The Warehouse Club Industry – A Detailed History
Sam’s Club opened its first location on April 7, 1983. The first Costco Wholesale location opened in Seattle, Washington on September 15, 1983 and the first BJ’s Wholesale location opened in Medford, Massachusetts on February 6, 1984.
The following industry history will take you through 1996. This is the first year when the current group of five clubs were the only operators left after the industry experienced a wave of consolidation.
Solomon “Sol” Price was born in 1916 in the Bronx in New York City (he passed away at the age of 93 in 2009). When Sol was three or four years old, he had an infirmity in his left eye that caused a drooping eyelid. As a kid, he was teased a lot because of the condition and was shy and self-conscious. That taunting motivated Sol to work hard in school and he did very well. As a result, Sol skipped two grades and entered high school at the age of 13. (2)
His father developed tuberculosis, and, on advice of his doctor, the family moved and settled in San Diego, California. Sol attended San Diego High School. Sol graduated from high school at the age of 16 in 1931. Sol graduated from the University of Southern California (USC) in 1936 with a degree in philosophy. In 1938, not only did Sol graduate from USC’s law school, but he married his high school sweetheart, Helen Moskowitz. (2)
Sol began his legal career working for Jacob Weinberger, an established attorney in San Diego, around 1939/1940. Sol and Helen had two sons. Robert was born in 1942 and Larry was born in 1946. During World War II, from 1941 to 1945, Sol, who was not eligible for the draft due to his drooping eyelid, not only continued his legal career but at night he helped build B-24 Liberators at Consolidated Aircraft in San Diego. (2)
During and after the war, an early influence on Sol’s eventual retail career was due to the Navy’s presence in San Diego and its regulation that sailors on leave needed to depart their ship and arrive back on their ship in their uniforms. Those sailors did not want to wear their uniforms around town and needed a place to change and store their uniforms. Locker Clubs were created that offered those sailors a place to change and purchase items. (2)
One of the more famous and successful locker clubs was called the 7-Seas Locker Club. The locations (there were several) not only included lockers for the sailors to store their uniforms but sold a wide variety of merchandise and services targeted to those sailors. One of Sol clients was a senior executive at the 7-Seas Locker Club and he began to learn about the retail industry. (1)
Sol’s father-in-law passed away in 1947. As part of his father-in-law’s business and investments, he owned a property that took up a full city block near Balboa Park in San Diego. Sol’s mother-in-law inherited the property. It was not producing any income and Sol wanted his mother-in-law to sell it. However, she did not want to sell it because she did not want to pay taxes on the sale. (2)
The decision was made to trade the property for another which would enable Sol’s mother-in-law to potentially own an income producing property. They eventually sold it for a 21,000 square foot empty warehouse on Main Street in San Diego. Now, Sol had to find a tenant for the warehouse. (2)
One of Weinberger’s clients was Mandell Weiss. Despite being 25 years older than Sol, the two developed a close friendship. Weiss and Leo Freedmann, his business partner, opened a jewelry store in downtown San Diego in 1953. In addition to their retail business, the jewelry store sold merchandise wholesale to other retailers including a company in Los Angeles called Fedco. (1)
Sales to Fedco were very strong, so, in the Summer of 1954, Sol, Weiss and Freedmann visited the operation. Fedco was a non-profit organization that was only open to federal employees and who charged its customers a membership fee to shop. (1) The advantage of charging the membership fee was that the retailer was able to offer merchandise at a discount below the manufacturer’s suggested retail price and avoided problems with Fair Trade Laws. (3)
The three were very intrigued with the idea of opening a Fedco in San Diego. Weiss said, “We found out there were 5,000 employees of the federal government in San Diego and they were all going up to Los Angeles once a week to do their shopping. So, we all wondered, why not have one here?” (1)
Sol called Fedco and proposed a joint venture to open a Fedco in San Diego. He was turned down on two different occasions. Undeterred, Sol decided to open his own Fedco-style retail operation in the 21,000 square foot warehouse on Main Street. On December 3, 1954, Sol opened Fed-Mart (later changed to FedMart). FedMart stood for Federal Employees Merchandise Mart. (1)
Initially, FedMart restricted membership to government employees and employees of other organizations and businesses such as teachers, the military, banks, hospitals and government suppliers. Initially, eligible members paid a $2 fee to join and a $1 fee annually thereafter (the membership fee was eliminated around 1963). (4)
FedMart sourced many of its initial products from Sol’s clients that included furniture from one client, jewelry from a couple clients and liquor from a third client. In addition to those products, the initial category assortment included mattresses, clothing, luggage, hardware and large and small appliances. That first location was a success with sales three times plan.
FedMart was described in an article. “Merchandise in most instances is priced below manufacturers’ suggested retail prices … Selling costs are held down by an emphasis on self service in almost all departments, the location of the stores in low rent areas and the elimination of advertising expenditures, loss leaders, free deliver and wrapping services. A monthly newspaper is published to keep members informed of new merchandise.” (4)
Shortly after opening that first location, FedMart’s merchandise assortment expanded to include food products. Its first food product was Planters peanuts. FedMart sold so many, the president of Planters Peanut Company visited FedMart’s location in Main Street to see what the company was all about. The second location was opened in 1955 in Phoenix, Arizona. For the company’s first two years of operation, Sol continued to practice law but by the late 1950s, he concentrated fully as president of FedMart.
In 1959, FedMart went public on the American Stock Exchange. In its first year as a public company in 1959, FedMart, with five locations at the time, reported annual sales of $26 million and a profit of $470,000. (1)
FedMart – Buying and Operating
FedMart’s business philosophy developed into four cornerstone beliefs with the unique concept that the needs of investors and stockholders would be preceded by the company’s customers and employees.
First, FedMart would provide the best value to customers by selling quality products at the lowest possible prices. Second, employees are treated well with good wages and good benefits. Third, FedMart must operate using honest business practices and fourth, FedMart should make money for its investors and stockholders. (2)
Sol helped employees keep their focus on their responsibilities and created an easy to remember philosophy. It was called the six rights of merchandising and it continues to be followed by Costco buyers and merchandisers today. It stated: the company requires the correct merchandise, in the right place, at the right time, in the right quantity, in the right condition and at the right price.
Beyond those four cornerstone beliefs and the six rights of merchandising, FedMart developed a set of strategies that would become the core of the warehouse club industry.
