Steady growth for PriceSmart
Can U.S. discount retailer PriceSmart continue to grow? Observers believe that as long as PriceS mart adheres to its basic principles, long-term success is virtually assured.
Elsevier Food International, Vol. 5, Number 4, November 2002
Len Lewis
In 1976, Sol Price foreve , changed the face of discount store retailing in the U.S. when he launched the Price Club. A quarter of a century later, PriceSmart is successfully cloning the same membership warehouse concept in Central America, the Caribbean and Asia for a burgeoning population of middle- and upper-income consumers hungry for U.S. goods. However, faced with economic and political instability in these regions, currency fluctuations, long distance management, a rising tide of retail competition and the occasional typhoon, can PriceSmart continue to grow?
For the most part, the answer is yes, according to industry observers, who are confident that the chain is not overexpanding in terms of store size, number of units or geography, making it easier for U.S.-based management to control the operation. Its highly effective model has achieved a significant market share in most areas and, so far this year, sales are on track and the bottom line is back in the black after two years of loss. Overall, some observers believe that as long as PriceSmart adheres to the basic principles developed by the Price family, long-term success is virtually assured. The big difference is that PriceSmart does not have the advantage of relatively high shopper incomes as Price Club did in the U.S. The company's mission is to provide value-priced merchandise to so-called Third World countries. Some members in countries where the per capita income is $2,000 are spending one per cent of their annual income on membership costs, which run from $25 to $35, according to Price Smart officials. As such, the company focuses on "entry-level" rather than on high-end goods like 36-inch television sets and bicycles, which are part of the mix at B.J.'s Costco or Sam's Club.
Although Price Smart separated itself from PriceCostco several years ago, the two remain inexorably linked. For one thing, Robert Price, son of the founder, remains chairman of PriceSmart. Additionally, the company is sticking pretty close to its roots in generating high volumes on low or relatively low margins.
Past achievements
The company's history began in 1994 with the creation of Price Enterprises, which held non-club commercial real estate and was a wholly owned subsidiary of PriceCostco. When Price Enterprises was sectioned off in December of that year, it retained Price Global Trading, which had the rights to develop membership warehouse clubs in regions such as Australia, Central America, Asia, Bermuda and the Caribbean (with the exception of Puerto Rico), according to a detailed history of the company by Warehouse Club Focus, a newsletter and website devoted to reporting on the club business.
Price Enterprises also retained a 25.5 per cent interest in the PriceCostco Mexican operation. This was sold back to PriceCostco in 1995. However, the company is now expanding on its own in and around Mexico City in a joint venture with Grupo Gigante, one of Mexico's largest retailers.
In 1994, Price Enterprises established a company called Price Quest, which was involved primarily in export sales to Hong Kong and Mexico.
A year later, revenues from the export operations enabled Price Quest to open its first two clubs in Saipan, Micronesia and Guam in a joint venture with Saipan-based Joeten Enterprises.
In 1996, the company opened its first store in Panama, adding a second location the following year, at which time it licensed the first club in Beijing, China. It was also in 1997 that Price Enterprises and Price Quest became separately traded public companies. The company's name was changed to PriceSmart and, in the same year, Gilbert Partida, who had been a director of the company, took over as president and CEO.
The company today
As the name implies, PriceSmart's success is largely based on deep, across-the board discounts on a wide variety of food and general merchandise products. However, PriceSmart has also garnered the number one or two share in each of its markets with a growing list of services ranging from automotive and insurance to pharmacies and optical centres in some stores, services which also parallel developments at PriceCostco.
At present, PriceSmart operates 26 warehouse clubs in a dozen or so countries. This includes Panama, Costa Rica, Dominican Republic, Guatemala, EI Salvador, Honduras, Trinidad, Aruba, Barbados, U.S, Virgin Islands, Guam and the Philippines. Additionally, the company now licenses ten warehouses in China and one in Saipan, Micronesia. The company has nearly 600,000 membership accounts, which represent about one million cardholders worldwide.
As noted, the company has entered into a joint venture with Grupo Gigante to open three stores in Celaya, Irapuato and Queretaro, middle-income areas north of Mexico City. One additional unit is proposed for Mexico City. Two of the proposed units are slated to open before Christmas and will be the first warehouse club operation in the region. Meanwhile, Angel Losada Moreno, vice chairman of Grupo Gigante has joined PriceSmarts board of directors, a strong indication of significant growth to come, according to industry observers.
