This video is sponsored by Omaze. Costco is one of the largest retailers in the world — worth an estimated $137 billion. It's been reported that members could find better deals at Costco than on Amazon — 80% of the time — and that its Kirkland products can be compared to high-quality brands as opposed to regular ones. Building such an empire that grew to having 55 million members in 11 countries was no easy feat. It all started with a business lawyer-turned-retail genius and his protégée — a grocery bagger earning $1.25 an hour — and would have crumbled if it wasn’t for a plane being forced into an emergency landing after being struck by lightning. Before we get into the next part of the story, our team would like to quickly thank our sponsor, Omaze, a fundraising company that gives the chance to win life-changing prizes while also empowering world-changing nonprofits. Through Omaze, you could be among the first to own a Tesla Model S Plaid, the fastest and most advanced production car ever made with a nearly 400-mile range and a 1,020-hp electric engine. The Tesla Model S Plaid also has an acceleration of 0-60 in 1.9 seconds, top speed of 200 mph, and comes with these special features: 17” cinematic display, new yoke-style steering wheel, 21” wheels, panoramic glass roof, in-car gaming from any seat, 960-watt audio system with active noise canceling, and more. Plus, taxes and shipping are included for US winners. By entering, you’ll be supporting REVERB: a charity that partners with musicians, festivals and venues to reduce the environmental impact of concerts. Their work makes a real, positive difference for the environment, including eliminating over 3 million single-use plastic water bottles at concerts through providing free reusable bottles and water refill stations. To potentially win a Tesla Model S Plaid and support REVERB, a great cause, go to omaze.com/hook In 1916, Sol Price was born in the Bronx, New York, to Jewish-Russian immigrants, Bella and Samuel Price. Both parents were garment workers and helped to organize a union before owning a clothing factory in Manhattan. Later, the family moved to San Diego since Samuel contracted tuberculosis, and his doctor advised him to move somewhere warm. There, Sol attended San Diego High School and then enrolled in the University of Southern California to pursue his bachelor’s in philosophy and a law degree. During Sol’s first year in law school, his parents divorced. But in spite of the news, Sol managed to remain focused on his studies and became one of the top students in his class. After graduating, he worked as an attorney for the city of Oildale, and then for the office of Weinberger and Miller — where he was given the opportunity to represent small business owners. Over time, he discovered a newfound passion. “I was very involved not only with their legal problems but their overall business as well. I handled bankruptcies, real estate deals, partnerships, divorces, and estates. 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 began to accumulate the knowledge and interest in business.” Eventually, Sol became a business owner himself by opening a law firm with a group of attorneys. He also began helping his mother-in-law with her business interests after his father-in-law passed away. One business problem his mother-in-law faced was what she should do with a property that wasn’t producing any income. Sol convinced her to trade the property for a warehouse building and gave his word that he would help her find a tenant. Shortly after, Sol’s client, Mandell Weiss, invited him to Los Angeles to visit one of his retail and wholesale businesses, Four Star Jewelers. During his trip, Sol discovered one of Mandell’s biggest wholesale buyers, Fedco: a non-profit that operated a chain of stores that offered products at near wholesale prices to members. The concept had come together when the Second World War ended and federal government employees were slapped with wage freezes. As a result, 800 postal workers got together and chipped in $2 to open their own store. When enough orders for a product were made, members would purchase the product in bulk from a wholesaler — allowing them to save a significant amount of money. Within five years, Fedco had grown to 12 locations by loosening its membership requirements and only charged a one-time fee of $2. Its products and services expanded to include groceries, clothes, shoes, books, auto supplies, a garden center, an optical counter, and a snack shop. Impressed by Fedco’s concept and growth, Sol asked the non-profit if they’d be interested in opening another location in his mother-in-law’s warehouse — instead of the typical store. Thousands of federal employees in San Diego were already members and would drive up to Los Angeles once a week. But to Sol’s surprise, Fedco turned down his offer. When he asked a second time, Fedco made it clear that they wanted nothing to do with him. Sol was