Low Prices – The membership fee enabled FedMart to avoid problems with fair trade laws and the company approached its business from the perspective of what customers would most want: low prices. Sol said, “I never allowed anybody at FedMart to use the word ‘discount’. The whole philosophy was: How do we sell stuff at the lowest markup rather than the deepest discount? … We tried to look at everything from the standpoint of, is it really being honest with the customer? If you recognize you’re really a fiduciary for the customer, you shouldn’t make too much money.” (5)
Buying Strategy – To achieve low prices, consistently over time, Sol taught FedMart buyers an essential buying strategy. In an August 8, 1967 company memorandum, Sol explained the company’s pricing philosophy. He said, “Although we are all interested in margin, it must never be done at the expense of our philosophy. Margin must be attained by better buying … operating efficiencies, lower markdowns, greater turnover.” (2)
Loss Leaders – Sol abhorred “loss leaders” or products sold below cost to increase traffic. FedMart would make a similar margin on all products and not less money on some and more money on others. When competitors like grocery stores were selling products at a loss, well below FedMart, Sol instructed managers to put signs next to those products telling customers to purchase them at a competing grocery store. (2)
Intelligent Loss of Sales – Normally, a retailer would stock a wide variety of items within a category in order to capture sales from all possible customers. However, Sol believed that limiting the number of items not only increased sales but it was less expensive to purchase, distribute and merchandise fewer items.
Refund Policy – Sol was also aware of the value of going easy on people who wanted to return goods. “He advocated for things like giving people cash for their returned items, no questions asked. It was certainly Sol’s feeling that that’s the way you build good will.” (1)
Private Label – Many brand name suppliers chose not to sell FedMart due to its pricing philosophy because they did not want to alienate existing customers. To be able to offer similar type items to the ones those brand name suppliers would not sell the company, FedMart developed its own line of private label products. Sol required these items to have specifications and standards similar to the branded item. (2)
Integrity and Ethics – Sol, grounded by his career as an attorney, believed he and his company needed to operate using ethical, honest and fair business practices. For example, FedMart employees were prohibited from taking any form of gratuity from suppliers, even a free lunch (2)
Employees – Sol’s greatest contribution and legacy may be his belief that the combination of paying high wages, providing good benefits and providing a teaching environment that empowered and developed employees would deliver a long term benefit and a competitive advantage. (7)
Sol’s employee philosophy was exemplified in a bulletin sent to FedMart employees. It said, “You will be permitted, encouraged and sometimes even harassed into growing with the company to the limit of your ability … We believe you should be paid the best wages in your community for the job you perform.” (8)
Larger Package – FedMart’s business benefited from stocking larger packages: a lower per-unit-retail could be listed, they are more efficient to process through registers and have a higher price which benefited overall sales. (2)
Services – Many of the ancillary businesses and member services that exist in the club channel today were developed at FedMart.
Gasoline – In March, 1955, FedMart opened its first gasoline station at its initial location offering fuel at 15% below competitors. An early FedMart board member said, “When we started selling gas at that little Main Street store, the volume of business we did almost immediately was astounding, people in the business would look at it and not even believe it.” (1)
The gasoline business caused a controversy. Gasoline suppliers, who also operated gasoline stations that competed with the retailer, stopped delivering product to FedMart. Although the action by the gasoline suppliers was illegal, FedMart had little immediate recourse. To fix the situation, FedMart set up a wholesale gasoline subsidiary that acquired product in Texas, shipped it through the Panama Canal and delivered it to FedMart stores through the ports in California. (2)
Pharmacy – In 1959, FedMart opened an in-store pharmacy which sold prescription drugs at lower prices than competing independent and drug store chains. Charles Burnett was eventually hired as FedMart’s pharmacy director and later became Costco’s senior vice president in charge of its pharmacy operation.
Car Wash – In 1968, FedMart opened its first car wash location. (9)
Restaurant – In 1968, FedMart opened its first sit down restaurant called “Open Range”. The 210-seat restaurant was open from 11:00 am to 10:00 pm. (9)
Member Magazine – To communicate and market its business, FedMart published a monthly newsletter to keep members informed about products and services. (4)
Fresh Meat – FedMart began adding fresh meat to its locations in 1966.
Insurance – In 1959, the company created FedMart Life Insurance Company to write life insurance policies. The policies were sold within booths located in its locations. (4)
Automotive – In 1971, FedMart opened two 4,000 square foot automotive service centers. (10)
Twenty years after FedMart opened its first location and 15 years after the company went public, the company, in 1974, operated 45 locations with annual sales of $320 million. However, FedMart had become a large organization and was becoming difficult for Sol to manage. (1)
Not only was the excitement of running a small business gone but competition from Walmart, Target and Kmart was increasing and the responsibilities of managing a public company were a distraction. At one point in 1974, Sol told a group of local financial analysts in a public meeting that he wished FedMart had never gone public and was trying to find ways of buying back those shares and returning to private status. Going private was difficult because the stock was thinly traded on the American Stock Exchange. Instead, Sol focused on finding someone to help take the company private. (1)
In 1974, Sol, Helen and some friends traveled to Europe on business and for a vacation. A United States investment banker set up meetings for Sol and European retail executives. (2)
In the Netherlands, Sol met with the founder of Makro. Makro operated 200,000 square foot stores with food on one side and general merchandise on the other side. Anyone could shop on the non-food side of the store but only business owners could shop on the food side. To shop on the food side, business members were required to purchase a “passport” membership (this term was later used by Costco for the initial name of its coupon program). (2)
In Germany, Sol met with executives from Metro, which operated cash and carry stores. Also, in Germany, Sol met with Hugo Mann. He was born in 1913 in Southern Germany. During World War II, Mann was a Soviet prisoner of war. Mann owned Mann Mobilia, a furniture store chain, and Wertkauf, a chain of retail stores called hypermarkets which is similar to a Walmart supercenter. (2)
Sol returned from his European trip and was impressed with Mann. He wanted to make a deal with Mann but he did not want to force a decision on his executive team. In January, 1975, several FedMart executives few to Germany to meet with Mann and his executive team. That trip went well and FedMart’s executives gave Sol permission to negotiate with Mann. (2)
Negotiations began in March, 1975. Mann and Sol agreed that the German retailer would purchase 500,000 shares of FedMart’s common stock at $25 per share and another 300,000 unissued shares at the same price. That initial investment totaled $20 million and, with additional purchases, by May, 1975, Mann controlled FedMart with 51% of the outstanding shares. (11) Sol would president and chief executive officer of FedMart but would relinquish the role of chairman of the board of directors. (1)
By August, 1975, Mann increased his FedMart investment to $28 million and now controlled 81% of the company. Around this time, the board of directors agreed to reduce board membership to just five people: Mann (chairman), two of Mann’s associates, Sol and Robert Price (he began his career at FedMart in September, 1965 at 23 years old and by 1969 was promoted to senior vice president of operations). Additionally, the new five-member board (controlled by Mann) was given the authority to change any company bylaw without seeking ratification from shareholders. (1)
Sol Price is Fired From FedMart
After Sol and Mann agreed to FedMart’s sale, the company continued to operate in the same manner with Sol in charge. However, their relationship changed. The first board meeting of the new five-member group was on September 18, 1975. Mann spent 90 minutes criticizing FedMart, only looking at Robert and never at Sol. (3)
In November, 1975, Sol would learn that Mann’s associate, Heinz Gundlach (a board member) and the other German board member had secretly approached Dillard’s Department Store (a $200 million retail chain based in the South) about a merger. Sol sent a letter to Mann complaining he wasn’t told about the proposed merger and asked for the resignation of the two board members. (1)
At the next board meeting on December 4, 1975, Mann responded. He informed Sol that he was terminated for cause as FedMart’s president and chief executive officer. That night, after the board meeting, the locks on Sol’s office were changed. One week after Sol was fired, Robert resigned. (1, 3)
By 1982, FedMart went out of business and was only valued for its real estate. FedMart’s 46 existing locations at the time were converted to Target (35 stores) and Ralph’s grocery stores (11 stores).
