this is Jim Sagal founder of Costco writing in the forward of this book about four years ago shortly before his death and a few days after we had lunched together I received a letter from Soul price dear Jim it's always nice seeing you and experiencing Your Enthusiasm knowledge and commitment to your values you've been very generous about giving me some credit for influencing you I suspect that's true but you would have been a great achiever under any circumstance I've related only the first paragraph of this letter because soul went on to say some very complimentary things that I will keep personal upon reading the letter I turned to my assistant and said I've been waiting 50 years for this letter it was well known that compliments from Soul came around about as frequently as Haley's comment after digesting the letter i reflected on the fact that here I was in my 70s and still seeking approval from this guy what was it about the man that engendered so much admiration and respect not just for me but from thousands of us who worked with soul over the years certainly there was his intelligence and creativity but that's not the complete answer because there are millions of bright people in the world and only a handful make a lasting impact there was so much more to Soul's leadership qualities that touched all of us and made everyone confident that we would persevere regardless of the obstacles I started working at fedmart that's a company that's soul founded I started working at fedmart in 1954 while still in college a path that was followed by many of Costco's current Executives so gave us incredible opportunities to learn the business teaching us the skills and core principles we applied throughout our business careers and then later when we launched Costco in 1983 Soul's teachings had a great impact on our business ethics our core values and of course our merchandising philosophy he believed in developing strong operating efficiencies and he continually emphasized passing on savings to the customers in 1993 our two companies Price Club and Costco merged to form the Costco that we know today we owe our Legacy to the retail concept that Soul pioneered with fedmart and Price Club as do all of our competitors in the industry and bigbox retailers in general Sam Walton who started Walmart in 1962 8 years after fedmart was founded later admitted that he had borrowed many of Soul's Innovations Soul's greatest business Legacy was the creation of the price concept that as many as a dozen existing retailers and startups attempted to clone at one point a reporter asked Soul how it felt to be the father of an industry to which he replied I should have worn a condom the fact that he instilled these Concepts in so many who are around him is in my mind his greatest Legacy and so that was Jim syal writing in the forward of the book that I'm going to talked about today which is soul price retail revolutionary and social innovator and it was written by his son Robert price so I just finished reading this book for the second time the first time I read it was several years ago so there's a few reasons I wanted to read this book again the first is that I'm unbelievably impressed with Costco as a business and then Jim Sagle as a founder and as you'll see as we go through the book uh Jim is very adamant he says you know every single thing that he ever learned in his career came from Soul price and so by rereading this book I actually see the origination and like the the formation of the idea behind Costco and another reason I want to do it is because I'm fascinated how so few people know who so price is yet I would argue that he's the most influential retailer of all time if you factor in how many people are on record saying that they took Soul's ideas and applied it to their own life and work Jim snagle of Costco obviously Sam Walton of Walmart Jeff basos of Amazon Bernie Marcus of Home Depot the founder of Trader Joe's it's pretty incredible to think about that Soul's ideas have created literally trillions of dollars of value and then finally Soul's a very unusual person this is a biography written by his son and in my opin iion the last the way his son ends the book The Last paragraph which I'll share with you at the end is the definition of winning at life so I'm going to jump right into the book most of the highlights that I have or what I want to talk you about are his ideas Soul sets like he was like really creative and he had great ideas but he thought he was a poor uh he was poor at execution and one of the reasons that he identified Jim as the person he wanted to sell Price Club to later on was the fact that he thought Jim was a world class operator and fantastic at execution which everybody obviously that's run into jym has agreed with so I just but before I get into the ideas and where he uh like his ideas for his company building philosophy I want to just touch on a few things in his early life this is something that's very common he was a misfit he just felt the the need to prove himself through achievement so soul is talking about he had a physical deformity so when you you look at pictures throughout his book the older he gets the like his one of his eyes essentially looks like it's almost permanently closed and it started drooping when he was a young man and he gave lot of like he was self-conscious about it so he says when I was 3 or four years old I had an infirmity in my left eye that caused a drooping eyelid it