Costco is the king of warehouse stores. Not only is the members-only discounter the third largest retailer in the country, but it’s also a leader abroad with 268 international stores. In other words, everything about Costco — from its bulk products to its stock price — is massive. But it didn’t start that way.
Sol Price Founds FedMart
Although Costco lists James Sinegal and Jeffrey Brotman as its founders, Costco’s history wouldn’t be complete without Sol Price, a lawyer turned businessman who started one of the first successful discount warehouses, FedMart, in 1954. The members-only chain, which Price opened in a converted airplane hangar in San Diego, sold to government employees and their families. That business model was a success — so much so that a German retailer bought the company.
But the company’s new owners “ousted” Price from the operation in 1975, according to the Los Angeles Times. Rather than returning to law, Price built another warehouse chain from the ground up: Price Club, a Costco precursor.
Price Club and Costco’s Meteoric Rise
When Price Club opened in 1976, it lost $750,000 in its first year, or around $4 million adjusted for inflation. But just a few years later, Price and his son grew the chain's profits and expanded its reach.
The warehouse store was unique since it was limited to small business owners and employees in finance, the government, and utilities. That meant that Price Club could advertise through credit unions, bringing advertising costs down to “practically nil,” Price told the LA Times in 1982. Its members were also loyal and dependable.
“Employees from utilities, banks, and government agencies have usually been screened by their employers for reliability and are less likely to be laid off in a recession and more likely to remain in a community for longer periods,” the LA Times reported of Price Club’s customer base, which the retailer later expanded to include the general public.
Like Costco warehouses today, Price’s stores were described as “vast, concrete-floored” warehouses filled with bulk goods: “cigarettes, auto parts, alcohol, clothing, Robert Ludlum paperbacks, Rolex Oyster watches, 10-pound bags of rice, and gallon jars of mayonnaise.” And all of it was pretty cheap.
“The price is up here, and the question is, Can we get under it? Well, we could, because conventional merchandising was set up with very high margins to cover advertising, credit cards, the enormous selection, the delivery costs,” Price told Fortune in 2003. “We focused on bare bones: limited hours, limited selection, fast turnover.”
At the same time that Price Club was thriving with its spartan business model, James Sinegal and Jeffrey Brotman opened the first Costco in Seattle in 1983, and its rise was similarly meteoric. Costco became the first company to grow its sales to $3 billion in six years.
PriceCostco Is Born
The two warehouse superpowers joined forces eight years later in 1993, merging to create the nation's largest warehouse club in a more than $2 billion stock swap. That year, the combined 206 stores generated $16 billion in sales, competing with the newly formed merger’s biggest competitor: Sam’s Club.
“It’s truly a blockbuster event in retailing,” Michael Exstein, a retailing analyst, told the LA Times in 1993. “The merger would give the company the resources and the presence to compete with Sam’s Clubs, which saves these companies from further decline or failure. And it creates a more viable player on the international retailing scene.”
Costco’s Winning Formula
After the PriceCostco merger, the mammoth retailer celebrated milestone after milestone, expanding to Asia in 1994, introducing the Kirkland Signature private label in 1995, and changing its name to Costco in 1997.
But a lot of things haven’t changed since the days of Price Club. For one, Costco has maintained its barebones business ethos with its drab warehouses, lack of advertising, and commitment to low prices — all of which make the retailer stand out.
Another aspect of Costco’s winning formula is its investment in employees; today, employees make at least $17 an hour, plus benefits. Investopedia notes that the average Costco employee “generates nearly triple the revenue produced by the average Walmart and Target employee,” in part because “happy employees” make excellent workers.
Today, Costco is among the most successful retailers in the world, with a $200 billion market capitalization. The Motley Fool has even called the company “recession-proof” — and for good reason. Over the past five years, Costco’s stock has increased by nearly 200%, and the wholesaler also boasts consistent sales growth.
“I always felt department stores and conventional retailers were doomed,” Price told Fortune in 2003. “They lived and died trying to take advantage of customers, and they were inefficient. The more I studied it, the more it seemed the cost of getting goods to consumers was way too high. I'm surprised the department store has survived this long.”
The wholesaler operates 839 membership warehouses, with plans to open nine more stores in 2022, including its first Swedish location in Stockholm.
“When we started out, we thought we would be lucky if we opened 20 or 30 of these places and grow the business,” Costco’s co-founder and former CEO said in 2008. “A lot of good things happened to us.”