Adam Smith articulated the rhetoric of bourgeois pact by emphasizing the fundamental differences between commercial, political, and martial societies. He argued that everyone is constantly practicing oratory against others, trying to persuade them to cooperate by saying, “Give me what I want, and you will get what you want.”
Luke Frobe and his co-authors explained in the managerial economics textbook I was teaching my MBA students that “The art of business consists of identifying resources in low-value uses and finding ways to profitably move them to higher-value uses.” Two of the best people in this field in the 20th century were Sam Walton, the very famous founder of Wal-Mart, and Sol Price, the lesser-known but still very important founder of FedMart and later Price Club.
In a 2023 paper, Charles Courtemanche, Reginald Harris, and I explore how Price and Walton rank among the “vital” entrepreneurs described in Jonathan Hughes’ 1966 book, The Vital Few: The Entrepreneur and American Economic Progress. Hughes explains the innovations in entrepreneurship in American history through the stories of political/religious entrepreneurs William Penn and Brigham Young. technology entrepreneurs Eli Whitney and Thomas Edison; Financial entrepreneur E.H. Harriman and J.P. Morgan. industrial entrepreneurs Andrew Carnegie and Henry Ford; and bureaucrat entrepreneurs Mary Switzer and Marriner Eccles. The rise of retail and its continued importance in the late 20th century makes Mr. Price and Mr. Walton interesting candidates to be added to the Hughes Entrepreneurial Hall of Fame. Much has been written about Sam Walton, so I’d like to focus on Sol Price here. Sol Price’s commercial legacy includes modern warehouse clubs like Costco.
Not much has been written about Price other than a biography published by his son in 2012, which provides an interesting glimpse into the man, his mind, and his methods. Price was a New York-born son of immigrants whose father was a socialist labor organizer. They then moved to San Diego and began their careers as lawyers after graduating from law school. Price built social capital by (for example) doing pro bono legal work for local merchants who were in trouble with the Price Control Board during World War II. He noted that his tycoonism led to more lucrative jobs, such as divorces and big contracts, adopting the language of retail when the time came. He used such unpaid work as a “loss leader” for something bigger. Among other groups, Price represented the Pawnshop Association, which was constantly under pressure from the state’s political leaders, but the association invariably held a reception or fundraiser for one of them, relieving the pressure slightly.
Sol Price had no intention of changing retail. I stumbled upon it by chance and wariness. He was an active member of the San Diego community and served as an attorney for several retailers and wholesalers, including jewelry and liquor selling to a store called Fedco in Los Angeles. He accompanied the customer to Los Angeles and visited a Fedco store. Fedco was a store that sold at deep discounts to government employees. Price realized that many government employees commute from San Diego to Los Angeles and believed a similar store would work in San Diego. He and his partners submitted a proposal to Fedco, which rejected it.
But Price had a warehouse in San Diego that needed something done, and he thought, “What if we did something in San Diego that Fedco didn’t want to do?” Soon after, a FedMart opened in the warehouse, offering deep discounts to selected members of local city and county credit unions. This strategy had several advantages for Price. Because he chose solid middle-class customers who were less likely to write many bad checks. Additionally, because credit unions were marketing their memberships, they didn’t have to spend as much on advertising. Both of these reduce costs, so the prices he can offer have also come down.
Note that when he founded FedMart, he tried to replicate Fedco’s success by targeting specific customers. He turned to credit unions, phone companies and other big concerns used by city and county employees. This had the advantage of pre-screening FedMart customers and reducing costs to the store from theft and bad checks. Price’s reasoning is correct: County Employees Credit Union members are more likely to be honest and trustworthy than the general public. Additionally, credit union membership indicated that a person was less likely to write a bad check. This policy is an often overlooked but crucial difference between membership warehouse stores (especially in the early days) and stores like Walmart. FedMart and Price Club pre-selected their customers based on trustworthiness. Walmart, on the other hand, is dealing with significant downsizing as it allows literally anyone to enter. Costco, for example, didn’t accept food stamps until 2009, which is one way it screens customers.
