Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we are breaking down PriceSmart. If you aren't already familiar with the name Sol Price, I suggest you take some time to read about the godfather of warehouse retailing. Price influenced many people in the industry. You may recognize the name Sam Walton – he founded a company called Walmart – and he says he borrowed as many ideas from Sol Price as from any one. Arthur Blank, prior to founding Home Depot, had a nice lunch meeting with Sol Price about this specific idea. And when you look at Amazon today and the Amazon Prime model, yes, that can trace itself back very much to what Sol Price did with his original business and this membership model. Now what many people probably don't realize is that the Price family still has an entity that they have created that remains outstanding. Now the US based entity merged into Costco, but PriceSmart is essentially like Costco, but being executed abroad. So my guest today is Markus Hansen, who returns for a second episode. You may remember him from a crowd favorite, the Casey's General Stores episode. And he comes on to lay out what this business looks like, its history, a lot of the similarities and differences relative to the same model in the US. It's a fun conversation. It's a name that I think more people should know about. So please enjoy this breakdown on PriceSmart. All right Markus, it is great to have you back. Your episode on Casey's General Stores was a fan favorite and I think one that I was mentioning just before we hit record. I still hear about it today, and I'm excited to be talking about another very interesting name which I expect to pique many listeners' interests, and that is PriceSmart, which I think as a business model that a lot of people love but also ties into a founder that is a cult favorite to many people in the audience. So maybe you could just kick us off with the high-level intro to what PriceSmart is and what they do from a business perspective.
· Markus Hansen
[00:00:00] S1: Absolutely, and thanks for having me again. I love the Casey's stuff. They continue to do great and congratulations on their S&P 500 entry. Yeah, look, there's nothing better than a hometown hero story and I say that in sincere form, in the sense that a couple of retail consumer, I've looked at the large names here in the US – all the names from the Walmart to the Costco's. But really, if you want to go back and understand the novelty of the retail formats we know today in the US, there is one name which a lot of people don't realize out there unless you speak to the guys who follow the leads going back many days is a gentleman called Sol Price who was born and raised in the San Diego area, and basically created what we know today is the modern club store or wholesale store as they called it originally, but now called club store. It's basically a membership retail where you as a consumer pay an annual membership fee for the right to go and shop at this place, because it sells you a limited range of products but at great value prices because they use bulk purchasing to get cost savings. And then it's very good at honing in on the stuff that you really need, but more importantly giving you interesting discounts and then occasionally adding new product areas, but also giving you things like samples and then adding services like a vision or dental services. Which when you think about what you're paying you're getting a lot of value for money back. But then on top of that there's a social factor which is this idea of giving you great quality value products at a good price while at the same time investing in the employees and the customer area and growing this on a sustainable fashion. The great thing about Sol Price and a lot of people that realize this you can trace his impact on some of the major names we know today. Sam Walton in his book talks about the one guy who basically opened his eyes a bit to how he should be running business, and that was Sol Price with his then business called, well Fed Mart but then where he moved on and started Price Club. This is the guy who basically merged later with Costco and created what is today's modern day Costco, and also influenced the guys at Home Depot and Target who bought some of the old Fed Mart stores later.
· Markus Hansen, Matt Reustle
So the retail giant names we know but here's this gentleman, and now we're talking about a business which is in its third generation. The grandson is running the business today. So the DNA is in the family, except for those who are wondering about this story – so PriceSmart is listed in the US, based out of San Diego. Does all its business in Central America, Caribbean and South America and effectively is replicating the Costco model across those regions and is doing very well and has a runway of growth I think and those who look at it which is decades in the making. So this, we believe is a fantastic compounding growth story for the mid future and is one of these small caps that will become a bigger player over time. [00:00:00] S0: It's really hard to overstate the impact of Sol Price. I think you can even look at Amazon and the Prime model and what that represents from a membership perspective. It just has extended so far and it's a name that should be known by pretty much every investor out there. On the PriceSmart origin story, you mentioned they were working outside of the US in these emerging markets. Was that a deliberate plan? I'm just curious about the origin story and how it differs from what eventually became Costco with Price Club, and the decision to have a dedicated EM-focused brand.
