PriceSmart, Inc.

9740 Scranton Road
San Diego, California 92121
U.S.A.
Telephone: (858) 404-8800
Fax: (858) 404-4500
Web site: http://www.pricesmart.com

Public Company
Incorporated: 1997
Employees: 3,314
Sales: $609.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: PSMT
NAIC: 452910 Warehouse Clubs and Superstores

PriceSmart, Inc. operates membership club stores in Latin America, the Caribbean, and Asia, selling food and consumer goods in approximately 30 warehouse-style stores. Members pay between $20 and $35 to shop at PriceSmart stores, which offer merchandise at reduced prices. The company also licenses 11 stores in China. Father and son Sol and Robert Price own 47 percent of PriceSmart's stock.

Origins

PriceSmart was founded by an individual whom Forbes, in a December 22, 2003 article, described as a retailing "demigod," a businessman whose influence on U.S. retailing in the 20th century created a $70 billion industry. PriceSmart was Sol Price's third retail venture, a company started more than 40 years after he first entered the retail sector. Price began his storied career in the mid-1950s, when he was working as an attorney in San Diego. His first venture sprang from the coincidence of two fateful events: the inheritance of a vacant warehouse in his home town and a knock on the door of his law office. Price needed to find a tenant for his warehouse, and the solution to his problem was answered by the knock on his office door. A couple of Price's clients had stopped by to ask him to take a short trip to Los Angeles to give his opinion on an unusual business they had come across. The clients were involved in the wholesale jewelry business, and they had been selling watches to a non-profit, member-owned, retail operation in Los Angeles called Fedco. Price made the trip north and noticed that Fedco's facility was similar to the warehouse he had inherited. He asked his clients to look at his warehouse, suggesting that his building could be used for the same purpose. His clients agreed, marking the beginning of Fedmart and the first traces of the membership club industry.

The business was begun in 1954, started with a $50,000 capital investment. Price solicited the help of eight individuals, who each invested $5,000, and he convinced his law firm to invest the remaining $10,000. Price obtained his inventory from his clients, beginning with the two jewelry wholesalers. Another client, who was involved in the furniture business, provided Price with a small selection of furniture. A third client sold liquor, giving Price's Fedmart the odd merchandise mix of jewelry, furniture, and liquor. He opened membership to government employees of all levels—federal, state, and local. Despite the less than comprehensive selection of goods, Price's business thrived from the start, collecting $4.5 million during its first year in business, four times the total projected by Price and his investors.

Success spawned the establishment of other warehouse stores and a more coherent merchandising strategy. Fedmart developed into a chain of stores, and along the way, Price pioneered several innovations in the retail industry. Fedmart became the first retailer to sell gasoline at wholesale prices. The chain was the first to open an in-store pharmacy. Fedmart also opened in-store optical departments, establishing a format that was aped widely decades later. Aside from developing several industry firsts, Price guided the company into food retailing, a product line that would underpin the chain's development. Price was joined in his business by his son, Robert, who served as Fedmart's executive vice-president until the father-and-son team sold the chain in 1975. After 21 years, Price's start-up had flowered into a 45-store chain with sales exceeding $300 million.

Price Club Debuting in the 1970s

After selling Fedmart, the Prices searched for an idea for their next business venture. "We spent a lot of time walking up and down streets of San Diego talking about it," Sol Price remembered in a November 1990 interview with Supermarket Business. "Then," Price continued, revealing the inspiration for his second venture, "we spent a lot of time talking with small business owners—grocery store owners, restaurateurs, the people who ran newspaper and candy stands. We'd ask them where they bought their merchandise, and we discovered a gap in the distribution system just waiting to be filled." The gap was filled by The Price Co., started by Sol and Robert Price in 1976. The pair opened their first store, called Price Club, on the outskirts of San Diego. Although Fedmart bore many of the markings of a club warehouse, industry pundits generally ascribed the birth of the industry to the opening of the first Price Club.

