Business Breakdowns
· 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.
· Markus Hansen
Really what you're appealing to here is, and this was part of his thinking going back to the origin, is this growing middle class that you're seeing emerge in these emerging markets. Which really you're thinking about the top 10-15% of the population, which is growing over time. But that population base is the ones which are seeking very similar shopping experiences to what they've seen. And these are the people who come and travel to the US. I've spoken to customers of this company and actually spoken to the management. A lot of people who send their kids from South America to school in the US, experience the US – they come back, they get corporate jobs. They want exposure to US products that they saw in the US. Come for a vacation visiting family who are over here, and very often people who've come and worked in the US to make some money and go back, love the experience of going to their Walmart, going to their Costco, going to BJ's and all this stuff. And they love the benefit of the products, and they're getting good US style quality products. Again, most of the competition tends to be local SMEs, local supermarkets, where the quality can be different, the costs can be different and so forth. You're paying what you're getting, you're getting access to stuff from the US that you may not find locally. The nature of how you're shopping as well in terms of the big box, the style of the box, it's air conditioned with parking, it's safe. But you're getting good value for money, and as you mentioned one of the attractions of and this is what they use here as well, of the club store, is if you're paying the premium rate you're getting some added services whether that be two or three checkups on vision. Maybe I need to get to my club store and get my eyes fixed as well. But you get two or three free visions a year, maybe some dental checks. In some of their markets they're offering a basic doctor checkup. In some regions of the world that is both expensive and hard to come by, and this allows – the cost of doing that locally, it more than pays for the actual membership, so that's seen as an added benefit. And then on top of that you have some added things. There's seasonal products they come up with, and they're always constantly innovating and bringing new things in.
· Markus Hansen, Matt Reustle
So that equates to a similar story, if you pop into a Costco today, why are you going to Costco? Firstly it's going to do your regular shop, secondly they always have stuff you're trying, which is always cool. I mean, you could do a whole meal if you walk around the place. I remember my first visit to a Costco in America, I was like, I love this place, it's great. And then on top of that, maybe get your eyes checked, get your dental check, and it's all in one quick trip. A bit similar actually to what we talked about the in the Casey's story – the power of convenience at the right price is probably one of the single biggest drivers of retail demand, and particularly that recurring customer that's going to come back. [00:00:00] S0: I just had a visit to the tire center because I needed new tires and went to Costco. You see the gas lines there, particularly when gas prices are where they are. A good club membership pays for itself many times over and it certainly seems like that's the approach that they take. In terms of the footprint today and maybe tracing it back in some way, you mentioned it started maybe more Caribbean focused. [00:00:00] S1: The Caribbean, yeah. [00:00:00] S0: What has that looked like in terms of build out to the 61 today? Have there been periods of material expansion, or even thinking about where they've been over the past couple of years and their interest in increasing the footprint or exposure to different geographies? How would you frame that?
· Markus Hansen
[00:00:00] S1: Yeah, so most of the early stage of the expansion really in the 90s was really the Caribbean. And this was interesting from a combination of – you have three types of customer base in the Caribbean. One is, you've got the expat community which is growing, and I don't have the exact number to hand, but the number of Americans who are retiring outside of the US, particularly to Central America and the Caribbean, for a lifestyle that's both a luxury lifestyle but even a cost of living lifestyle – the weather's nicer, the facilities that are available and you're seeing this with the growth in terms of medical stuff which has been moved. Panama is a growing example – it might be the largest percentage of American community, along with Costa Rica living outside of the US in Central America. Easy to get back and forth, there's airports if you have to come and visit. And people like it because family come and visit. So that customer base is looking for American style shopping. And then on top of that, you have a tourism industry which is looking for good quality products at a scale that they may not be able to find just from local providers. So the Caribbean plays very nicely into that – think about all the high-end hotels or even mid-level hotels which are driven primarily by American tourists. So it was an easy symbiotic thing to do. And then finally the Caribbean, most of the countries will have some sort of dollar-based economy. So from an FX perspective, very easy to manage and set forth. And then really the next thing was moving into South America, and the biggest single move they did there was going into Colombia which I'm going to double check my numbers here but the Colombia story is about I think 10 years old now. Colombia, for those who don't realize, is a pretty sizable economy. It's overtaken Argentina, I think it's the second or third largest economy now in South America in terms of GDP. Pretty large population, we're talking about 45-50 million people. Young, dynamic, growing. It went through turmoil with civil war, there was obviously the drug dealer the side of things, but along the way it has really emerged as this go-to place, developing technology, becoming an important consumer market as well.