· Markus Hansen
[00:00:00] S1: Yeah, so basically the story goes back to the 1950s. He created this company called Fed Mart, and this was based on what I was reading – by the way there's a book out there about Sol Price. It's no longer in publication so it's become one of those cult books that's gone up in price so I'm probably talking my own book here. I own a copy of the book so it's going to go up in value as we do this. But it's very interesting, because a lot of people who are in the industry will say, oh my God, this is one of the ones you have to read, along with Sam Walton's own biography. But Fed Mart was initially started, and back then it was a two dollars annual subscription and mostly geared towards federal employees who generally were on lower salaries, to come in and buy products. And here was the other revolution that Sol Price initiated at the time, this idea of mixing grocery with general merchandise. Generally back in the '50s you went to a grocery store to get groceries, and then you went to a department store or similar type thing to go and buy clothing and they weren't mixed together. So this idea was also revolutionary, which if you look today at the big chains, that's what drives things. The company eventually was listed and then there was a German family owner who came in and bought it. Eventually had a bit of a falling out with Sol, who was managing the business, and he left in 1975. And then he went off with his son and started a business called Price Club, which is the origins of today's PriceSmart. And this was the idea of this club store which would hone in on about between 2000 to 3000 SKUs, so this is individual items you sell. Now it sounds like a lot, but if you think about your average Walmart you're talking about a 25,000, and if you go to a general big supermarket they'll be carrying maybe 30, 40,000 items. Think about all the ranges of ketchup and mayonnaise and snacks you get. In a club store, generally when you're going in you'll have two or three national brands, and maybe two sizes of the packaging not the 10 different ones you get any And then very often you'll have a private label in there as well which is their development of a cheaper version.
· Markus Hansen
And this is where the club stores focus in on the idea of this if I buy bulk and I sell limited amounts of SKUs, I can get those at a cheaper price and then offer that cheaper to my customer coming in. And there starts the flywheel of why you'd want to join and become a member. Coming back to your question about the Costco side, Price Club then IPOed in 1980. And by the way, Sol Price was 60 years old at this stage, so he wasn't retiring.This is a guy who wants to work his entire life. He's a retailer at heart. And about this time in the early 1980s, a gentleman called Sam Walton who has Walmart starts noticing, there's this Club Store thing where people are paying to go and shop, and it keeps growing. Maybe I should go chat to these guys. At the same time, Costco is coming into existence. What's interesting about Costco is the main founders behind Costco started their careers at Fed Mart. Here you're seeing the relationship come amongst the different things. Sam Walton actually was interested in buying Price Club and Sol Price said not interested in selling, this is my baby. Eventually ends up merging to form what we call today Costco, though you have some older listeners here from the 80s, they'll remember a company called PriceCostco because you used to get a little card and that was the name on it. And then later in about 1984 the Price family – and you got to go back to the 80s, Costco was very big in the US or growing in the US, going into some developed markets outside. But it had some individual stores in Central America where they'd gone and tried to see what happens. Wasn't really going anywhere, and if you think about it in terms of revenues, moving the needle was taking up more management time than needed. And so those assets, and at the time I think there were two or three stores, were spun into a company called Price Enterprises that then was spun out from Costco and taken private by the Price family. which became the original framework for today's PriceSmart. And then PriceSmart was then I think founded in 1996 technically, so this all happened in '93 and the first door was in Panama the country of Panama and then would expand further forward. But that was the link and there is a link today still with Costco they actually do buy some private label Kirkland brand.
· Markus Hansen
So Kirkland for those who don't know, is the Costco private label brand very successful I think at Costco it's about 33 percent of the products they sell and again the whole idea of a private label is you can offer the same quality and taste or feel of a branded label, but obviously at a discount of anywhere between 25 to 30 percent. So not messing around with the quality, but the attractiveness is that you control that product and it's a high margin business. And so they sell some of that they do some of their own but there is this goodwill factor between them. The attraction at the time of setting up, and why he realized PriceSmart could be interesting is that in the markets they operate, which are Central America the Caribbean and South America, there are no other club stores. There is no competition. And then going back to the Walmart story, Sam Walton, not to be bitter, but said all right I can't buy you, I'm going to start my own thing. It's called Sam's Club, and that's why Sam's Club came around being today as well. It's a very interesting story so this is why the allusion to the idea that this is the Costco of South America has lots of the elements to it. But when we think about today's Costco it's interesting that Sol Price and the family, the Price side really were main contributors to developing that concept and the success of what it is today