International Distributing Company
As FedMart grew, a company-owned distribution system was created to supply the locations from two facilities: one each in California and Texas. The division was called International Distributing Company (IDC) and it was managed as a for-profit business. IDC added a management cost onto the products that were shipped to FedMart stores. That cost more than covered warehouse expenses such as receiving, stocking, picking, delivery and management with a small percentage left over generating cash and profits. (2)
In January, 1976, a little more than a week after he was fired and in preparation for his next business venture, Sol leased office space directly above his FedMart office. The company was called “The Price Company”. Sol had developed a good relationship with Bank of America and he opened a $4.0 million line of credit with the bank. Sol provided Robert with an office and a small salary. By February 13, 1976, The Price Company was officially registered as a California corporation. (2)
Potential business ideas were discussed, many targeting small businesses. One specific area of interest was IDC. The concept of selling merchandise with a smaller than normal merchandise gross margin to small businesses was intriguing. (2)
Sol talked with restaurants, convenience stores, newsstands and other small businesses around San Diego. He learned that in many cases, they had to purchase business supplies from five or more different wholesale companies, often on unfavorable terms. As these conversations continued, he began to realize a market existed where those small business owners might be interested in purchasing the majority of their merchandise from one location at lower prices. (12)
In California, Smart & Final had been operating small business food and merchandise supply stores since the early 1900s and Makro had been operating a similar business model in Europe. While the concept Sol and Robert discussed was not new, their experience with FedMart led them to believe that it could be done more efficiently on a larger scale. (13)
That larger scale operation became Price Club. To finance Price Club, Sol and Robert raised $2.38 million by selling 475 shares of The Price Company at a cost of $5,000 per share to friends and associates. Robert was named president of Price Club and, along with his executive management team, was largely responsible for the company’s success.
Jim Sinegal, who worked at FedMart and Price Club before co-founding Costco, commented on Robert’s talent and achievement with Price Club. He said, “Robert played an invaluable role not only in grasping the genius of the ‘Price Club concept,’ but also recognizing the operating disciplines that would later be essential to the business’s success. I have stated may times over the years that Robert has received insufficient credit for his contributions.” (2)
Price Club – First Location – Morena Boulevard
Robert was responsible for finding a location. He located a 102,000 square foot warehouse that was part of a 500,000 square foot complex that was built in 1954 for Convair Corporation, an aircraft manufacturer. The 102,000 square foot warehouse was free standing and the former tenant had moved out by the time Robert contacted the owner.
At this point, along with Sol (who was chairman of the board of directors and company advisor) and Robert, Giles Bateman and Richard Libenson rounded out Price Club’s executive management team. Bateman was hired in February/March, 1976. He graduated from Oxford University in England and Harvard Business School. Bateman was hired as Price Club’s chief financial officer. (2)
Libenson was Sol’s nephew. He was hired in 1964 by Sol at FedMart and was responsible for helping FedMart set up new stores. Libenson left FedMart shortly after Sol and Robert and was hired as Price Club’s executive vice president of merchandising. Libenson developed the types of items Price Club would sell. He would rise to Price Club’s chief operating officer and director and would eventually serve on Costco’s board of directors. (2)
The first Price Club and the first membership warehouse club was opened on July 12, 1976 at 4605 Morena Boulevard in San Diego. Initially, Price Club only allowed businesses to become members. That membership cost was $25 per year. However, sales were weak. (14)
To increase sales, Robert talked to purchasing managers at government agencies around San Diego to learn how to bid on government contracts. At one meeting, the San Diego City Credit Union asked if their member customers could shop at Price Club. While Sol, Robert, Giles and Richard were concerned that small businesses would be upset that consumers could purchase the same product as them at wholesale prices, they developed a workaround. (2)
Non-business members would not have to pay a membership fee but would have to pay a 5% surcharge on all their purchases. In return for allowing San Diego Credit Union members to shop at Price Club, a mailer promoting Price Club would be included in monthly statements for free. This marketing concept was duplicated at other credit unions, public service agencies, government agencies, banks and other financial institutions around Sand Diego.
Despite the membership change, sales were still slow. There were several problems with that first location: no other stores were in the area to attract customers, the hours of 7:30 to 4:00 on weekdays were not amenable to business owners, consumers were not ready to purchase case quantities and consumers needed a different product mix. (2, 3)
These early challenges forced Price Club’s management team to constantly take a fresh look at the business and make changes. One last piece of that initial puzzle remained. Price Club opened its membership to employees of the small businesses who were already wholesale members.
Eventually, sales started to increase and by the end of November, 1976, weekly sales reached $151,000. Robert said, “Somehow it got shifted around and it began to work. If we had failed, there probably never would have been the warehouse club industry as we know it. Everyone would have thought it was not viable. The bottom line is, it introduced a much more efficient way of selling merchandise. It combined something not combined in the U.S. or anywhere before – the idea that the wholesale customer and the retail customer could shop in one place.” (7)
Price Club – Buying and Operating
Many of FedMart’s buying and operating principles would be duplicated at Price Club with new concepts introduced over time.
Low Prices – Price Club’s merchandise gross margins, from 1976 through 1984, ranged from approximately 10% to 11%. Buyers were taught how important low prices were to Price Club and how those low prices helped entice new members to join and convince existing members to renew.