crushed. He was convinced that it was a missed opportunity, especially since all the government department heads in the area confirmed they’d be interested. He couldn’t help but think about it day and night, often finding himself unable to sleep. During one such evening, Sol pulled out a legal pad. He started crunching numbers and writing down his thoughts — convincing himself that his idea would work. At that moment, Sol decided to take over the warehouse himself and launch a business that mirrored Fedco’s concept. Soon after, he managed to raise $50,000 from a group of investors to fund his idea. He called it FedMart. One year later, FedMart launched — offering memberships to federal employees and veterans for a one-time fee of $2. Since FedMart was a business instead of a non-profit that began with hundreds of members like Fedco, Sol established a philosophy that focused on building long-term relationships with members built on loyalty and trust. FedMart strived to offer members the lowest prices for high-quality products through keeping overhead to a minimum, such as no paid advertising, limited inventory, and not accepting credit cards. FedMart also gave members full refunds with no questions asked. At the time, FedMart’s practices were unheard of since fair-trade laws gave manufacturers the right to set and enforce minimum prices for their products. As a result, retailers set high prices when selling their products to cover costs associated with advertising, inventory, credit card fees, and delivery. When FedMart first opened, it offered mattresses, clothing, luggage, furniture, hardware, housewares, sporting goods, appliances, cigarettes, and liquor. But after just a few months, it expanded its products and services to include packaged food, in-house brands, and a full-service gas station. By the end of the year, FedMart brought in $4.5 million, three times more than the number that Sol and his investors had projected. In the coming years, FedMart became even more successful and seemingly unstoppable — up until one of the world’s richest men stepped in and wielded his power against Sol. School was never a priority for 17-year-old Jim Sinegal. He was shy, unfocused and struggled to get good grades. By the time he was close to graduating high school, the state university system had little faith in him. If he wanted to pursue post-secondary, community college was the path he was advised to take. Following the system’s advice, Jim enrolled in San Diego Junior College to study art. He enjoyed community college so much that he decided to stay longer than planned and obtain an associate of arts degree before transferring to San Diego State University. During his second year in community college, he worked odd jobs to pay for his tuition — waking up at 4 o’clock in the morning to pick up clothing off of Navy ships in San Diego’s Harbor. One day, Jim received an unexpected call from a friend who worked for FedMart. The store needed help putting away an unusual load of mattresses and were offering $1.25 per hour to anyone who could help. Jim decided to take the opportunity and headed over immediately. What was supposed to be a one-off gig turned into a new job of unloading mattresses and then bagging groceries. “It wasn’t that great a job. But it was exciting. Sol was a major part of that excitement.” At the time, Jim was thinking of pursuing law school after obtaining his bachelor of arts degree. But after working with Sol for several months, he had second thoughts. He grew an interest in business and aspired to be just like Sol, whose innovative ideas created a difference in San Diego’s community. For example, when FedMart opened an in-store pharmacy, members could buy prescription medicines at lower prices than traditional pharmacies. Pharmacists were outraged that FedMart had disrupted their business and even made threats. But over time, they began to lower their prices too. Eventually, FedMart expanded to 13 locations and extended memberships to the public for $2 annually. Its success had such an impact in retail that it led to the launch of new stores that offered discount products to the public: Walmart, Kmart, and Target. Sam Walton, the founder of Walmart, openly admitted to using many of Sol’s ideas and even thanked Sol for inspiring him to start Walmart. Twelve years later, FedMart had expanded to forty-five locations and brought in $300 million a year. Meanwhile, its fiercest competitor, Walmart, had one-hundred-and-four locations and brought in $236 million. FedMart’s continued success above competitors caught the attention of German retail mogul, Hugo Mann, who proposed a merger with his supermarket chain, Wertkauf. Sol accepted Hugo’s offer in exchange for an over $20 million investment, which allowed Hugo to own 66% of FedMart and Sol to remain as president and CEO. Soon after, Sol realized he had made a grave mistake. During the first board meeting after the merger, Hugo announced