Price Club Introduces the Warehouse Club Concept Summary

  • Last updated on November 10, 2022

The introduction of the warehouse club concept dramatically changed the field of retailing with its cash-and-carry approach of offering goods to members at reduced cost.

Summary of Event

On July 12, 1976, Sol Price and his son, Robert Price, opened the first warehouse store in the United States under the name Price Club. The store, which was located in a remodeled airplane hangar in San Diego, California, was initially open only to business shoppers. By the end of the twentieth century, three major warehouse clubs would evolve from the retailing concept introduced by Sol Price: Costco (which began as Price Club), Sam’s Club, and BJ’s. Retailing;warehouse clubs Price Club Warehouse club shopping [kw]Price Club Introduces the Warehouse Club Concept (July 12, 1976) [kw]Warehouse Club Concept, Price Club Introduces the (July 12, 1976) Retailing;warehouse clubs Price Club Warehouse club shopping [g]North America;July 12, 1976: Price Club Introduces the Warehouse Club Concept[02450] [g]United States;July 12, 1976: Price Club Introduces the Warehouse Club Concept[02450] [c]Marketing and advertising;July 12, 1976: Price Club Introduces the Warehouse Club Concept[02450] [c]Trade and commerce;July 12, 1976: Price Club Introduces the Warehouse Club Concept[02450] [c]Organizations and institutions;July 12, 1976: Price Club Introduces the Warehouse Club Concept[02450] Price, Sol

The warehouse club is a retail format in which a limited assortment of general merchandise and food items is available only to customers who are members of the club. The emphasis in this form of retailing is on discount prices; members generally purchase items in bulk and at reduced cost. In exchange for the opportunity to buy in bulk at lower prices than the same goods sell for elsewhere, members pay yearly membership fees. Warehouse clubs typically operate on smaller profit margins than other retail formats and offer few customer services. They keep prices low by taking a no-frills approach to stocking and inventory and by doing little, if any, promotion. Warehouse club stores are usually very large, at least 100,000 square feet, and are typically freestanding.

In the early days of warehouse clubs—also known as wholesale clubs or membership clubs—members were often small business owners who shopped at the clubs because they wanted to pay reduced prices for items they used in operating their businesses. Over time, however, warehouse club membership broadened to include ultimate consumers—that is, customers who make purchases primarily for their own use. Warehouse clubs may charge ultimate consumers prices that are a little higher than those paid by business consumers. Eligibility for membership in warehouse clubs is usually tied to individuals’ affiliation with specific organizations or industries; clubs offer membership to labor union members, municipal employees, educators, and members of other specific groups.

More than twenty years before he opened Price Club, Sol Price started the discount operation Fed-Mart Fed-Mart[Fedmart] in 1954. In the early 1950’s, Price, an attorney practicing in San Diego, was frustrated by price-fixing and fair-trade laws that made it illegal for retailers to discount prices. He was looking for a tenant for a warehouse he had inherited when two of his clients who were in the wholesale jewelry business asked him to go to Los Angeles with them to see Fedco, Fedco a membership store that sold watches. When Price returned to San Diego, he realized that the Fedco he had just visited looked much like his vacant warehouse, and he decided to turn the building into a membership store for government employees. He named the store Fed-Mart and offered membership only to employees of federal, state, and local governments.

Fed-Mart started slowly, carrying merchandise bought from Price’s clients. Initially, the stock consisted of jewelry, furniture, and liquor. The warehouse store concept eliminated many of the costs associated with traditional retail businesses; Fed-Mart had few, simple fixtures and did not do any advertising. Price’s enterprise was successful; sales for the first year were $4.5 million. Later, the store began carrying food items, opened an in-store pharmacy, and started selling gasoline to members at wholesale prices. In 1975, Price sold Fed-Mart to the German retailer Hugo Mann.