Seeking to be a wholesaler to businesses that lacked the financial clout to demand the wholesale prices commanded by larger businesses, the Prices tried to tailor their merchandise mix to meet their customers' needs. Office supplies was first on the list, followed by tires, food, paper products, and a range of other goods, all stacked on metal shelves in a spartan, cavernous, 100,000-square-foot store. To qualify for membership in Price Club, customers were required to show proof of business activity, either presenting a business license or a resale permit.

In contrast to Fedmart's first year of business, Price Club performed terribly. "We almost went off the cliff for about the first seven months," Sol Price admitted in his interview with Supermarket Business. By the end of the first year, the San Diego store had collected $16 million in sales, but posted a loss of $750,000. The Prices had no idea what the problem was until a customer suggested opening membership to government employees as Fedmart had done. Soon, membership was opened to employees of the government, hospitals, financial institutions, and utilities, the type of customers who were unlikely to bounce checks (one of Sol Price's enduring business credos was never to accept credit cards: "it's against my religion for people to go into debt to shop," he remarked in a Supermarket Business interview). The less discriminatory membership policy turned Price Club into an unmitigated success story, fueling the expansion of the concept into a chain and convincing many onlookers to start membership clubs of their own.

The Prices took Price Co. public in 1980, enabling eager investors to share in the rapid growth of the chain. By the time of the company's initial public offering, the chain was generating nearly $150 million in sales and earning $6 million before taxes. The stores, which looked "like something the Red Cross might set up for disaster relief," according to the April 1985 issue of Dun's Business Month, represented the fastest growing format in U.S. retailing, and Price Co. by far ranked as the segment's dominant player. The stores by this point carried everything from appliances to auto supplies and from liquor to luggage, but the merchandise diversity belied the soundness of the Prices' business strategy. "Price is the most disciplined retail organization I have ever seen," an industry analyst stated in the April 1985 issue of Dun's Business Month. Midway through the 1980s, Price Co. had 20 warehouses in operation, 14 of which were located in California. The success of the chain had created many imitators, including Costco Wholesale Club, BJ's Wholesale Club, and Sam's Wholesale Club, but Sol Price and his son enjoyed a large lead over all rivals. The sales of the eight largest companies combined did not equal the revenue volume maintained by Price Co. Put another way, the warehouse club industry had become a $2 billion industry by 1985, the year Price Co. collected $1.8 billion in sales.

By the end of the 1990s, Price Co. operated more than 50 warehouse stores. Its revenue at the beginning of the decade exceeded $5 billion. The company continued to hold sway as an industry leader, but competition inspired by its own success had set the stage for a fierce battle in the 1990s, a battle the Prices opted to wage with the help of a rival. In 1993, when Price Co.'s leadership position had been usurped by Wal-Mart's Sam's Wholesale Club, the Prices decided to merge with Costco. At the time, Price Co.'s revenues totaled $7.5 billion, about a billion dollars more than third place Costco, creating a $16 billion wholesale club that counted Robert Price as its chairman. For less than a year, the merged company operated with two headquarters, one in Kirkland, Washington, where Costco was based, and the other in San Diego, Price Co.'s hometown. The arrangement failed to work, leading to a spinoff that put the company back under the control of the original Costco management team. Robert Price left the organization in 1994, leaving with control over Price/Costco's commercial real estate operations and controlling interests in merchandising opportunities in certain international markets, including Australia, New Zealand, and Central America. These assets became part of a new company, aptly named Newco, but they eventually formed the foundation for another company, PriceSmart.

Company Perspectives:

At PriceSmart, the scope of membership shopping has expanded to include merchandise and services. Members realize true value as a result of PriceSmart's efficient and aggressive low cost sourcing, distribution and operations. PriceSmart today is a global, volume-driven, merchandising and services leader delivering value to the member-customer and small businesses.

