“It’s hard to believe that a business could be worth many billions by essentially giving things away,” Charlie Munger once remarked about his favorite company, Costco. The business model seemed to defy conventional retail wisdom: a company that deliberately limited its markup to 14% on most products, yet consistently generated enormous cash flows. Last year, this approach produced nearly $7 billion in free cash flow, enabling a $6.6 billion special dividend to shareholders while funding aggressive expansion. Even more remarkably, this business maintained these results while paying its workers 30% above industry standards and providing comprehensive benefits – a combination that would bankrupt most retailers.
The numbers tell an extraordinary story. Over the past decade, operating cash flows grew from $4.2 billion to nearly $12 billion. This wasn’t achieved through financial engineering or cost-cutting, but through a fundamental reimagining of retail economics. While traditional retailers typically turn their inventory four to six times per year, this business managed to turn its inventory over 12 times annually. Each product spent mere days on the warehouse floor before being sold, while the company typically enjoyed more than a month to pay its suppliers.
The magic behind this seeming contradiction traces back to a revolutionary idea conceived half a century ago: what if a retail business could sell products before it had to pay for them? What if, instead of tying up millions in inventory, a retailer could use its suppliers’ money to fund its growth?
This wasn’t just clever accounting, it was a complete reinvention of retail fundamentals. Every time a customer bought something, the business had already sold it before the bill from the supplier came due. This created a perpetual cycle of free financing that grew stronger with each sale. Traditional retailers were trapped in a costly cycle of buying inventory, hoping it would sell, and managing the cash flow gap in between. This new model turned that equation on its head.
The architect of this revolutionary model wasn’t a Wall Street financial wizard or a Silicon Valley innovator. He was a San Diego lawyer turned retailer named Sol Price, who first implemented these ideas at Price Club in 1976. His protégé, Jim Sinegal, would later co-found Costco in 1983, building upon Price’s principles. The two companies eventually merged in 1993, creating the retail powerhouse we know today as Costco. His story begins with a simple question: Why should retailers be in the business of financing their inventory at all?
In “Sol Price: Retail Revolutionary Social Innovator,” Robert Price offers more than just a biography of his father – he provides an insider’s view of how these transformative ideas came to life. As both son and business partner, Robert worked alongside Sol at Price Club, witnessing firsthand the development and implementation of these revolutionary retail principles. Through this deeply personal yet practical account, we get unprecedented access to the mind of a man who didn’t just build a successful business, but fundamentally changed how retail operates. The story that unfolds in these pages is not just about retail innovation – it’s about questioning conventional wisdom and having the courage to implement radical ideas, even when they seem to defy business logic.
What Did I Get Out of It
Sol Price’s revolutionary approach to retail offers lessons for investors and business operators alike. His methods weren’t just about selling products – they represented a complete reimagining of retail economics that would influence giants like Walmart, Costco, and countless others. Through his journey from FedMart to Price Club, several key principles emerge that are particularly relevant for understanding superior business models:
The Power of Negative Working Capital
Imagine running a retail store where your suppliers effectively finance your business. Sound impossible? This is exactly what Sol Price achieved, creating what finance professionals call a “negative working capital” model. To understand this breakthrough, let’s first look at how traditional retail works.
In a typical retail store, the owner must first buy inventory, put it on shelves, and wait for customers to purchase it. This means tying up significant money in inventory – money that sits idle until products sell. If a store buys $100,000 worth of inventory and takes three months to sell it, that’s $100,000 of the owner’s money locked away for 90 days.
Sol Price turned this model upside down. As the book reveals:
Price Club had $8 million in inventory and accounts payable of $7 million, a nearly 90% payable to inventory ratio.
What does this mean in practice? Price Club would receive products from suppliers but wouldn’t have to pay for them for 40-45 days. Meanwhile, the company was turning its inventory over 12 times per year – meaning products were typically sold within 30 days. This created a magical equation: Price Club would sell products and collect cash from customers before they had to pay their suppliers.
Let’s break down the math:
- Time to sell product: 30 days (12 inventory turns per year)
- Time to pay supplier: 40-45 days
- Result: 10-15 days of free financing
This explains why, as the book notes:
In short, Price Club’s suppliers were financing The Price Company’s business.
The membership fee added another layer to this financial innovation. As members paid $25 upfront, Price Club received cash before providing any services. This created an even more powerful cash flow engine:
There were a number of reasons for charging a membership fee of $25, a significant amount of money compared to the rather nominal $2 membership fee that members of FedMart had paid. The most important reason was to use the membership money to lower prices by including the fee in the calculation of merchandise gross margins.
