Business Breakdowns
· 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
· Matt Reustle
[00:00:00] S0: Absolutely and I know Jim Sinegal, the popular Costco CEO for a very long time credits Sol Price with a lot of things and mentorship. And you mentioned one of the questions that I have there around private label, and just some of the approach that PriceSmart takes and how it might compare to a Costco or a Sam's Club. When you think about memberships versus merchandise, is there anything that looks drastically different from a revenue perspective or operational perspective versus what the club model in the US looks like?
· Markus Hansen
[00:00:00] S1: Yeah, so first and foremost the markets they operate in. Whereas Costco is predominantly a North American business, these guys are operating in about 12 odd markets across the region which has a bit more volatility to it, in terms of both differentiation of per capita income, population, political volatility, and then also in terms of foreign exchange volatility. So what's interesting here is in a lot of the Caribbean islands, where they originally started out, and some of the Central American countries, there are dollar-based economies. So about 50% of their end revenues are in dollar-based economies, the rest are with some more volatile local. And they don't really do much hedging, they really take a product which is priced in US dollars and then sell it in the local currency. Interestingly enough, and this tells you the strength of the reputation and the brand, very often when you have some sort of wild move in a local currency – so to give you an example today, there's about 60, 61 stores 11 of those are in Colombia and the Colombian local currency has been a bit wild for political reasons, oil price related and so forth. When there is crazy inflation in the local moves there is a near term impact, but very often they keep the pricing as is and the customer keeps coming back and buying. And so the smoothness on the numbers of the other – and sometimes they'll raise prices for certain moves in FX if needed, but it has almost, based on the numbers we're seeing, de minimis impact in terms of revenue. And this is maybe coming back to giving you an idea of the size of this company, we're talking about coming right now which has a market capitalization of just over five billion dollars. They do just over five billion dollars of total revenue, and so this is not the biggest thing around we're talking about a couple of hundred billion of revenue at the Costcos of the world. But they have a customer base, so these are paying customers, members. That's the same thing, you can only shop here if you're a member. They have two tiers of membership, it varies by country but the average price is 45 US dollars. The higher one is 90 US dollars. That's lower than what we say here in the US, when you're buying a Sam's Club or even a Costco, but for local emerging market that's a high number, relatively.