PriceSmart Is Born in the Late 1990s

Before starting PriceSmart, Robert Price presided over the operations spun off from Costco. Initially organized within Newco, the real estate properties, which consisted primarily of shopping centers in California and Arizona, became known as Price Enterprises, which operated as a real estate investment trust (later renamed Price Legacy Corporation). The other interests gained from the spinoff consisted of the rights to operate membership club stores in certain international markets, giving the Prices the opportunity to express their skills in building another retail chain. They decided to open stores in emerging markets in Latin America and the Caribbean, focusing on regions with a rising middle class free from the competitive likes of Wal-Mart and Carrefour. The Prices opened their first Price-Smart in Los Pueblos, Panama, the first of an expected 30 to 35 warehouse stores. The Prices informed investors that each unit was expected to generate between $20 million and $30 million in sales annually, enabling their retail chain to reach $1 billion in sales within five years. They took PriceSmart public in September 1997, when the company began trading on the NASDAQ. Following the initial public offering, Sol Price owned 33 percent of the company and Robert Price owned 25 percent, giving the pair substantial control over the direction of their new retailing venture.

To lead their company, the Prices selected Gilbert Partida, who joined PriceSmart in December 1997. Partida, like Sol Price, was an attorney by training who also served as the head of the San Diego Chamber of Commerce. Under Partida's leadership, the execution of Price's retailing strategy went according to plan—at first. A second store was opened in Panama the same month Partida arrived, a unit located in Via Brazil. Together, the two stores generated $60 million in sales in 1998, meeting the high end of the Price's revenue projection. No additional stores were opened in 1998, but the company compensated for the lack of activity by assuming an aggressive expansion posture in 1999, when PriceSmart opened seven new warehouse outlets. The stores opened in Panama, Costa Rica, the Dominican Republic, El Salvador, Honduras, and Guatemala, with each grand opening a testament to Partida's skill. He made sure that each grand opening was a celebrated affair, orchestrating spectacular events that often included a visit by the home country's prime minister. Unfortunately for Price-Smart, Partida's talents ended there, and the chain began to suffer from poor management as it entered the 21st century.

PriceSmart in the 21st Century

Partida had never led a company before joining PriceSmart. The 35-year-old attorney had no retailing experience either. When the company began to falter, critics pointed their fingers directly at Partida or at the Prices for having selected someone ill-equipped to manage the development of what promised to be a $1 billion retail business. "He," an analyst said, referring to Partida in a December 22, 2003 interview with Forbes, "made a lot of ego-driven decisions that were terrible." PriceSmart opened seven new stores in 2000 and seven more stores in 2001, giving the company a total of 23 stores in 11 countries by the end 2001. Sales for the year reached $489 million, representing substantial growth for the company, but the cracks in the organization already were beginning to show. The profits recorded by the chain were meager, and some of Partida's actions were questionable. In August 2001, he flew to New York to solicit interest in a private-equity offering, extolling Price-Smart's strengths to investors. One week later, however, he sold 28 percent of his stake in the company, netting $700,000 from the sale and causing a furor among investors.

In 2002, PriceSmart began straying from its original strategic course, causing further anxiety among shareholders. In January, the company announced it was opening three stores in Mexico, a country dominated by Wal-Mart—the type of competitor the Prices had said they wanted to avoid. Suspicious of the move, and tired of lackluster profitability, the largest Price-Smart shareholders organized a meeting to discuss their grievances. Next, Partida began offering telephone cards at Price-Smart units, turning to a business that yielded exceptionally low profit margins. At the end of the year, the company recorded $648 million in sales, but net income amounted to only $6.3 million, less than 1 percent of sales and well below half the company's projected total.

Partida resigned abruptly in April 2003 before the full extent of PriceSmart's problems were revealed. Robert Price took over as the company's interim chief executive officer and tried to correct some of the mistakes made by Partida, getting PriceSmart out of the telephone card business and closing four stores during the year. The worst was yet to come, however. In November 2003, when losses for the fourth quarter threatened to be as much as $20 million, the company announced it was restating its financial figures for 2002 and 2003 because of improperly booked revenue. Shareholders, who watched PriceSmart's stock value plummet from $49 per share in March 2000 to $6.75 per share at the end of 2003, filed a class-action lawsuit against the company, charging that it had violated federal securities laws by issuing a series of materially false and misleading statements.