Price Club buyers were not always able to purchase an item at the lowest cost. Buyers were taught to negotiate with suppliers to purchase items, despite actual volume, at the lowest cost. If the item were offered at the lowest price initially, the member would purchase the item in sufficient quantities that would allow the buyer to buy future orders at the lowest cost. If merchandise gross margins had to be given up early in an item’s life, Price Club would get larger sales long term and the merchandise gross margin would eventually increase.
Also, buyers were taught that when efficiency and operational savings were gained through improved buying, the member should receive that benefit in the form of lower prices.
Quality – Despite its location size, Price Club only stocked 3,500 products. Buyers were focused on making sure the items it purchased were high quality. The logic was simple. If Price Club is only going to stock a limited number of items in each category, the products that are sold should be of high quality. By combining high quality merchandise with its low price philosophy, a value-based competitive advantage is created.
Treasure Hunt – Price Club buyers were taught to rotate unique merchandise. This created a “treasure hunt” atmosphere, as nonessential or “impulse” products were constantly changing and a “buy it now” attitude among members was created as they recognized those products may not be in stock the next time they shop in their local club.
Operations – To keep merchandise gross margins low, Price Club had to operate its business in a more efficient and different way that traditional retailers. Since Price Club was membership based and operated large buildings, less visible locations could be purchased reducing real estate cost. Price Club was only open for eight hours per day. The company believed that if it extended its hours, it would just stretch out and not increase sales. Additionally, by opening for eight hours, Price Club would only pay employees for one shift. Since Price Club would primarily be selling high quality name brand items, advertising would not be needed. (16)
Name Tags – To improve communication and respect among employees at all levels, name tags with each person’s first name were used. Sol said, “We’ve kept the corporate infrastructure lean and tried to erase status differences between management and other organizational levels. Everyone, including Robert, wears a name tag with his first name on it and we address each other by first name. No one has a fancy office with a couch or private toilet … That’s all part of our culture.” (15)
Hebrew National Hot Dogs – Libenson had a hand in creating the food court concept. Prior to opening the first Price Club, Libenson and another Price Club executive visited that location numerous times and mapped out the merchandising strategy that they would use when the club was opened. During that time, they recounted where they grew up. (17)
Libenson grew up near New York City and remembered a hot dog vendor who sold the best tasting hot dogs. The other executive grew up in New England and caddied at a local golf course. He remembered how much he liked the kosher hot dogs that were sold at the golf club. The idea was born to have a hot dog cart with an umbrella stationed outside the club. (17) Shortly after opening that first club, Robert contacted Hebrew National to see if they would sell their ¼ pound hot dog to Price Club. Hebrew National supplied the cart for free and a hot dog and a can of soda was sold by Price Club for $1.50. (2)
Product Demonstrations – As Price Club added grocery, candy, snack, frozen and perishable food, it began offering product samples to members. The samples created a fun atmosphere inside the buildings with many members walking the aisles during their lunch break to get something to eat.
Special Events – In 1991, Price Club launched a special events program that featured expanded lines of merchandise that were stocked for a short period of time, usually three days to one week. This concept allowed Price Club to expand its assortment without making an inventory investment, since Price Club only paid for merchandise that was sold.
Membership – In 1984, Price Club changed its consumer membership program. Non-business members would now pay a $15 membership fee and the 5% surcharge would continue. Price Club said the additional revenue would be used to reduce margins by approximately 2% to between 8.5% and 9.0% enhancing its low price image especially with business members.
Private Label – Around 1988, Price Club introduced private label products selling Gibson Gourmet Ranch ground beef, Hattie Brooks candy and ice cream and Club Classic clothing.
Price Club Industries – Price Club created a division called Price Club Industries (PCI). This division would be responsible for three areas: entrepreneurial concepts, in-house product manufacturing and specialty operations. The goal was to test and add a variety of services and products that supplemented the products it sold in its club locations.
In 1983, PCI’s first venture was to open a centralized photo processing operation. In 1987, an in-club pharmacy was tested and an automobile buying program was introduced. In 1989, two 60,000 square foot stand-alone furniture stores called Price Club Furnishings were tested near existing clubs. Within two years, the locations were closed but the company learned how to buy and merchandise home furnishing products. In 1989, it tested one-hour photo processing. In 1990, it tested and expanded: business delivery, hearing aid centers, fresh baked pizza, optical centers, gasoline stations, tire centers and a food court called Price Club Café.
Fresh Foods – In 1992, it successfully added fresh meat and bakery departments and announced plans to remodel all locations with these departments.
Price Club Growth
In 1979, Price Club was classified as a public company because it had more than 500 stockholders and by 1982, its shares were traded on NASDAQ.
By 1980, each of Price Club’s four locations were averaging $49 million in sales per year. The original Bank of America credit line was paid off and the company would use its positive cash flow to expand by purchasing real estate instead of leasing. By 1982, Price Club added three locations with each one averaging $67 million in sales annually. In 1983, Price Club opened its first locations in Los Angeles and San Francisco and in 1984, the company entered two new markets with locations in Virginia and New Mexico.
In 1986, in a joint venture, Price Club opened its first international location in Canada in Montreal, Quebec. Price Club and Steinberg, Inc. (it’s Canadian partner) each owned 50% of the venture. By the end of 1986, Price Club operated 25 locations with each one averaging $113 million in sales annually. By 1988, Price Club had two locations that were averaging close to $200 million in sales per year. In 1992, in a joint venture, Price Club opened its first location in Mexico. Price Club and Controladora Comercial Mexicana each owned 50% of the venture.
It did not take long for Price Club to face competition. Beyond Costco, Sam’s Club and BJ’s (all three will be discussed later), Price Club faced competition from 12 other membership warehouse club operators who are now defunct businesses (see chart below for a year by year list of club operators from 1983 to 1996).
In the early 1980s, Super Saver Wholesale Club opened its first location in Louisiana (this company was ultimately purchased by a club competitor in 1987). In 1981, Makro opened four wholesale locations (Kmart purchased Makro in 1989). In 1983, PACE opened in Colorado (Kmart purchased this company in 1989 and it was ultimately purchased by a club competitor in 1993). In 1983, The Wholesale Club opened in Indiana (this company was ultimately purchased by a club competitor in 1990).
In 1983, Club Wholesale opened in Idaho and by 1990, the company closed. In 1983, Walter Teninga, a former Price Club executive, opened the The Warehouse Club in Illinois (the company filed for bankruptcy in 1995 and eventually closed). In 1984, Price Savers opened in Utah (Kmart purchased this company in 1991 and merged it with its PACE operation).