This model was so effective that it changed Sol’s perspective on capital requirements:
“I used to say afterwards that when we didn’t know what we were doing it only took $50,000 to start a business and five years later when we were really experienced at running FedMarts, it took $5 million to open.”
The irony in this quote reveals a truth: sometimes the most sophisticated business models appear to require more capital, but actually generate their own financing through superior operations. This wasn’t just clever financial engineering – it was a fundamental reimagining of how a retail business could work.
Operating Efficiency Through Simplicity
Most retailers believe that offering more choices leads to more sales. Sol Price discovered the opposite – that limiting selection could actually increase sales while dramatically improving efficiency. This counterintuitive insight came to be known as “the intelligent loss of sales.”
As the book explains:
Conventional wisdom in retailing is to stock as many items as possible in order to satisfy every customer’s needs and wants. The “intelligent loss of sales” turns that theory on its head, postulating that customer demand is most sensitive to price, not selection. And low prices are possible only if there is integrity in the pricing combined with being the most efficient operator.
The numbers were striking. While traditional retailers stocked around 50,000 items, Price Club carried just 3,000. But why did this dramatic reduction in selection lead to better results? Sol Price understood the hidden costs of complexity:
Because payroll and benefits represent approximately 80% of a retailer’s cost of operations, pricing advantage follows labor productivity. Fewer items result in reduced labor hours throughout all of the product supply channels: ordering from suppliers; receiving at the distribution center; stocking at the store; checking out the merchandise; and paying vendor invoices. Put simply, the cost to deal with 4,500 items is a lot less than the cost to deal with 50,000 items.
This principle extended beyond just reducing SKUs. Price understood that selling larger sizes was another way to improve efficiency:
The intelligent loss of sales involves more than stocking fewer SKUs. Selling high quality merchandise is more cost efficient than selling inferior merchandise. Fewer product returns is one obvious advantage. Also, selling one size-the large size-of a product is another way of giving up sales to gain more sales. Large sizes almost always cost less per unit than smaller sizes, beginning with the manufacturing and packaging costs and ending with the cost to handle at the store.
Even store layout was designed with efficiency in mind:
Sol insisted that FedMart stores have low displays and wide aisles. Sol had two inviolable rules: the 54-inch height rule and the six-foot aisle rule. His reason for these rules was to make shopping more comfortable for the FedMart members by giving the shopper the feeling of an open and uncluttered shopping environment.
The beauty of this system was that it created a virtuous cycle. As Price noted:
FedMart buyers were taught to do their best to ascertain the supplier’s lowest cost, to base the markup on the assumed lowest cost, but never pricing below actual cost. By pricing the product “right,” FedMart would sell more and eventually reach a sales volume that would support the best cost from the supplier.
This approach to simplicity and efficiency wasn’t just about cost-cutting, it was about creating a better shopping experience while simultaneously driving superior economics. As one executive noted about Sol’s teaching style:
“You train an animal, you teach a person.” Sol really wanted all FedMart employees to think about and understand why their jobs were important to the success of FedMart. He was not a big fan of procedures and training manuals because he believed that manuals were a substitute for thinking.
The Mathematics of Low Margins
Most retailers believe high margins are the path to profitability. Sol Price proved that the opposite could be true – that systematically lower margins, when combined with high volume and efficient operations, could create superior financial returns. This wasn’t just discounting; it was a complete mathematical reimagining of retail economics.
The contrast between traditional retail and Price’s model was stark. As the book reveals:
The first major difference was the cost of sales (merchandise markup). FedMart had a 30% markup compared to Price Club’s 11.7% markup.
But low margins were just the beginning. The real magic came from the operational efficiency that made these low margins sustainable:
FedMart’s total operating expenses were 17% compared to Price Club’s 9%. Moreover Price Club’s sales were approaching $1,000 per square foot, at least twice as much as a typical FedMart store.
Price’s philosophy on pricing was radically different from traditional retail. The book describes his approach:
According to Sol, FedMart was not a discount store. He described FedMart as a “low margin retailer.” FedMart priced merchandise starting with the cost of the product and taking as small a markup as possible-consistent with covering expenses and a small profit while giving the customer the best price.
He even rejected common retail practices like loss leaders:
Sol also had a rule against pricing any product below cost, the traditional “loss leader.” His reasoning: if some products are sold below cost, other products must be sold at very high margins to make up for the losses. In fact, when grocery stores were selling items such as sugar or coffee below cost, Sol told FedMart managers to place signs next to FedMart’s display of sugar or coffee advising customers to purchase these products at those grocery stores.
This commitment to consistent low margins created a trust with customers that proved invaluable:
Sol described his business philosophy as the professional fiduciary relationship between the retailer and the customer. In his words: “If you recognize you’re really a fiduciary for the customer, you shouldn’t make too much money.”