various changes that Sol had never agreed to. The two quarrelled so bitterly that Hugo fired Sol at their next meeting and locked him out of his own office. By then, Hugo had purchased more shares of FedMart, which gave him a controlling interest in the company and left Sol helpless. Sol had no choice but to sue Hugo to collect his salary and access his own files. At that point, Jim had worked his way up to becoming FedMart’s executive VP of merchandising. And while it took years to earn his position, he left FedMart with Sol. Fortunately, Sol and his son, Robert, were quick to come up with a new business idea that gave Jim a new career opportunity. Through chatting with small business owners around San Diego, Sol and Robert discovered that they all faced a common problem: having to turn to several wholesalers to buy supplies and merchandise — often on unfavorable terms. Recognizing the need for a solution, Sol and Robert decided to launch a new business similar to FedMart and cater to small business owners instead of individuals. They called it Price Club. One year later, Price Club launched — offering memberships to small business owners for $25 annually. Similar to FedMart, Price Club strived to offer members the lowest prices for high-quality products through keeping overhead to a minimum and provided full refunds with no questions asked. Price Club also aimed to ensure employees were happy by offering them generous wages and benefits. When Price Club first opened, it offered the same variety of products as FedMart and others that catered to small businesses, such as electronics and office stationery. Unfortunately, Sol and Robert’s idea was not as lucrative as they had anticipated. During Price Club’s first year, it lost $750,000 — prompting Sol and Robert to extend memberships to the public. Three years later, new memberships made up for the losses, and Price Club expanded to two locations. As Price Club began to succeed, FedMart fell behind. Hugo undertook a massive expansion program that led to many financial difficulties, and ultimately, going out of business — making Price Club became the only warehouse club left in America. But later that year, Walmart launched a direct competitor called Sam’s Club. Unbeknownst to Sol, Sam’s Club would become the least of his worries. While traveling in Europe, a lawyer named Jeff Brotman discovered what the French call hypermarkets: a combination of supermarket and department stores that sold discount products. By then, the U.S. had ended its fair-trade laws that gave manufacturers the right to set and enforce minimum prices for their products. As a result, retailers didn’t need to resort to setting high prices when selling their products to cover costs associated with advertising, inventory, credit card fees, and delivery. Still, many retailers decided to keep prices high and take in a bigger profit. Knowing this, Jeff told his family about hypermarkets and commented that they would do well in the U.S. His father, Bernie, the owner of a retail chain called Seattle Knitting Mills, suggested that he pursue the idea. Jeff was hesitant, but after much convincing, he decided to take the risk. Afterward, he called his retail contacts to ask who could help him. One name kept coming up: Price Club’s executive VP of merchandising, Jim Sinegal. After cold-calling Jim, Jeff flew from Seattle to San Diego to pitch his idea of opening a hypermarket in the U.S. The two immediately hit it off and began making plans to launch what was eventually named Costco. Similar to Price Club, Costco would be built in a warehouse, extend memberships to the public, and strive to offer the lowest prices for high-quality products. But unlike its competitors, Costco would charge $35 annually, and in return, it would offer all kinds of brand-name electronics, food, books, clothing, housewares, and more. When Sol received the news, he was hurt but didn’t stop Jim from venturing on his own. To fund their plans for Costco, Jim and Jeff used their own money and credit. But it wasn’t long until banks canceled their cards and hindered their plans. Fortunately, not long after, a near-fatal accident led to an unexpected offer. While Jeff was on a flight to Seattle, the plane was struck by lightning and had to make an emergency landing in San Francisco. Having to wait for the next flight for four hours, Jeff started chatting with a fellow passenger and even shared his plans for Costco. The man was intrigued and began to offer Jeff advice — and later financing. That man was Fred Paulsell, a venture capitalist who was an early investor in Starbucks. With his backing, Jim and Jeff managed to raise $7.5 million to fund their plans for Costco. One year later, Costco launched in Seattle. Jim and Jeff had decided to open in the Northwest since it was one of the least competitive markets in the U.S. Still, business was slow and manufacturers refused to sell their products to them. Sony