In 1984, Buyer’s Club opened in Colorado. By 1989, Buyer’s Club filed for bankruptcy and eventually closed. In 1986, American Wholesale Club opened in Texas. By 1988, American Wholesale Club filed for bankruptcy and eventually closed. In 1989, the Wholesale Depot opened in Pennsylvania (the company was founded by Mervyn Weich who was BJ’s first president) and it filed for bankruptcy in 1994 and eventually closed. In 1992, Meijer opened SourceClub in Michigan (the division was closed in 1994). In 1993, Mark Mers, a former executive with Price Club, Costco and Price Savers, opened the first Max Club in Arizona. Max Club was a division of SuperValu and was closed in 1995.
Price Club Struggles
By 1992, Price Club’s growth was slowing as comparable sales increased 2.6%. In 1993, overall sales increased 4% to $7.65 billion but comparable sales decreased 8.9%. There were several reasons for its struggles:
Competition – Price Club experienced tough competition in several markets. In 1991, Price Club closed its Buffalo, New York location only a few months after its opening. This was the first time that Price Club closed a location. Competition from a five-year-old BJ’s Wholesale and a new PACE location was too strong. In 1992, Price Club faced additional competition in its home market of San Diego as Costco planned to open four clubs. In 1993, Price Club closed recently opened locations in Dallas, Texas and Bensalem, Pennsylvania as it faced stiff competition from Sam’s Club.
Lack of Innovation – By 1989, Price Club’s competitors were experimenting with new departments and products such as frozen, refrigerated, bakery, fresh meat and deli. Price Club was not innovating as quickly and its buying and operating strategies had not dramatically changed since its inception.
Slow Expansion Strategy – Sol continued to manage real estate and he did not like overpaying for land. The result was Price Club expanded at a slower pace than its competitors. Industry observers said Price Club seemed more interested in real estate development. By 1987, within four years of opening their first locations, Sam’s Club operated 49 clubs, Costco operated 42 locations and Price Club operated 32 buildings.
Poor Membership Decision – In 1992, in response to its struggles, Price Club made a strategic mistake. In an effort to increase sales and its membership base, Price Club waived its membership requirements in certain markets. This was indicative of the problems that Price Club was having in some markets. Long term, losing membership revenues and continuing to operate at merchandise gross margins at approximately 9% was a “recipe” for disaster.
James (Jim) Sinegal was born in Pittsburgh, Pennsylvania in 1936. In the summer of 1951, when Sinegal was 15 years old, he traveled to San Diego, California to live with a relative and work. His parents eventually moved to Southern California that same summer. (19) Sinegal graduated from Helix High School in La Mesa, California in 1953. (18)
Since his grades were not that good coming out of high school, Sinegal attended San Diego Junior College (now San Diego City College) for two years and graduated with an associate degree in 1955. Sinegal said, “My test scores were good, but my grades weren’t that good, because I needed focus. It was at San Diego Junior College where I regained that focus, and paid attention, because deep down I knew education was important.” (18)
He transferred to San Diego State University and graduated with a bachelor of arts in 1959. (18) During his first year at San Diego Junior College, Sinegal was looking for part time work. A friend called him, who was already working at FedMart, and asked if he wanted to unload some mattresses there. (2)
Sinegal said, “They had gotten in an unusual load of mattresses and needed help in putting the mattresses away. The pay was $1.25 per hour. But I didn’t get paid the first day or the second day. So, I just kept coming back, figuring eventually they were going to pay me. And on the third day as I was carrying a sofa over my head, I heard this gruff voice say, ‘Put that damn thing down before you break your back, or worse yet, break something in the store.’” (20) Sinegal said, “So, I turned to somebody who was there and I said, ‘What ticked him off? And who in the hell is he?’ They said, ‘He’s Sol, he’s not mad. That’s just Sol,” (2)
Sinegal was planning to go to law school but after working at FedMart for several months, he changed his mind. He decided to study business and he strived to be like Sol. (20) Sinegal continued to work at FedMart through around 1976 eventually becoming executive vice president in charge of IDC. Sinegal credits Sol for teaching him about operating a retail business and credits him for his future success and Costco’s.
At Sol’s memorial service in 2010, while Sinegal was still president and chief executive of Costco (he retired one day short of his 76th birthday on December 31, 2011), Sinegal spoke about his mentor. He recounted the time a reporter called to ask him some questions about Sol. Sinegal said, “A newspaper reporter called me and said, ‘Gee, you knew him [Sol] that long, ya know, since 1954? You must have learned a lot.’ My response was: ‘No, that’s inaccurate. I didn’t learn a lot. I learned everything, everything I know.” (2)
In another interview, Sinegal said, “Costco reflects everything I’ve learned in business over the years and Sol Price was certainly a big influence … Many of the things we do at Costco began back at FedMart … and simply evolved, including the concept of membership, limited selection, pricing and the strong private label program.” (13)
After leaving FedMart, Sinegal worked at Builder’s Emporium (a home improvement chain based in California) and worked at Price Club as an executive vice president. Ultimately, Sinegal started a food and non-food brokerage company called Sinegal/Chamberlain and Associates. Sinegal operated the brokerage company from 1979 to 1983.
Jeff Brotman was born in Tacoma, Washington in 1942. His family, on his father’s side, emigrated from Romania to Canada and ultimately settled in Tacoma in the 1930s. Brotman’s father, Bernie, was a retailer who by the 1970s operated 18 stores in Washington and Oregon. (22)
Brotman graduated from high school in 1960, graduated from the University of Washington in 1964 with a degree in political science and graduated from the University of Washington School of Law in 1967. Brotman and his brother Michael operated a jeans store for young women called Bottoms in the 1980s and a men’s clothing store called Jeffrey Michael in the 1990s. Brotman was an early investor in Starbucks. (22)
In 1982, Bernie called Sol and Robert and asked if Price Club would be willing to enter into a franchise agreement with himself and other Seattle investors. Sol and Robert declined. (2) After a trip to France where Brotman visited and learned about hypermarkets, his father encouraged him to look at duplicating Price Club. (23, 24)
In 1982, Brotman networked to find a retail executive who could run the business. Sinegal’s name came up often and Brotman ‘cold called’ him one day while Sinegal was running his brokerage company. Brotman eventually flew to Southern California to meet with him. (24) Sinegal said, “We hit it off immediately.” (23) Plans were developed to start a warehouse club in the Northwest.