After talking to a lot of small business owners, Sol and Robert Price learned that small businesses suffered because of the high cost of supplies. They did not have the clout with vendors and transportation suppliers that larger businesses had. The Prices identified a gap in the distribution channel for small businesses: The wholesalers who sold to small businesses found it expensive to serve them because the businesses’ orders were so small; it was costly and inefficient to take each small order, process it, deliver it, and collect payment. The Prices hit upon the idea of filling this gap by establishing a place where small business owners could purchase wholesale merchandise themselves. They opened Price Club on July 12, 1976, to a small customer base; each member paid an annual fee of twenty-five dollars.

The operation started with limited product categories. Office products, tires, and food products were among the first items Price Club carried. The enterprise almost failed in its early days because of its small customer base, so the Prices added more categories of membership and many new product categories. Initially, membership was available only to people with professional licenses or resale permits, but it was soon opened to government employees, utility and hospital workers, and credit union members.

By 1979, Price Club had two stores, 900 employees, and 200,000 members, and the company boasted a profit of $1 million. By 1984, sales exceeded $1 billion. As Price Club celebrated its tenth anniversary in 1986, Forbes magazine named it the “Best Managed Company”; it had grown to twenty-two locations, more than 7,000 employees, and more than 3 million members. In 1993, Price Club merged with Costco to form PriceCostco; the name was changed to Costco Companies Costco Companies in 1997.

Significance

Price Club’s success with the warehouse club concept led to the establishment of competitor membership retailers as well as to the proliferation of nonmembership warehouse-style discount retail outlets. Sol Price’s retailing philosophy was to sell merchandise as cheaply as possible. He believed in operating on the lowest markup rather than the deepest discount. He did not like his employees to use the word “discount” or to use comparative pricing, and his stores never had sales. Price refused to use any gimmicks. In the early twenty-first century, Costco continued to grow and succeed, operating in many ways according to Price’s philosophy.

Costco developed a very efficient inventory management system and a practice of displaying almost all merchandise, much of it in its original packing containers, on the sales floor, so that practically no space would be wasted. The deliberate lack of aisle markers encouraged customers to walk around the store and browse. The company continued to support Sol Price’s dedication to customers and members with its unconditional “double guarantee”: “On merchandise: We guarantee your satisfaction on every product we sell with a full refund. On membership: We will refund your membership fee in full at any time if you are dissatisfied.” Retailing;warehouse clubs Price Club Warehouse club shopping

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">“A Short History of Membership Clubs.” Supermarket News, November 5, 2001, 16. Trade journal article details the start and evolution of warehouse stores.
  • citation-type="booksimple"

    xlink:type="simple">Berman, Barry, and Joel R. Evans. Retail Management: A Strategic Approach. 10th ed. Upper Saddle River, N.J.: Prentice Hall, 2006. Textbook aimed at management and retailing students emphasizes various retailing strategies and their importance to success in the field.
  • citation-type="booksimple"

    xlink:type="simple">Bragaw, Richard S. “At Price Club the Golden Rule Keeps the Customer Satisfied.” Supermarket Business 45 (November, 1990): 37-41. Trade journal article presents an interview conducted with Sol Price when he was chairman of Price Club.
  • citation-type="booksimple"

    xlink:type="simple">Helyar, John. “Sol Price on Off-Price.” Fortune, November 24, 2003, 164. Presents Price’s views on the Price Club merger with Costco and the state of business among retailers in the early years of the twenty-first century.
  • citation-type="booksimple"

    xlink:type="simple">Levy, Michael, and Barton A. Weitz. Retailing Management. 6th ed. New York: McGraw-Hill/Irwin, 2006. Textbook focuses on strategic decision making in retailing.
  • citation-type="booksimple"

    xlink:type="simple">Mackoff, Barbara, and Gary Wenet. The Inner Work of Leaders: Leadership as a Habit of Mind. New York: AMACOM, 2001. Discusses the various thinking and strategies of sixty-five leaders of business and industry.
  • citation-type="booksimple"

    xlink:type="simple">Nicksin, Carole. “Sol Price, Price Club: The Originator of the Membership Warehouse Is in an Elite Club Indeed.” HFN: The Weekly Newspaper for the Home Furnishing Network, November 27, 2000, p. 32S. Trade newspaper article focuses on Price as an innovative retailer.

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