executives even barked that they would never work with them. Convinced that Costco would eventually succeed, Jeff, Jim, and their wives worked constantly — forcing them to be away from their children. Fortunately, after a few weeks, business did pick up and quickly grew — hitting $1.4 million in sales under 10 weeks. That same year, Costco expanded to three locations. And two years later, it went public and hit $1 billion in sales. After a decade, warehouse clubs had proliferated, and the industry was in deep trouble. Costco began to fear a takeover from their fiercest competitor, Walmart’s Sam’s Club, and they weren't the only ones. Price Club felt the same way. Eventually, Jim, Jeff, Sol, and Robert decided to merge Costco and Price Club to avoid such an outcome. That same year, business skyrocketed and hit $15.5 billion in sales. Two years later, Costco launched a private brand — named after the city that once hosted its corporate headquarters: Kirkland. Jim had come up with the idea after traveling to the UK and discovering that private brands dominated 50% of the food business. Costco was also able to fend off competition from Walmart's Sam's Club and other warehouse clubs since Kirkland grew a reputation for its quality. Many members insist that Kirkland's wines and liquors taste better than high-end brands, and taste testers have given its French vodka higher scores than Grey Goose — which is known as the best-tasting vodka in the world. Along with its Kirkland products, Costco ensures savings are passed along to members by keeping suppliers in check. And there are no exceptions for any company. Once, Jim discovered that Starbucks did not lower its prices for products supplied to Costco when there was a drop in coffee bean prices. And while Jim was friends with Starbucks’ then-CEO, Howard Schultz, Jim insisted that Starbucks adjust their prices. “Who do you think you are? The price police?” Howard questioned. Jim simply responded that he was. In the end, Starbucks relented. In spite of Costco's influence, success and rising share price, Wall Street analysts began to criticize the company and even insisted business would go downhill — unless they raised their prices, paid their employees less, or skimped on benefits. At the time, Costco marked up brand-name products by no more than 14%. Meanwhile, supermarkets generally marked up products by 25%, and department stores by 50% or more. In addition, Costco's average employee pay was 42% higher when compared to competitors, and its health plan was more generous than most retailers. "They could probably get more money for a lot of items they sell,” an analyst insisted. “It’s better to be an employee or a customer than a shareholder,” another analyst complained. Amid the pressure, Jim, Jeff, Sol, and Robert refused to give in to demands and continued business as usual. “On Wall Street, they're in the business of making money between now and next Thursday. I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now." Today, Costco has grown to offer more services, including travel, optical, car services, and a food court — which offers a famously cheap hot dog combo. Costco now has 55 million members globally and earns most of its profits from membership fees — rather than the products it sells. But that doesn’t mean members do not value its Kirkland products. Kirkland accounts for nearly one-third of Costco sales and is preferred by many above legacy brands, such as Kraft Heinz. Kirkland was even said to be a dangerous retail competitor by Warren Buffet, one of the most successful investors of all time. And while many retailers have focused on their online presence, Costco remains unaffected by its biggest online competitor, Amazon. In fact, CNBC reported that members could find better deals at Costco than on Amazon — 80% of the time. Currently, Costco is one of the largest retailers in the world and is worth an estimated $137 billion. In an interview, Jim shared two pieces of advice that he would give to students who are thinking about starting a business: “The first is if you get involved in something that you’re not passionate about, run. Don’t walk to the fastest exit you can find. If you’re not happy and you’re not giving 100%, you’re not doing yourself any good and you’re certainly not doing the organization any good. The second thing is to find a mentor. Find somebody who you really admire. All of us have had somebody who we truly admire — somebody who we’ve always thought had the right answer and handled every situation right like Sol Price. But, guys like Sol aren’t a dime a dozen. You’re not going to find them on every street corner. Don’t just hope it will happen. Seek it out and embrace it.” This is the story of how a business lawyer-turned-retail genius and his protegee redefined the American retail experience. For more inspiring stories and advice from today’s most successful leaders, don’t forget to subscribe to our channel!