Even though Sinegal was several years removed from working with Sol and Robert at FedMart and Price Club, when he told Sol that he was launching a competing warehouse club, “Sol was pissed”. (25)
Brotman passed away, unexpectedly, in 2017 at the age of 74. Shortly after his passing, Sinegal wrote about his relationship with his long time business partner. He said, “I like to think that Jeff and I were a much more efficient, productive team than Laurel and Hardy, at least where Costco was concerned. We made all our major decisions together, whether it was about a merchandising opportunity, a new site or a new partner. This is not to say that we didn’t argue. Of course we did. We had some doozies over the years, but here’s the thing: they didn’t last more than a day. Jeff never harbored animosity towards anyone. We’d see each other and exchange a hug — it’s very difficult to be angry with someone when you’ve just given them a hug — and we’d work past our difficulties.” (26)
Initially, Costco Wholesale was capitalized with credit cards and funds from the co-founders. Brotman said, “We were both all in. If we failed, we’d be broke.” Eventually, they raised $7.5 million from friends and acquaintances to open the first three locations. (24) Brotman and Sinegal came up with the name Costco over beers at a restaurant in South Seattle. Brotman said, “We didn’t need to hire a firm for a couple hundred thousand dollars to come up with some name for us. We got loose enough to come up with a name ourselves.” (27)
Sinegal and Brotman decided to open their first location in Seattle, Washington. They looked at a lot of cities including Denver, Chicago and Dallas. Seattle, in particular, was an attractive option due to several reasons: it was in the same time zone as California and they knew they would be recruiting people from the state and Portland and Seattle were among the least competitive markets in terms of grocery stores but they had higher prices on food and non-food products compared to most markets. (21)
Costco’s first location was opened on Fourth Avenue South in Seattle, Washington on September 15, 2023. The building was a mile south of the Kingdome (the former indoor multi-use stadium). The partners said it was easy to describe the location of Costco in relation to the Kingdome. Additionally, there was a lot of traffic on the road.
In 1983, business members were charged $25 per year and consumer members were not charged but paid a 5% surcharge on purchases. By 1987, the company’s membership policy changed with business member fees remaining the same and consumer members paying $30 per year with the 5% surcharge being eliminated.
Prior to opening day, Costco signed up 115 people and first day sales were just $48,000. However, business increased quickly and within ten weeks, weekly sales reached $1.4 million. However, Costco faced push back because their business strategy was unique in the region.
Sinegal said, “Very early on we applied for a license to sell beer and wine in the state of Washington, but we were meeting with all sorts of obstacles. After a period of time, it became very clear that they were trying to stop us from selling [beer and wine]. They would come in and run an audit on our books and looked at all sorts of things like what [price] we were selling milk for … It became very obvious that our business would always be subject to scrutiny because of the nature of it and because we were asking people to pay a membership fee and because we were offering great prices on all sorts of branded merchandise. So, we understood that there would always be a lot of questions and lots of skepticism on what we were all about.” (28)
That experience with the state made Costco learn that it had had a responsibility to treat everyone involved in its operation: employees, suppliers, government officials and other stakeholders with honesty and fairness. Sinegal said, “We were going to overcome every single objection that people would have in shopping with us. Because we had a lot of former FedMart and Price Club people working for us, we understood the concepts that Sol Price had taught us. We had that DNA of what we had learned from him. Business was about more than making money. Business had a responsibility.” (20)
Craig Jelinek, who followed Sinegal as president and chief executive officer of Costco in 2012, worked at FedMart for 18 years and was working at Price Club when he interviewed with Sinegal in January, 1984. Jelinek said, “I was thirty years old, single and not really concerned about the weather or other things people tend to take into consideration. I just made a decision to move after talking with Jim. Jim had said, ‘Look we’ll probably have 20 of these Costco’s, and one day, there will probably be a little profit sharing of some kind, who knows.’ So I figured, who knows, I’ll come up and live there for the next thirty or forty years running a warehouse. So, I wrapped up some things in California, and moved up to Seattle to start on April 1st of 1984. And shortly thereafter, I opened up the sixth warehouse [in Tukwila, WA].” (29)
In December, 1985, Costco went public and raised $29.8 million by offering 4.2 million shares at a price of $10 per share.
Costco – Buying and Operating
While there are many concepts, strategies and philosophies that Costco uses to manage its business that were learned at FedMart and Price Club, there are key principles that Costco has uniquely perfected.
Quality – Costco believes it is easy and wrong to offer low prices on low-quality merchandise. The trick, from their point of view, is to be able to stock and sell high-quality products at lower prices than can be found elsewhere. This creates the value proposition that convinces members to continue to pay to shop.
Since its initial assortment was limited to the top selling branded items in a category, Costco buyers were taught that they did not have any specific brand loyalty. This afforded the company four benefits. First, recognized brands are perceived to offer a quality product. Two, that lack of brand loyalty on the part of buyers allows merchandise to be purchased on the most advantageous terms with the savings passed onto the member. (30)
Three, because the supplier has invested in making its product of the highest quality, Costco’s exposure to returns is limited. Lastly, the manufacturer’s marketing program would satisfy Costco’s promotional needs and members will have product awareness without the company having to spend on advertising. (30)
Sol commented on Costco’s creativity, “Now, Jim has done a pretty damned remarkable job. He puts a great emphasis on quality and has moved into the food business and other new lines. We [the Prices] were very good at creating, but Jim was very good at developing.” (31)
Culture – An industry observer said, “History is going to write that Sinegal and Brotman were the best merchandising duo since Marshall and Field or Sears and Roebuck. They have created a long-lasting management culture that their job is never finished.” (32)
From its beginning, Sinegal and Brotman strove to create a culture at Costco that would be above reproach and would last. Costco has four cornerstone ethical concepts that every employee is taught: obey the law, take care of members, take care of employees and respect suppliers.
Sinegal said, “And if [the business] does all those things, pretty much in that order, they will do what they ultimately have to do as a public company or as a corporation, which is reward the shareholders. Our view is that you can reward the shareholders in a short term by not paying attention to one of those aspects, but you can’t do it in a long term. Sooner or later you are going to stumble very badly. You are either going to have labor problems, or you are going to break the law, or your customers are going to be turned off, or the suppliers are not going to want to do any business with you. You have to recognize that all those things in a long term view are important.” (28)
Members – Costco will always stand behind its members and the products it sells. Sinegal said, “They’d get a refund on their membership at any time. They could be a member for 11 months and if they said to us, ‘I’m no longer happy,’ we’d refund the entire fee we charged them. Additionally, we would never engage in any superlatives in describing anything we did in our stores or advertising. Which was easy, since we weren’t intending to advertise anyway.” (20)
Commenting on its item refund policy, Sinegal said, “We … decided to guarantee every single product unconditionally … If someone buys a TV from us and drops it from a third floor window, then bring it back to us saying they’re unhappy with it, we give them their money back.” (33)
Employees – Costco strives to pay its employees the highest wages along with the best benefits. Costco provides its employees with an opportunity for long term growth and will promote from within before hiring from the outside. Sinegal said, “Paying good wages is not in opposition to good productivity. If you hire good people, give them good jobs, and pay them good wages, generally something good is going to happen.” (34)
Commenting on its tenet to address any potential objection anyone would ever have with Costco for any reason, Sinegal said, “We are going to pay our employees the highest wages and have the best benefit package in retail — nobody will ever be able to say to us that we are making money off the backs of our employees.” (20)
Retail Theatre – Sinegal said, “We’re in the business of retail theater. We have to understand that. We have to stay out front every day. Though we’ve been successful we can’t rest on what we’ve done. We have to continue to be creative and inventive … The art form of our business is intuition, We can’t lose that idea.” (19)
Eliminate Costs – Because Costco manages its business on very small merchandise gross margins, the company’s greatest concern is increasing operational costs. Costco teaches all its employees to look for ways to save money, at all levels of the company.
