. and Costco are expected to cut costs by consolidating, which would give them the resources to offer a greater variety of products and open more stores in the United States and in fast-growing foreign markets.

“It’s truly a blockbuster event in retailing,” said Michael Exstein, a retailing analyst at the Kidder Peabody brokerage in New York. “The merger would give the company the resources and the presence to compete with Sam’s Clubs, which saves these companies from further decline or failure. And it creates a more viable player on the international retailing scene.”

Exstein said Price Co. plans to open a store in Spain next year. Price Co. already operates two Price Clubs in Mexico and hopes to open three more before the end of this year. K mart and Wal-Mart recently established stores in Mexico. Price Co. executives are also considering expanding into Asia. Costco, which already has 12 stores in Canada, plans to open a store in Great Britain later this year.

For several months, industry analysts have predicted mergers and other consolidations in the warehouse club business, which has seen sales slow dramatically after a decade of rapid growth. Last month, K mart sold 14 of its struggling Pace stores to Wal-Mart.

“This industry has been under pressure for a long time so the consolidation is not a surprise at all,” said Merrill Lynch retail analyst Fran Blechman Bernstein.

Wall Street signaled its approval of the merger. Price Co. stock climbed $6.25 to close at $38.50 in over-the-counter trading; Costco shares jumped $2, to $19. Meanwhile, Wal-Mart sank 75 cents to $25.75 on the New York Stock Exchange, a 1993 low.

Price Co. and Costco will combine assets but split executive responsibilities. Costco President Jim Sinegal will become the company’s president and chief executive, and Price Co. Chairman Robert Price, son of founder Sol Price, will be chairman.

“This merger will allow the new company the opportunity to . . . create greater operating efficiencies, which mean lower prices for our members,” Price and Sinegal said in a statement. “While aggressively pursuing club expansion in North America, the new company will take advantage of international business opportunities and maintain merchandise entrepreneurial leadership.”

Executives said the merged company will have two home offices, in San Diego and Kirkland.

The merger comes as the warehouse store business is experiencing tough competition in several big cities.

“The industry needs to consolidate in the face of two trends,” said Saul Yaari, senior retail analyst at the investment firm Piper Jaffray Inc. in Minneapolis. “First, the various warehouses are cannibalizing, or robbing sales from themselves and each other by opening too many units in certain cities and saturating the markets.”

Now that much of the nation already has warehouse stores, the new Price/Costco is likely to rely less on sales to small businesses and reach out to more general market customers by expanding its choice of goods, said Ira Kalish, a Los Angeles-based retail economist at Management Horizons, a division of Price Waterhouse.

“Costco is already moving in that direction by expanding the selection of apparel and consumer electronics,” Kalish said. “These companies already have a solid portion of the small-business market. They have to reach more of the general consumer market if they are to grow.”

Indeed, executives at both companies said they can grow quickly enough to retain their current employment base. In an interview, Robert Price said there will be no layoffs among Price’s 900-plus administrative employees in San Diego, although some may be transferred or given new assignments. Nor are there any plans to close any Price Clubs or Costco outlets, he said.

“The message is that this new company is going to have an aggressive agenda and we’re going to be needing people and there will be plenty of opportunity,” Price said.

According to terms of agreement, each share of Price Co. stock will be converted to 2.13 shares of Price/Costco stock and, one share of Costco will be exchanged for one share of the new stock.