Commerce and Warehouse Clubs – Econlib

Adam Smith articulated the rhetoric of the Bourgeois Deal by highlighting fundamental differences among commercial, political, and martial societies. Everyone, he argued, is always practicing oratory on others and trying to persuade them to cooperate: “give me that which I want, and you shall have this which you want.” 

Luke Froeb and his coauthors in the managerial economics textbook from which I used to teach MBA students explained that “the art of business consists of identifying resources in low-value uses and finding ways to profitably move them to higher-value uses.” Two of the absolute best in this during the twentieth century were the very well-known founder of Walmart, Sam Walton, and the less well-known but still very important founder of FedMart and later Price Club, Sol Price.

In a 2023 paper, Charles Courtemanche, Reginald Harris, and I explore how Price and Walton might deserve among the “vital” entrepreneurs explained in Jonathan Hughes’ 1966 book The Vital Few: The Entrepreneur and American Economic Progress. Hughes explains entrepreneurial innovation in American history through the stories of political/religious entrepreneurs William Penn and Brigham Young; technological entrepreneurs Eli Whitney and Thomas Edison; financial entrepreneurs E.H. Harriman and J.P. Morgan; industrial entrepreneurs Andrew Carnegie and Henry Ford; and bureaucratic entrepreneurs Mary Switzer and Marriner Eccles. The ascent of retail in the late 20th century and its continued importance make Price and Walton interesting candidates for inclusion in Hughes’s entrepreneurial pantheon. A lot has been written about Sam Walton, so here I’m going to focus on Sol Price, whose commercial legacy includes modern warehouse clubs like Costco.

There isn’t a lot written about Price beyond a biography his son published in 2012, but even this offers a fascinating look at the man, his mind, and his methods. Price was the New York-born son of immigrants, and his father was a socialist labor organizer. They later relocated to San Diego, and after completing law school, he began a career as an attorney. Price built social capital by doing pro bono legal work for local merchants who (for example) found themselves in trouble with World War II price-control boards. His largesse, he pointed out, led to more lucrative work—such as divorces and larger contracts—when the time came, adopting the language of retail: he used pro bono work like this as a “loss leader” for the bigger things. Among other groups, Price represented the Pawnbrokers’ Association, which was continually under pressure from state political leaders until, invariably, the Association held a reception or fundraiser for one of them, thereby easing the pressure slightly.

Sol Price did not set out to change retail. He stumbled into it by accident and alertness. He was an active member of his community in San Diego and served as a lawyer for several retailers and wholesalers, including those in jewelry and liquor, who sold to a Los Angeles store called Fedco. He accompanied his clients to Los Angeles to visit a Fedco store. Fedco was a store that sold to government employees at deep discounts. Price observed that many government employees commuted from San Diego to Los Angeles, and he believed a similar store could do well in San Diego. He and his partners presented their proposal to Fedco, which rejected it. 

Price, however, had a warehouse in San Diego he needed to do something with, and he thought, “Why not do in San Diego what Fedco doesn’t want to?” Shortly thereafter, FedMart opened in that warehouse, offering deep discounts to members drawn from local city and county credit unions. The strategy had several advantages for Price because he selected a solid, middle-class clientele that was unlikely to write many bad checks. In addition, since the credit unions would market memberships to him, he didn’t have to spend much on advertising. Both of these cut costs and, therefore, the prices he could offer.

Note that when he founded FedMart, he sought to replicate Fedco’s success by targeting a specific clientele. He looked toward the credit unions patronized by city and county employees, the phone company, and other large concerns. By doing so, he had the advantage of prescreening FedMart customers to reduce the costs stores incur from theft and bad checks. A member of the County Employees’ Credit Union was, Price reasoned correctly, likely to be more honest and trustworthy than a member of the general population; moreover, membership in the credit union signaled that the individual was unlikely to write bad checks. The policy is an often-overlooked yet crucial difference between membership warehouses (particularly in their early years) and stores like Walmart: FedMart and Price Club preselected their customers based on trustworthiness. Walmart, meanwhile, deals with considerable shrinkage because it will literally let anyone in. Costco, for example, didn’t accept food stamps until 2009, one way of screening its customers.

