Chapter 43 - Sol Price Retail Revolutionary & Social Innovator
Today’s Chapter is based on the book “Sol Price Retail Revolutionary & Social Innovator” by Robert Price, the son of Sol Price, the founder of FedMart and Price Club.
Here’s what I have learned from the book:
Fiducial Relationship
“Do unto others as you would have them do unto you”
— The Golden Rule
Sol Price, notorious for being the founder of FedMart and Price Club, started his career as an attorney in California. However, his practice as a corporate lawyer allowed him to deal with various small businessmen and Price became involved with not only their legal problems but also with their overall business.
Sol Price once said that “Over a period of time I really learned far more from my clients than I ever learned in law school, and because I involved myself so deeply, I think that is where I began to accumulate the knowledge and the interest in business.”
While Price ended up becoming an entrepreneur, he definitely implemented a few principle from his law practice to the way he would run his company. As a matter of fact, Price often describes his business approach as a “professional fiduciary relationship with the customer.”
“We felt we were representing the customer. You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the best advertising is by our members... the unsolicited testimonial of the satisfied customer."
— Sol Price
This fiduciary relationship with the customer is similar to the Golden Rule; Do unto others as you woulld have them do unto you. In fact, Sol believes that if you want to be successful in retail, you need to “put yourself in the place of a cranky, demanding customer. In other words, see your business through the eyes of the customer.”
This reminds me of what we have learned from Isadore Sharp who also believed in the Golden Rule. Sharp explained that treating employees well was the key to providing exceptional services to their customers, and therefore, he made it a priority for senior managers at Four Seasons to ensure that their employees were well-treated.
“Our customer-front line relationship is crucial. Customers seldom see or talk to you. They interact almost solely with our front line, three to seven junior employees. If that contact disappoints the customers we want as lifetime patrons, they become ex-patrons. But when our employees remember them, greet them, know what they want and provide it quickly, they create a loyal customer whose referrals and long-term repeat business can often run well into six figures. That’s a cycle of success, dependent entirely on junior employees.“
— Isadore Sharp
Similarly, Sol Price also believed that he had a fiducial duty towards his employees. As a matter of fact, Price often made decisions from the point of view of an attorney rather than through the eyes of a retailer or entrepreneur. As his son Robert mentions, “He [Sol Price] was never driven by the need to have the most stores or the most money, but by the desire to give the customer the best deal and to provide fair wages and benefits to FedMart's employees.”
One example of Price’s desire to provide fair wages and benefits to FedMart’s employees happened when he opened a FedMart in San Antonio where wages were typically lower than in San Diego and in Phoenix. Instead of following the normal wages in San Antonio, he decided to pay his employees the same wages as his employees in San Diego and Phoenix: $1.00 an hour, more than twice as much as his competitors in the city.
The reason for this decision was simple: “employees in San Antonio worked just as hard and as well as other FedMart employees. FedMart had excellent profits in San Diego and Phoenix while paying good wages, why not apply the same wage philosophy in San Antonio?”
"Our first duty is to our customers. Our second duty is to our employees. Our third duty is to our stockholders."
— Sol Price
Through his concept of “professional fiduciary relationship”, it is fair to say that making money for his shareholders is at the bottom of the list in terms of priority. In fact, Price believed in building a long-term relationship with his customers and as such, he explained that "If you recognize you're really a fiduciary for the customer, you shouldn't make too much money.”
Here’s how Robert Price defined Sol’s simple business philosophy:
Provide the best possible value to the customers, excellent quality products at the lowest possible prices.
Pay good wages and provide good benefits, including health insurance to employees.
Maintain honest business practices.
Make money for investors.
Alter Ego
“If you’re not spending 90 percent of your time teaching, you’re not doing your job.”
— Jim Sinegal
Jim Sinegal, Costco’s founder, started working with Sol Price at the age of 18. He was once asked by a newspaper reporter if he learned a lot from Sol Price. Sinegal responded with “No, that’s inaccurate, I didn’t learn a lot. I learned everything, everything I know.”
This is a great anecdote showing how much Sol Price focused on teaching. Price believes that there is a big difference between training someone and teaching someone. When he was at FedMart, Price wanted all of his employees to think about and understand why their jobs were important to the success of the company. As such, he did not like having procedures or training materials as he believed that it would not encourage thinking among his employees.