The results spoke for themselves. As one example from the early days shows:
We had anticipated that we might do $1 million the first year but it ended up approximately three times more than we expected. It was the hottest thing to hit San Diego in a long time.
This mathematical precision in pricing, combined with relentless operational efficiency, created a model that competitors found difficult to replicate. Even Sam Walton, who would later build Walmart into the world’s largest retailer, acknowledged learning from Price’s approach.
The Real Estate Strategy
Sol Price’s approach to real estate was as innovative as his retail operations, though it ultimately became a source of tension in his business empire. His perspective on real estate evolved from viewing it as a necessary cost of doing business to seeing it as a crucial component of long-term value creation.
The evolution of his real estate strategy is evident from his earliest days. As the book notes about FedMart’s first location:
We negotiated a lease with my mother-in-law and her sister-in-law to rent the warehouse from them for ten years. It seems to me for $1,000 a month triple rent, which was a return of about six or seven percent and in those days that was a high yield. We were so uncertain as to the future of this enterprise, that we reserved the right to cancel the lease at the end of one year if it didn’t work.
By the time of Price Club, real estate had become a strategic advantage. The book reveals how other retailers sought to leverage Price Club’s drawing power:
Many retailers, including Home Depot and other big box stores, wanted to locate next to Price Clubs to take advantage of Price Club’s customer draw. Consequently the company began to look for Price Club sites that had extra land for real estate development.
However, this focus on real estate development created internal tensions:
Some of the company’s senior executives, and most of the investment community, frowned on the company’s directing so much of its financial resources into real estate development. First, they felt that real estate development was a diversion from the company’s core business. Second, the immediate financial returns on real estate were much lower than returns on the Price Club’s operating business, and they feared that The Price Company was moving toward becoming a real estate business.
This tension would eventually contribute to significant changes in the company. As the book notes:
Sol was pushing for The Price Company to become more involved in real estate development… He was tired of the constant pressure from Wall Street for more growth.
The culmination of this strategy came with Price Enterprises:
Price Enterprises emerged in 1994 as a publicly traded real estate company. The real estate that Price Enterprises owned consisted primarily of Costco and Home Depot leases along with other smaller tenants.
Sol’s commitment to real estate wasn’t just about property ownership. He used real estate decisions to enforce his values, as demonstrated in this powerful example:
The mortgage agreement stipulated that FedMart must maintain separate bathrooms for “whites” and “colored people.” Sol told the lender that the separate bathrooms provision was unacceptable and that he would not enter into the mortgage agreement unless the provision was removed. The lender did in fact remove the provision and FedMart was able to complete the mortgage on the Dallas property and operate its business with one set of restrooms.
The Human Capital Equation
In an industry notorious for minimizing labor costs, Sol Price proved that paying workers more could actually lead to better financial results. This wasn’t just good ethics, it was good business. His approach to human capital was built on a fundamental belief that treating employees well would create superior business outcomes.
The commitment to employees was explicit and comprehensive, as outlined in FedMart’s employee philosophy:
We believe that you should be paid the best wages in your community for the job you perform. We believe that you should be provided with an opportunity to invest in the company so that you can prosper as it prospers. We believe that you should be encouraged to express yourself freely and without fear of recrimination or retaliation. We believe that you should be happy with your work so that your occupation becomes a source of satisfaction as well as a means of livelihood.
This wasn’t just altruism, it was rooted in business logic:
Much has been made of the fact that FedMart and Price Club paid employees better wages than other retailers. The common wisdom is that Sol’s generosity was based solely on his value system-a belief in treating employees in a just and fair way… Sol was committed to the idea that paying good wages and benefits would attract better employees who would remain loyal to FedMart. Providing excellent compensation and treating all employees as part of the team would also result in better job performance, loyalty, and honesty.
Price understood the mathematics behind this approach:
The success of FedMart and later Price Club had a lot to do with being the lowest-cost operator. But low operating expenses were never achieved by shortchanging employees. Because such a large portion of the expense structure in retailing is employee compensation, how is it possible to provide excellent compensation and still be the low cost operator? Employees who are paid well and treated fairly perform better.
His management philosophy centered on the concept of the “alter ego”:
If the owner of a store was able to do all the jobs himself-greet customers, order and receive merchandise, do the accounting, sweep the floors and clean the bathrooms-he would. But, the reality is that normally the owner can’t do all the work himself. Therefore, he must hire people to help. Then, he must teach his employees to become his “alter ego,” so that they understand the importance of their jobs and perform their jobs as well or better than he, the owner, would if he had the time.
This approach to employee development was deeply personal and focused on understanding rather than just following procedures:
“You train an animal, you teach a person.” Sol really wanted all FedMart employees to think about and understand why their jobs were important to the success of FedMart. He was not a big fan of procedures and training manuals because he believed that manuals were a substitute for thinking.