Early on in its bakery operation, at the suggestion of an employee, Costco began packing baked goods in cardboard instead of plastic. Sinegal said, “It’s pennies but when you multiply it out over hundreds of thousands of units, it saved us $2 million. That’s $2 million we can use to lower prices. That’s the way we think.” (35)
Suppliers – Costco believes its buyers should create a partnership with suppliers. Suppliers should expect Costco buyers to be fair but tough negotiators. Costco will not renege on purchase commitments, it will pay invoices on time and will not bully suppliers.
As the company grew, Costco recognized the negative impact its philosophy of constantly changing items could have on suppliers. Buyers were taught, especially with smaller suppliers, to explain that it would not want to account for more than 25% of a vendor’s business. Costco does not want to be responsible for a company’s failure due to an item change or deletion.
Costco expanded quickly. One of the reasons was Sam’s Club. Brotman said, “When Wal-Mart announced it was going into the discount warehouse business, we had to compete and grow quickly.” (24) By 1984, Costco operated seven locations in the Northwest that generated an average of $15 million annually per club. By 1987, Costco operated 42 locations that generated an average of $44 million per year per location. For comparison, by 1987, Price Club operated 32 clubs that averaged $114 million annually per club. Costco narrowed that club sales productivity gap. By 1993, Costco operated 107 buildings that generated $78 million annually per club and Price Club operated 78 locations that generated $98 million per club per year.
Sam Walton was born in Kingfisher, Oklahoma in 1918. Walton graduated from the University of Missouri in 1940 with a bachelor’s degree in economics. After college, he worked at J.C. Penney for 18 months. During World War II, Walton was in army intelligence and he reached the rank of captain. Walton purchased a Ben Franklin variety store in 1945.
FedMart’s success did not go unnoticed around the country. Walton continued to operate Ben Franklin variety stores and would not open his first Walmart location until 1962 in Rogers, Arkansas. Part of the model he used to open Walmart was FedMart as he visited one of the locations in Houston in 1960.
Walton said, “I learned a lot from Sol Price … a great operator who had started FedMart out in Southern California … I guess I’ve stolen – I actually prefer to use the word ‘borrowed’ as many ideas from Sol Price as anybody else in the business … I really liked Sol’s FedMart name so I latched right on to Walmart.” (36)
Price Club’s success did not go unnoticed. Intrigued by an investor prospectus and an invitation to invest in Price Club, Walton became interested in developing his own membership warehouse club. In 1982, Walton called Sol, visited Price Club and was given a tour. Shortly after their meeting, Walton called Sol and informed him Walmart would be opening a competing membership warehouse club, Sam’s Club (it was originally called Sam’s Wholesale Club). Walton passed away at 74 in 1992 in Little Rock, Arkansas.
Sam’s Club opened its first location in Midwest City, Oklahoma on April 7, 1983. Sam’s Club modeled its operation on the concepts and ideas that were created by Price Club. The Midwest City location drew members from a 100 mile radius. Wholesale members paid a $25 membership fee to join. Consumer members did not have to pay a membership fee, but did have to pay a 5% surcharge on purchases.
By 1989, Sam’s Club had begun testing and expanding new departments and services such as: fresh foods, (a scratch bakery, fresh meat and fresh produce), optical, a travel club, delivery and a fax ordering system for business members. Around this time, Sam’s Club changed its membership program with business members continuing to pay $25 annually and consumers who would now pay $30 annually and the 5% surcharge was eliminated. In 1991, Sam’s Club introduced private label products.
Sam’s Club Growth
During its first four years, Sam’s Club expanded quickly. It tended to avoid large metropolitan markets and focused on smaller markets with populations between 100,000 and 200,000 in the Southern part of the United States. Price Club was opening clubs in markets with populations between 250,000 and 350,000 people.
In 1985, Sam’s Club opened eight locations with four in Texas and its first clubs in Florida, South Carolina and Alabama. Sam’s Club opened 12 buildings in 1986 including six clubs in Texas as well as buildings in Tennessee, Kansas and Arkansas. In 1987, Sam’s opened 26 clubs with new locations in Louisiana, Mississippi, Colorado and Kentucky.
While Sam’s Club continued to open new locations for the next five years from 1988 through 1993, its expansion strategy during this time was supplemented by purchasing competing membership warehouse clubs. In 1988, in addition to opening 22 new clubs, Sam’s Club purchased the 20 unit Super Saver Wholesale Club. Sam’s Club closed three of those locations and converted 17 buildings to its format. Sam’s Club purchased three Price Saver clubs in Cincinnati, Ohio. These were its first three locations in the market.
In 1991, Sam’s Club purchased The Wholesale Club and its 28 locations. The Wholesale Club was strong in the Midwest where Sam’s Club had little presence. In 1992, Sam’s Club purchased three locations from PACE and in 1993, it purchased an additional 14 PACE locations.
By the beginning of 1993, Sam’s Club was the largest warehouse club operator with 259 locations and $12.73 billion in sales compared to Costco with 107 clubs and $7.65 billion in sales and Price Club with 78 buildings and $7.85 billion in sales.
Zayre Corporation, a $2.6 billion diversified retail chain based in New England, opened the first BJ’s Wholesale Club in Medford, Massachusetts on February 6, 1984. The company’s first chief executive officer was Mervyn Weich and his wife, Barbara Jane, was the inspiration for the BJ’s Wholesale Club name. BJ’s was organized as a subsidiary of Zayre and was separately staffed and headquartered.
BJ’s based its operation on Price Club. Business members paid a $30 annual fee. Consumer members did not have to pay a membership fee, but paid a 5% surcharge on all purchases. In its beginning, in an effort to appeal to the consumer member, BJ’s compared itself to and competed against local supermarkets, drug stores and discount stores.