As PriceSmart prepared for the future, the company was working to set its operations on a proper course. In February 2005, the company announced it was closing its warehouses in Mexico. "We were late (in entering Mexico) in terms of the number of operators," conceded Robert Price in a February 13, 2005 interview with the San Diego Union-Tribune. "We were the last ones in and found it to be a challenging situation," he said. In March 2005, the company settled the lawsuit filed by investors, agreeing to pay $2.35 million. As the company pressed ahead in 2005, Robert Price held onto his title as interim chief executive officer. The search continued for a permanent replacement, one whose task would be ensuring that the Price's third retail chain enjoyed as much success as their first two ventures.

Principal Subsidiaries

PriceSmart (Guatemala) S.A. (66%); PriceSmart Aruba (90%); PriceSmart Barbados; PSMT Caribe, Inc.; PriceSmart Guam; PriceSmart Jamaica (67%); PriceSmart Mexico (50%); Price-Smart Nicaragua (51%); PriceSmart Panama; PriceSmart Philippines (52%); PriceSmart Trinidad (90%); PriceSmart U.S. Virgin Islands; Ventures Services, Inc.

Key Dates:

1954:

Sol Price starts Fedmart, an early version of Price-Smart.

1976:

Sol Price's second venture, Price Club, is started.

1993:

The Price Co. and Costco Wholesale Club merge.

1994:

Robert Price gains control of the international rights to operate membership club stores in certain international markets.

1996:

The first PriceSmart opens in Panama.

1997:

PriceSmart completes its initial public offering of stock.

2003:

PriceSmart announces it will restate financial results for 2002 and 2003.

2005:

PriceSmart settles investors' lawsuit and exits the Mexican market.

Principal Competitors

Carrefour SA; Royal Ahold N.V.; Wal-Mart Stores, Inc.

Further Reading

Allen, Mike, "PriceSmart Expands," San Diego Business Journal, July 24, 2000, p. 4.

——, "PriceSmart Struggles to Regain Once-Profitable Venture," San Diego Business Journal, May 31, 2004, p. 6.

Bragaw, Richard S., "At Price Club the Golden Rule Keeps the Customer Satisfied," Supermarket Business, November 1990, p. 37.

Crabtree, Penni, "PriceSmart Mulls Going Private to Avert Rules," San Diego Union-Tribune, February 26, 2005, p. B3.

Gallagher, Leigh, "Price to Pay," Forbes, December 22, 2003, p. 68.

Green, Frank, "San Diego-Based Retailer PriceSmart Experiences Decline in Sales," San Diego Union-Tribune, August 7, 2003, p. B4.

"Law Offices of Charles J. Piven, P.A. Announces Class Action Lawsuit Against PriceSmart, Inc. in Behalf of Investors," PrimeZone Media Network, December 23, 2003, p. 12.

Levy, Robert, "Make Way for Warehouse Clubs," Dun's Business Month, April 1985, p. 76.

McMahon, Shannon, "PriceSmart Settles Investor's Lawsuit," San Diego Union-Tribune, March 4, 2004, p. B2.

——, "PriceSmart Pulling Out of Mexico," San Diego Union-Tribune, February 13, 2005, p. B3.

Orol, Ron, "Activist Shareholders Eye PriceSmart," Daily Deal, September 10, 2002, p. 12.

——, "PriceSmart Founder: We're Not for Sale," Daily Deal, September 14, 2002, p. 13.

"San Diego-Based Warehouse Retailer PriceSmart Reports Slump in Sales," San Diego Union-Tribune, June 7, 2003, p. B6.

—Jeffrey L. Covell