In some ways, FedMart was a study in redundant discovery. The Resale Price Maintenance Act makes it illegal for retailers to offer discounts off the manufacturer’s suggested retail price unless they have a store membership. This was important. EJ Korvette’s in New York addressed this problem by handing out membership cards at the entrance, taking advantage of a loophole. FedMart refused to do business with companies that stocked private label brands at low prices and vigorously enforced so-called “fair trade” laws. Price Co. staged a major coup in the 1970s when California’s minimum price regulations for alcoholic beverages conflicted with federal price regulations. The court ruled that federal control overrides state control, and Mr. Price was finally able to provide the liquor discount he had sought for years.
Mr. Price identified six “rights” that guide business decisions. His company needed to stock the right type of product, in the right place, at the right time, in the right quantity, in the right condition, and at the right price. He and his subordinates had to make difficult business decisions every step of the way.
Mr. Price practiced what he called “intelligent revenue loss.” This may seem silly, but is there such a thing as intelligent loss of sales in retail? But if you think about it a little more carefully, it makes sense. Warehouse stores typically stock products from a single brand in a single size. An example in Price’s store was the 3-in-1 oil. They carried a single large size based on some beliefs. A quick Google search revealed two sizes: 8 ounces and 3 ounces. The cost of selling three 8-ounce cans of a three-in-one oil is less than the cost of selling eight 3-ounce cans. This reduces the number of times a customer touches the product and speeds up product turnover between the time the product is received and the customer leaves the store. That means less time for Price’s capital to be tied up in slow-moving inventory. Mr. Price could have sold more 3-in-1 oil by stocking smaller sizes, but he was willing to forego the sale, which might have been prudent, in order to benefit from increased sales and lower handling costs.
Mr. Price is an overlooked innovator who deserves a prominent place alongside the likes of Sam Walton, J.C. Penney, the Kresges and Charles Walgreens among those who have changed the way Americans shop and developed an entire sector based on creating value through a proper understanding of Mr. Price’s Six Rights. Of course, the right combination of “rights” does not exist independently of the process used to find it. It needed to be discovered, and for that Price needed freedom and more space where people could search for the best that they had to offer.
How did Price do it? I’ve imagined a future no one else has envisioned and risked resources to make it a reality. That was a risky proposition. Very often, people imagine the future, only to discover that it is different from reality.
Price and his men were in a position to make a discovery. Just as the inventor of Tabasco sauce was able to make a big splash by using a ton of surplus cologne bottles, one of Price’s buyers, who was working with suppliers to figure out what they could sell in bulk, remembered that one of the vodka makers they had been working with used very large plastic bottles. It occurred to him that mouthwash could be packaged in the same way.
Sam Walton, Sol Price, and many other retail innovators have also blazed important trails in using data to analyze and understand consumer behavior. In the 21st century, advances in statistical methods and software have made it easier for analysts to identify and eliminate supply chain costs. Shipping and distribution create value. In fact, it may be one of the most important operations performed during the entire journey from farm to fork.
Did Price get everything right? No, in fact, he was forced out of Fedmart at one point after a hostile takeover. He and his son Robert would once again revolutionize retail by launching Price Club and introducing the world to the modern warehouse club store. In a fitting coincidence, an entrepreneur named Jeffrey Brotman would later approach Price Club about opening a store in Seattle. Price Club would go into decline, so Brotman hired one of Price Club’s top executives, Jim Sinegal, to start his own company. You may have heard of it. It was a store called Costco, which later merged with Price Club.
Adam Smith argued that in a commercial society we are always “making arguments against others.” Prices are suggestions. Bidding and asking, “I’ll give you $50 for a box of baseball cards, Mr. eBay seller, and “This gallon of vitamin D milk can be yours for $3, Aldi customer,” is an exercise in oratory, distilled into a very simple and easy-to-interpret signal. Sol Price, like Michael Cullen, Clarence Sanders, and E.J. Corbett before him, and Sam Walton and Jeff Bezos after him, changed the game by doing things differently. We practice commercial speeches with each other.
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Some of the facts in this article are taken from Robert Price’s Sol Price: Retail Revolutionary and Social Innovator. Taylor Grace Carden provided helpful feedback on this article.