Early on, BJ’s did not cluster new locations and expanded outside Massachusetts. In 1984, it opened clubs in Florida and Rhode Island. In 1985, it opened clubs in Connecticut, New Jersey and New York. In 1986, it opened clubs in New Hampshire and Illinois (these locations were eventually closed).
In 1989, BJ’s changed its membership program. Business members continued to pay a $30 annual fee but it eliminated its 5% surcharge for consumers and instituted a $30 annual free for them.
Zayre shifted its focus away from its warehouse club division, which by 1989 included the home improvement company called HomeBase. In July, 1989, Zayre spun off BJ’s and HomeBase to a new company called Waban. The company was named after a small town in Massachusetts.
In 1990, BJ’s added a fresh produce department to all of its clubs. It tested fresh meat and a bakery department in two locations and a delivery service in two locations. BJ’s added more food and general merchandise products that were targeted specifically to restaurants and other food service members. In 1991, BJ’s started to add fresh meat and bakery departments to the rest of its clubs. The bakery department was primarily a bake-off operation in which BJ’s purchased frozen product that it baked in ovens located on site. By 1993, BJ’s generated $1.96 billion in sales and operated 52 clubs which averaged $44 million in sales per year.
Sinegal said, “I think our smartest decision was the merger with Price Club. I think it was a difficult process but it turned out to be a great move for us. Not only did we get some very good businesses in there, but just as importantly, we got some great people and some great management that came along with the merger. I doubt that we could have grown to the size we have since that point if we hadn’t picked up that very mature management team.” (37)
By 1993, the industry’s growth leveled off and speculation about consolidation and mergers increased. A Dean Witter security analyst “pointed out that Costco and Sam’s Club made a great strategic fit because there is little geographic overlap and because Costco, unlike the Price Club, is a nonunionized company.” He said that Sam’s Club could acquire Costco without diluting its 1994 per share earnings and “we think both Wal‐Mart’s and Costco’s management and board were keenly aware of this potential, and we wonder if Costco’s management heard Wal‐Mart’s footsteps.” (38)
By 1990, Sol did not have an official connection with Price Club. He was still the company’s largest shareholder and Robert still went to him for advice. By 1992, with its business struggling and long term outlook worrisome, Robert and Sol agreed that they would make a serious effort to find a buyer for Price Club. The only two logical options were Costco and Sam’s Club. (2)
Price Club’s problem with Walmart and Sam’s Club was their policy of not allowing unions and Price Club paid higher wages and provided more benefits to its employees. In the spring of 1992, Price Club and Costco executives met secretly to discuss merger possibilities. These discussions were abandoned. Merger talks between Costco and Price Club started again in April, 1993, but faltered shortly thereafter. However, from May to June, merger discussions increased.
Costco felt threatened by Sam’s Club and its history of growth through acquisition. Sam’s could have potentially purchased Price Club, which would have made it the strongest warehouse club operator in the industry. Sam’s also could have potentially purchased Costco. Price and Sinegal now preferred that their organizations remain part of an “extended family,” rather than separately face Sam’s Club.
In June, 1993 the merger was announced. A new holding company called PriceCostco was formed. Price Club and Costco would become subsidiaries of the new holding company. Costco shareholders would receive 52% of the new company and Price shareholders would receive 48% of the new company.
In a joint statement, Robert Price and Jim Sinegal said, “No two merchandising companies could be more alike in terms of their merchandising philosophies, corporate cultures, determination to offer high quality products at great value to consumers and commitment to their employees … [The merger] bring[s] together two talented management teams which have demonstrated remarkable operating results [and] will enhance long‐term shareholder value, broaden opportunities for more employees, and create greater operating efficiencies, which means lower prices for our members … [PriceCostco] will aggressively pursue club expansion in North America [and] will take advantage of international business opportunities.” (38)
PriceCostco had dual headquarters. Sinegal, in Washington, became president and chief executive officer and was responsible for warehouse operations, merchandising, financial reporting and investor relations. Robert, in California, was chairman of PriceCostco and was responsible for the Mexican joint venture, non-warehouse club real estate, implementation of electronic shopping, expansion of PCI, development of business delivery and other new businesses.
By 1994, its first year post merger, PriceCostco operated 221 locations generating $16.48 billion in sales. Each location averaged $76 million in sales annually. Despite the opportunity presented by the merger, there was one major drawback: senior management of the combined company could not agree on the long term direction of the company.
In July, 1994, management of the former Price Club and Costco organizations agreed to disagree, citing “philosophical differences.” Over time, former Costco executives took control of the company and some Price Club executives were not happy with the direction in which the company was heading.
Most of the former Price Club executives joined a separate public company, called Price Enterprises (ultimately, this company would become PriceSmart). Robert would become president and chief executive officer of Price Enterprises. At the beginning of 1997, PriceCostco changed its name to Costco Companies, Inc. The company was traded on NASDAQ under the symbol COST. All future locations would be called Costco Wholesale and all existing locations would eventually be converted to that name. Eventually, the Price Club name would no longer exist.
By November, 1993, after Costco and Price Club merged and with struggling sales, Kmart decided to exit the warehouse club business. Kmart sold 91 of its remaining 132 PACE locations and future sites to Sam’s Club for $300 million. The sale price was $22 million less than the amount Kmart had paid for PACE in 1989. The remaining unsold locations were either sold or converted by Kmart to other formats and the PACE name disappeared in January, 1994.
The addition of the 91 PACE locations enabled Sam’s Club to enter new markets, such as Arizona, Alaska, Utah and Rhode Island and enhanced Sam’s position in California, where it added 21 PACE locations to its four existing buildings. By 1994, Sam’s Club operated 426 locations generating $15.17 billion in sales. Each club averaged $44 million in sales annually.
Down to Five
After the PriceCostco spin-off, it took Price Enterprises several years to become PriceSmart. Up until 1996, it exported sales to Hong Kong and Mexico, licensed its business in China and operated locations that were ultimately closed in Saipan and Guam. In 1996, two traditional PriceSmart membership warehouse clubs were opened in Panama.
Cost-U-Less was founded in 1989. Its first location was on the Hawaiian Island of Maui. During its early years, 90% of the merchandise was purchased at a nearby Costco location in Honolulu. The company operated mini-warehouse club locations (approximately 30,000 square feet) on relatively remote island locations. Cost-U-Less did not charge a membership fee.
By 1996, the industry was fully consolidated and the five operators that remained: BJ’s, Costco, Sam’s Club, PriceSmart and Cost-U-Less would continue to operate the warehouse club business model through and after today.
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