“You train an animal, you teach a person.”
— Sol Price
Sol Price implemented the philosophy of teaching employees to become his “alter ego”. As a matter of fact, he explains that it is impossible for a business owner to do all the jobs himself, such as greeting customers, ordering and receiving merchandise, doing the accounting, etc. By consequence, it is the owner’s duty to teach his employees to understand the importance of their jobs and to perform their jobs as well or even better than he would.
By doing so, the owner would free his time to devote into managing the business and making sure that his alter egos are doing their jobs well.
“In return for providing a great workplace for FedMart employees, Sol asked only two things of his employees: that they work hard and that they think.”
— Robert Price
Price truly believed that everyone who worked at FedMart or at Price Club was an equally important part of the company’s success. As such, Sol personally taught all employees, even those that weren’t part of the management team at FedMart. He was known to teach by example and “by engaging people in challenging discussions, demanding that they use their brains.”
This reminds me of what we have learned from Henry Ford who was a master of delegating executive duties to others and made sure to have enough time on his own to think, and to plan and to watch. He would make sure to never assign any executive duties to himself and to have no social obligations.
This allowed Ford to make good decisions consistently as he was always in labour of thinking. While it may seems like he took business decisions quickly, in reality, “He reaches his decisions slowly and alone; he does not jump at anything, and so, when the time comes for execution, everything moves with marvelous rapidity because everything has been previously thought through and planned.“
“He has had the time to do this thinking and planning because he has used his time himself instead of permitting others to use it for him. And he is certain that plans will be executed for him, because he knows how to let men go when they grow too rich and lazy to execute.” — Harvey Firestone on Henry Ford
The Innovator
"We were good at creating the business, we weren't as good running the business."
— Sol Price
Sol Price is considered a legend in retailing due to his various innovations such as the Price Club’s wholesale concept that various entrepreneurs or existing retailers tried to copy. When asked about how he felt about being the father of an industry, Price famously replied with “I should have worn a condom.”
Firstly, Price is known for the concept of “intelligent loss of sales”. As a matter of fact, he demonstrated that it was possible to do more sales with fewer merchandise items. While, at the time, it was conventional wisdom in retailing to stock as many items as possible, the “intelligent loss of sales” theory was based on the idea that customer demand is more sensitive to price and not selection.
Here’s how Robert Price explains the concept of the “intelligent loss of sales”:
“Sol's classic example at FedMart was 3-in-One Oil. The manufacturer produced the oil in three sizes. Most stores carried all three sizes of 3-in-One Oil even though the large 8-ounce size was a better value per ounce than the smaller sizes. FedMart carried just the 8-ounce size and did far more business with the one larger size than would have been possible with the three sizes combined. The explanation is that most people who need 3-in-One Oil will buy the 8-ounce size if that is all there is on the shelf.”
— Robert Price
This reminds me of the Pareto Principle that we have learned from Tom Monaghan at Domino’s Pizza. Monaghan quickly realized that even though he sold three different sizes of pizzas, 80% of his sales came from 12-inches pizza. Similarly, 90% of beverage sold were either Coke or Pepsi. As such, Monaghan decided to only sell twelve-inch pizzas only, as he told himself if “at least 80 percent of the orders from dorms were for twelve-inch pizzas. So why have any other size?”
This was a major revelation and breakthrough in Domino’s Pizza history. By doing so, the company was able to leverage its profits even further. It may seems counter intuitive that simplifying a business may increase its revenue, but here’s how Monaghan explains it:
“The main argument for having only twelve-inch pizzas was faster service. But quality would be improved, too. A pizza maker has to learn how to make each size pie. The twelve-incher is easier and larger ones are much harder. There would be fewer mistakes too both in taking orders and boxing them. With three sizes of pies and just two inches difference between them, it sometimes happened during a rush that a worker would ruin a large pie by trying to jam it into a medium size box. Then there were the saving we would make in purchasing. Having one size would cut our box inventory requirements by two-thirds.”