In some ways, FedMart was a study in superfluous discovery. Resale Price Maintenance laws made it illegal for retailers to discount from the manufacturer’s suggested retail price unless — and this was crucial — it was a membership store. E.J. Korvette’s in New York addressed this by distributing membership cards at the door, thereby exploiting a loophole. FedMart stocked private-label brands at low prices and refused to do business with companies that vigorously enforced so-called “fair trade” laws. Price scored a major coup in the 1970s when California’s minimum price regulations for liquor ran up against federal price controls. Courts held that federal controls took precedence over state controls, and Price was finally able to offer the liquor discounts he had sought for years.

Price identified six “Rights” to guide his business decisions. His companies had to stock the right kind of product in the right place, at the right time, in the right quantity, in the right condition, and at the right price. He and his subordinates had to make difficult entrepreneurial decisions at every step. 

Price practiced what he called “Intelligent Loss of Sales,” which seems silly—in retail, could there possibly be such a thing as an intelligent loss of a sale?—but which makes sense once you think about it a little more carefully. Warehouse stores usually stock a single brand of a product in a single size. The example from Price’s stores was three-in-one oil. They carried a single large size based on a couple of convictions. A quick Google turned up two sizes: eight ounces and three ounces. It costs less to sell three eight-ounce cans of three-in-one oil than it costs to sell eight three-ounce cans; they have to be touched fewer times by fewer hands between when they are received and when the customer leaves the store, and they turn over more quickly, which means Price’s capital spends less time tied up in slow-moving inventory. Price could have sold more three-in-one oil by stocking the smaller size, too, but he was willing to give up the sales—intelligently, one might say—to reap the gains from higher turnover and lower handling costs.

Price is an overlooked innovator who deserves a prominent place, alongside Sam Walton, J.C. Penney, the Kresge family, and Charles Walgreen, among the people who changed how Americans shop and who developed a whole sector based on creating value by getting Price’s “six rights” right. The right combination of “rights,” of course, does not exist independently of the process used to find it. It must be discovered, and for that, Price needed liberty—and the much broader space over which people can search for the best they can offer.

How did Price do it? He imagined a future no one else did, and he risked resources to make it a reality. It was a risky proposition. Pretty frequently, people imagine a future and discover that it doesn’t comport with reality.

Price and his people were in a position to make discoveries. Just like the inventor of Tabasco sauce was able to make major inroads using a bunch of surplus cologne bottles, one of Price’s buyers, who was working with a supplier to see what they could sell in large quantities in bulk, remembered that one of the vodka manufacturers they had worked with had used extremely large plastic bottles. It occurred to him that they could package mouthwash the same way.

Sam Walton, Sol Price, and many other retail innovators also blazed important trails in using data to analyze and understand consumer behavior. In the 21st century, advances in statistical techniques and software make it easier for analysts to identify and eliminate costs in the supply chain. Delivery and distribution create value. In fact, this might be among the most important work undertaken in the entire process of getting goods from farm to table.

Did Price get everything right? No. In fact, he was at one point forced out of FedMart following a hostile takeover. He and his son, Robert, would go on to revolutionize retailing again by starting Price Club, introducing the world to the modern warehouse club store. In a fitting coincidence, an entrepreneur named Jeffrey Brotman would later approach Price Club about opening a store in Seattle. Price Club would decline, so Brotman would hire one of Price Club’s top executives, Jim Sinegal, and start his own company. You might have heard of it; it’s a store called Costco, which later merged with Price Club.

Adam Smith argued that we are always “practicing oratory on others” in a commercial society. A price is a proposal. Bids and asks—”I’ll give you $50 for that box of baseball cards, dear eBay seller, and “this gallon of vitamin D milk could be yours for $3, beloved Aldi customer“—are exercises in oratory condensed into very simple, easy-to-interpret signals. Sol Price, like Michael Cullen, Clarence Saunders, and E.J. Korvette before him, and Sam Walton and Jeff Bezos after him, changed the game by changing how we practice commercial oratory with one another.

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Some of the facts in this article are from ​​Robert Price’s Sol Price: Retail Revolutionary and Social Innovator. Taylor Grace Carden provided helpful feedback on this article.