PriceSmart Inc.

Source: Retail Digital

Date :06/08/2007 14:17:32

PriceSmart brings the American membership warehouse club concept to Central America and the Caribbean

Written and produced by Hailey Lynne McKeefry & Nick Ledue

Visitors to America get to experience many things not found in other parts of the world, from apple pie to baseball.

PriceSmart Inc., however, has brought another unique American phenomenon — the membership warehouse club — to hundreds of thousands of shoppers in Central America and the Caribbean. The company is betting on a winning combination of low prices, unique products, smart logistics and efficient operations to succeed.

“Our clubs are less than half the size of a typical American warehouse club,” says Bill Naylon, chief operating officer and executive vice president of PriceSmart. “However, we keep the same principals of warehouse clubs — an annual membership fee in order to shop, a warehouse facility instead of a store, a limited number of items, unique and higher quality products, [being] a supplier to small businesses, and low prices.”

From the Beginning

PriceSmart has its origins in the same family that developed and started the membership warehouse club concept in America in 1976, says Naylon.

“The whole concept started 31 years ago in San Diego by the Price family with the opening of the first Price Club. Today, they are the major shareholders in our company,” he adds. “Robert Price, the co-founder of Price Club, is our chairman and CEO.”

The San Diego, Calif.-based company has opened 15 clubs in Central America and eight clubs in the Caribbean since starting in 1995. Their roster of locations includes four clubs each in Costa Rica and Panama, two each in the Dominican Republic, El Salvador, Guatemala, Honduras and Trinidad/Tobago and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands.

In scouting out potential locations, PriceSmart has worked to find the right combination of population and income.

“We are in all the capital cities in Central America,” says Naylon. “We need a certain combination of population and income base to support a membership warehouse club. We look for areas where there is demand for the higher quality products that we are bringing in.”

Later this year, both Trinidad/Tobago and Guatemala will open their third PriceSmart locations.

Back to Basics

In many ways, PriceSmart has taken its basic premise from its American forerunners.

“Many people in the countries we’re in come to the U.S. to vacation, to shop, or they have relatives here, so they are familiar with the concept of club shopping,” says Naylon. “The comment we frequently get is that ‘you are bringing a U.S. concept to us.’”

The company’s model relies on selling high volumes at low prices and attracting an increasing number of members to allow it to remain both profitable and competitive.

“We strive to deliver good value to our members, and our high membership retention rate indicates that our members are seeing the value in their PriceSmart membership,” says Naylon. “We try to be a good place to work and pay well to reduce turnover and attract the best employees.”

So far, their efforts have been successful. In 2006, PriceSmart had approximately 469,000 membership accounts. Today that number has climbed to over half a million, who each pay an average annual fee of $25.

Meanwhile, the company’s overall revenues jumped to $719.5 million in fiscal 2006 from $605 million the year before.

Like many warehouse clubs, food and sundries make up the lion’s share of sales — in 2006, these items accounted for 74 percent of PriceSmart’s sales. However the hard lines and soft lines categories (such as major appliances, electronics, business machines, hardware, sporting goods, home furnishings and etc., which account for 26 percent of sales) are what enable PriceSmart to significantly distinguish itself with items that are hard to find or unique in the market it serves.

“We are bringing American made products and American brands into these markets,” says Naylon. “We look for unique products that otherwise wouldn’t be found there or, if members happen to find them, they are at a small specialty stores where the prices are very high.”

Of course, the company has had to tweak its model to accommodate the realities in the markets that it has entered. For example, an average PriceSmart location is 48,000 square feet, while the average Costco spreads itself across 139,000 square feet.

Based on the important industry metric of sales per square foot, PriceSmart distinguishes itself with an average of $616, making it the second most lucrative in the club industry, second only to Costco.

The company continues to work to differentiate itself from the competition with its merchandising strategy and commitment to value.

Last year, PriceSmart stocked an average of only 1,800 items per location, compared to the tens of thousands of items found in typical supermarkets and super centers, and in fiscal year 2006 the company’s membership levels increased 16 percent.

Getting Product There

Strong logistics are a key part of ensuring that its warehouse clubs receive the right merchandise in a timely manner. A San Diego, Calif.-based buying office is responsible for sourcing most U.S. and Asia sourced products, says Naylon.

Products are delivered to one of four shipping centers (located in Miami, Fla.; Carmichael, Calif.; Panama and Mexico) and delivered directly to the different warehouse clubs on a weekly basis.

“We don’t have any warehouses in our countries, so the products go directly from our distribution centers to the receiving docks of the warehouse clubs,” says Naylon.

These shipping locations were chosen strategically. The Panama distribution center, for example, operates in a free-trade zone so that it is free of customs duties. This facility is the primary recipient of goods imported from Asia, including furniture, high-end televisions, lawn and garden products, and other seasonal items.

Meanwhile, most U.S. vendors ship merchandise through PriceSmart’s distribu-tion center in Miami. Some high-volume items, such as Pirelli tires and paper products, are delivered directly to club locations without going through one of the hubs.

Picking the Right Products

Although logistics are a key driver in keeping prices down, PriceSmart’s ability to provide items that shoppers can’t find elsewhere are what helps to bring customers through the doors. These unique items help create a “treasure hunt” mentality amongst customers, who know that a distinctive piece of merchandise may or may not be available the next time they come to the store to shop, says Naylon.

“It creates a sense of urgency among members, since they know that if they see a unique item it may not be back again,” he adds.

Typically, the warehouses are stocked with goods that are split evenly between U.S.-sourced merchandise and locally sourced items. On the grocery and staples side of the equation, the company makes a commitment to have products on hand daily and often sources them locally. One challenge the company has faced is working with local manufacturers unaccustomed to the warehouse concept of larger packages and lower prices.

“A good portion of our sales on grocery and fresh foods items are from products made locally in these countries,” says Naylon. “We go into these countries and work with companies that typically have only served the supermarket industry and have only small pack sizes. We have been able to grow our sales volume with these suppliers and now they are producing items and pack sizes as close as possible to what’s found at the U.S. clubs. We teach them about our philosophy of high volume, limited selection and low margin.”

Staying in the Game

Going forward, PriceSmart must continue to differentiate itself from its competitors with its merchandise offerings and pricing structure in order to continue to grow its membership base.

“In the end, this is really a business about how to reduce operating expenses in order to continue to be able to sell at low prices,” says Naylon, adding that rising oil prices (which, of course raise transportation expenses, and also affect electricity prices) is also a concern. “We’ll continue to try to figure out ways to reduce operating expenses.”

Further, the company will continue to use incentives such as co-branded credit cards that provide cash back, and private label products that offer high quality at an even greater discount than their branded counterparts, to woo people to become members.

“We have to continue to find ways to attract more members into our clubs, which equate to higher sales growth,” says Naylon. “We do very little advertising; instead we rely on our members spreading the word about the benefits of shopping at PriceSmart.”

These strategies, along with their high volume, low-margin, low cost approach to merchandising promises to win customers in Central America and the Caribbean to the American ideal of warehouse membership clubs.