— Tom Monaghan
Secondly, Price is well known for creating the Price Club concept which was conceived as a wholesale business selling merchandise to small, independent businesses. The idea was for business owners to “come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices.“
The major advantage to purchase at Price Club was obviously because the prices would be much more lower than traditional wholesalers who often offered extra services such as order taking and delivery. In Price’s mind, these extra convenient services would be offset by the fact that Price Club’s warehouse “would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices.” This would be extremely helpful for small businesses to compete with the larger discount stores.
“By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices—in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were under-pricing small businesses.”
— Robert Price
Furthermore, Price Club also implemented a $25 membership fee that was used as an incentive for the member to purchase more in order to leverage the membership fee as a percent of purchases. Also, Robert Price mentions that the membership concept “helped reduce operating expenses for the business because the membership psychologically tied the member to Price Club and eliminated the need to advertise.”
Finally, Price Club were also one of the first companies to start in-store food sampling. In fact, it was initially used as a way to educate members about new in-store food products. While, some members of Price Club took advantage of this and would eat samples as a free lunch, it is clear that sampling increased sales both because members liked the products, and because of the psychology behind the “reciprocity rule”, the subconscious desire to reciprocate when receiving something for free.
As we have learned previously, Estee Lauder was also one of the pioneers in implementing the power of reciprocity in marketing in the beauty industry. She gave free samples of her products to customers, which not only allowed them to try Estee Lauder's products but also created a sense of obligation to buy the products in return for the free samples. This approach proved to be very successful and has since become a common practice in the beauty industry.
“Reciprocation tendency subtly causes many extreme and dangerous consequences, not just on rare occasions but pretty much all the time.”
— Charlie Munger
Giving Back
“No one has ever become poor by giving.”
— Anne Frank
One of Sol Price’s biggest quality was his generosity and his concern for others. Throughout his career in law and in business, he was always actively helping people by giving of his time and money. As a matter of fact, Price believed that his success more or less came from luck and that “sharing his advice and financial resources with someone in need was his way of trying to right a wrong and even out the playing field.”
Similarly, he often encouraged people who were fortunate enough to earn a significant amount of wealth to be generous. He would often cite this Andrew Carnegie’s saying: “The man who dies rich, dies disgraced.”
"A good businessman has to find the time to take care of being involved with his family and charity; it gives him balance. If you're lucky, you have the obligation to put a lot back into the pot."
— Sol Price
As such, Price was always eager to provide pro-bono legal services for the local community in his early law career. In terms of business, Price was always open to share information with others, even if they would become his competitors. In fact, Price believed that competition was essential as it would give the consumer a better deal and it would sort out the strong operators from the weak ones.
For example, Sam Walton, the founder of Wal-Mart explains that he learned a lot from Sol Price when he started FedMart. Walton once said, “I guess I've stolen—I actually prefer the word “borrowed"—as many ideas from Sol Price as from anybody else in the business.... I really liked Sol's FedMart name so I latched right on to Wal-Mart.”
Furthermore, in 1982, Walton called Sol Price in order to come to take a look at Price Club so that he could learn as much as he could concerning the warehouse club business. Once again, Sol Price was very open and generous with information. Not long after, Walton opened his first Sam’s Club.
Another good example of Sol Price’s generosity is the case of The Home Depot. Price took Bernie Marcus on a tour of Price Club and advised him to open his own home improvement business using the knowledge he learned from Handy Dan. Marcus took his advice and created with his partner Arthur Blank the first Home Depot by mixing his experience in traditional hardware business with Price Club’s warehouse format.
It is fair to say that Sol’s creative mind changed the retailing business forever. First, with his work at FedMart, where his retail format was followed by Walmart, Kmart and Target. As for the Price Club, the warehouse club format influenced the creation of Costco and Sam’s Club.
"We owe Costco's legacy to the retail concept that Sol pioneered with FedMart and Price Club, as do our competitors in the industry and big-box retailing in general."
— Jim Sinegal
But more importantly, Sol Price was humble and was never seeking publicity or recognition. He tried to maintain a low profile in everything he did, including his charity work. As a matter of fact, his name was usually never attached to the gifts he made. For Price, his existential sense of the meaning of life was defined by “the idea that he always had to be thinking and doing, functioning at the highest performance level to find the right answers, whether in business, in making someone's life better, or in improving society.”
Beyond the Book
Read "Reciprocity: Getting What You Give" by Farnam Street