Most of the regions served by PriceSmart are not particularly stable - economically or politically - and growth in per capita income can be relatively flat. However, population density makes these regions ripe for warehouse club expansion and PriceSmart's 40,000 to 60,000 square foot format. Overall, expansion has been slow and steady. The company opened six stores in 2001 and four additional units have opened their doors this year. This year's store openings include the company's first unit in Guam and its third store in metropolitan Manila. A fourth store in the Philippines along with the first two in Mexico and the first store in Jamaica are expected to open sometime later in 2002.
Although two other stores were deferred to 2003, PriceSmart executives are confident that the company will reach its 2002 sales goal of $650 million, a healthy 12.5 per cent increase over 2001. Through the first ten months of the current fiscal year, sales are up 35 per cent to $519.9 million. Despite weaknesses in some emerging market economies, the results are on track for the year, according to PriceSmart officials.
Looking forward with confidence
Underscoring the company's continued confidence that it will reach its numbers this year, Gil Partida, president and chief executive officer of PriceSmart noted: "Our success in emerging markets from Latin America, to the Caribbean to the Philippines even in difficult economic times has validated the portability of our business model."
A larger issue is the company's proposed goal of reaching $1 billion in sales by 2003. "1 think it's aggressive without knowing how many more locations there will be," says Michael Clayman, president of Warehouse Club Focus, Foxboro, Mass. "We're talking about a 40 to 50 per cent growth or $350 million over 2002. You're not going to get that on comps, which have not been in the double-digits consistently. It has to come from new locations - but that's a lot of locations," says Clayman.
"I think they've been helped by a relatively moderate growth rate. Remember, they're not opening stores in the U.S. When they open in the Philippines or Central America, they have logistical issues to overcome. Rapid expansion would put too much of a strain on them. But their plans are more moderate than those of other retailers," says Clayman .
If history is any indication, PriceSmart's growth will continue to be based on strategic alliances and joint ventures as it did in the past with PSC, S.A., a Panamanian company, and more recently with Grupo Gigante in Mexico. However, the company also has a history of either buying out their alliance partner or purchasing a majority interest for stock and cash as it did in Panama, EI Salvador and Trinidad, and more recently in Aruba and Barbados. The latter is one of PriceSmart's highest volume stores.
As to future expansion plans, Clayman notes:
"They've been as aggressive in Asia as they have in Central America and I could imagine them going into South America at some point. But I think their move into Mexico indicates that this could
|
PriceSmart sores are located primarily in urban areas that give them access to denser polulation. |
"I don't think larger locales are the direction they want to head towards," says Clayman. The markets they serve are not like club locations in the U.S. where you can have 250,000 people within a 10 to 15 mile radius.
"Dropping a 125,000-square-foot unit in the Philippines would be overkill," he adds. PriceSmart stores are located primarily in urban areas that give them access to denser populations. "But, if the market requires more square footage, they are inclined to plop a second unit down nearby and not worry about cannibalisation," Clayman says. Conversely, one source notes that the chain is likely to steer clear of smaller venues such as the Cayman Islands, where restrictions on ownership have also kept Kmart and Wal-Mart out of the retail scene."
Merchandising strategy
Basically, PriceSmart's merchandising strategy works well against local retailers and against Cost-If-Less, which operates about 12 warehouse club stores on remote islands like American Samoa, Fiji, Guam and the US Virgin Islands. Although the product mix is reportedly similar to PriceSmart, Cost-U-Less stores are smaller - averaging around 30,000 square feet - and do not charge membership fees.
To a degree, PriceSmart is also competing against Wal-Mart because of its gross margin structure, which runs between 14 and 16 per cent, according to Clayman. In 2000, gross margins averaged 12.3 per cent. The gain was due to increased purchasing power hat significantly lowered the cost of goods and from stronger sales of higher-margin non-food items. In merchandising, the focus is primarily on national brands. However, the chain is also developing a strong private label program that is giving other retailers a run for their money. Additionally, PriceSmart is generally considered an EDLP player in its markets. But it is also doing an outstanding job in higher margin perishables, including fresh produce, frozen foods and fresh meat.
"They have really raised the bar for other retailers in the Caribbean and forced them to be better," according to one competitor in the region. "The focus on high-quality fresh meat and produce is pretty new to the Caribbean. Everyone had frozen meat. Those that carried fresh primarily had a low quality product. Since PriceSmart came in, most retailers have switched over to fresh meat and upgraded produce and every other category," he says.
.jpg)