The results of this human capital strategy were evident in the company’s culture and performance. Perhaps the most telling example was Jim Sinegal, who started as an employee at age 18 and went on to found Costco, saying:
“A newspaper reporter called me and said: ‘Gee, you knew him (Sol) that long, ya know, since 1954? You must have learned a lot.’ My response was: ‘No, that’s inaccurate, I didn’t learn a lot. I learned everything, everything I know.'”
Strategic Control and Corporate Governance
Perhaps the most painful yet instructive chapter in Sol Price’s business journey came from the sale of FedMart to German retailer Hugo Mann. This transaction provides crucial lessons about corporate governance, control, and the dangers of cultural misalignment in business deals.
The initial signs of trouble emerged at the very first board meeting, as the book recounts:
The first indication of real trouble occurred at the first meeting of the new board in September, which was held at Sol’s office in the Fifth Avenue Financial Center… Rather than the friendly person we had seen, Mann launched into a ninety-minute tirade criticizing Sol and FedMart’s performance. During Mann’s harangue, he looked only at me, never once looking at Sol or addressing a single remark directly to Sol. Neither Sol nor I uttered a word despite the humiliating attack launched against us.
The situation deteriorated rapidly, culminating in a shocking termination:
On December 4, 1975, Sol, other FedMart executives, and I attended the relocation opening of FedMart’s Calexico, California, store. We had received a written notice of a Board meeting scheduled for December 5, my mother Helen’s birthday. The Calexico opening, in the usual FedMart tradition, was very successful. The next day at the board meeting in Sol’s office, however, Sol was informed that he was being terminated as FedMart’s president. He was told that the new FedMart owners were not going to honor the severance provision of his management agreement, which provided for a $120,000 payment to Sol if he was terminated.
The new owners attempted to justify their actions with questionable claims:
Hugo Mann and his attorneys were claiming that Sol was fired for cause. They contended that Sol “failed to follow directions and was fired for that reason.”
This experience influenced Sol’s future business decisions. When building Price Club, he ensured stronger controls and alignment of interests. The lessons from this episode were clear: maintaining operational control is crucial, and cultural alignment between partners is as important as financial terms.
These lessons would later influence the merger discussions with Costco, where cultural alignment was a key consideration:
Costco was a better fit in a number of ways. Though non-union, Costco’s wages and benefits were similar to the Price Club’s… Jim Sinegal was Sol’s protege. He had the same business philosophy as Sol with respect to giving the best possible value to the Costco members and providing good wages and benefits to Costco employees.
The FedMart sale serves as a cautionary tale about the importance of maintaining control over one’s business vision and ensuring true alignment with business partners – lessons that would shape Sol Price’s approach to all future business relationships.
Who Is This For
Sol Price’s story, as told through his son Robert’s eyes, is an invaluable resource for several distinct audiences. First and foremost, this book is essential reading for anyone interested in retail economics and operations. The detailed exploration of how Price revolutionized retail – from inventory management to real estate strategy – provides a masterclass in building superior business models.
For investors and business analysts, the book offers deep insights into what makes certain retail operations sustainably profitable. Price’s innovations in working capital management, his approach to margins, and his strategic thinking about real estate continue to influence modern retail giants. Understanding these principles is crucial for evaluating retail businesses today.
For entrepreneurs and business operators, Price’s journey offers timeless lessons about maintaining control, building culture, and scaling operations without compromising values. His unwavering commitment to employee welfare and customer value demonstrates how principled business practices can create lasting competitive advantages.
However, finding this book presents a unique challenge. As someone who discovered it through the Founders podcast and spent considerable time tracking down a copy, I can attest that it’s become something of a collector’s item in business literature. Current prices for used copies often exceed $400, reflecting both its scarcity and the valuable insights it contains. While this might seem steep for a book, I view it as an investment that has already paid dividends – not just in its appreciation in value, but more importantly in the deep understanding it provides of retail operations and business principles.
The book’s rarity shouldn’t deter serious students of business – while physical copies are expensive, digital versions do exist for those willing to search. What matters most is accessing these insights, whether through a cherished hardcover or a well-worn PDF. (And if my wife is reading this far, yes, I did spend quite a bit on this book, but consider it part of my continuing education!)
In the end, this book is for anyone who believes that business success comes not just from what you sell, but how you sell it – and more importantly, why. It’s for those who understand that truly revolutionary business models aren’t just about profits, but about creating sustainable value for all stakeholders. Sol Price’s legacy, as captured in these pages, continues to influence modern retail, making this book an essential addition to any serious business library, regardless of the format or cost of acquisition.