was something that bothered me and made me self-conscious the kids teased me a lot and consequently I was shy and compensated for this this is the most important sentence I was shy and compensated for this by being an overachiever in school even at a young age Soul was very intelligent but he also had like an aversion to being told what to do being an overachiever meant reading at an early age holding his own with adults in chess and doing well in school Without Really Trying Soul skipped to greats but he was mischievous in school this is this sentence made me think of the greatest description of an entrepreneur uh his teacher told his mom that her son was very smart but she warned that Soul could go in one of two directions a career as a gangster or someone who would do much good that sentence made me think of the greatest description I've ever heard for the mindset of an entrepreneur and it came from Avon chinard he says if you want to understand the entrepreneur study the juvenile delinquent the delinquent is saying with his actions this sucks I'm going to do my own thing thing and so that chip on the shoulder that Soul had as a young person I don't think ever left him he has this constant desire from Achievement and I would argue uh it stems back to his relationship with his father so there's this idea that you and I cover over and over again it's it may be in every single one of these books but I think the best way to describe this came from Francis for cop's biography that I covered back on episode 242 and it says you can always understand the son by the story of his father the story of the father is embedded in the son this is soul looking back and describing his father he said my father had contracted tuberculosis and the doctor advised him to move to California from the time he moved to California in 1927 until he died in 1949 my father never worked again he received his monthly Insurance disability now this is a crazy sentence that's coming next my father lived in grave danger of getting well the monthly Insurance disability payment would pay him $500 per month as long as he was disabled if you re bet the lines of a lot of things that are happening in this book it sounds like his dad could have worked and that he was kind of hustling the system so he could just hey I'd rather do nothing and get paid and hang out all day this winds up giving soul and his family a bad reputation he wind Soul winds up meeting his future wife they're W up being married I think for like 70 years in high school and his futur wife's parents didn't think Soul was good enough for their daughter because they thought Soul's dad was lazy and so I think this is another example of this chip on his shoulder that was there for his entire life my father didn't do anything except play cards and chess so they weren't wild about me this is his future in-laws and they didn't think I was good enough for their daughter so you can already see that Soul has a less than positive view of his dad and then what happens is his dad's wind up is wind up cheating on his uh his mom so there's just this a turbulent family life that is really interesting because it was solved in Soul's Life by picking a unbelievably supportive spouse and this idea of just having someone who believes in you making an unbelievable amount of difference in the life of entrepreneur is something that pops up over and over again in fact I think Stephen King has the best has the best way to describe this I'll get there in one second but this is more about his future in-laws not approving of him and his family and you'll see again he's a juvenile delinquent you'll see by his response here to make matters worse Soul's parents divorced in 1935 further convincing Helen's parents that their daughters should not continue to see him divorce in those days particularly among Jewish couples was almost unheard of Bella which is Soul's uh mother found out that Sam was in love with another woman but Soul picked a great spouse Helen having been raised in a stable home with nurturing parents provided much of that that Soul had never experienced with his own family soul is in love with Helen her parents say absolutely not you cannot uh you cannot date this guy Soul's response is okay we're going to go get married we're going to go elope soul and Helen recognizing that Helen's parents would never agree to to them marrying took matters into their own hands and eloped but before we move on let's go to this idea that having someone who believes in you makes a lot of difference uh back in episode 210 I read Stephen King's excellent autobiography obviously one of the the best written autobiographies you can ever come across because it's written by Stephen King and he says something that's fascinating like how many times do you pick up a book and at the beginning they're like hey you know I'd like to thank my spouse my husband my wife and this is what he said my wife made a crucial difference during those two years so he is describing everybody knows who Stephen King King is right and if you haven't read his autobiography or if you haven't listened to episode 210 what blew my mind is I didn't understand how unbelievably poor and just seeped in poverty that Stephen King was when he was trying to make it as a writer they live they lived in a trailer they couldn't even afford uh a telephone in their house they couldn't afford their daughter was sick and they couldn't afford the medication he's got unbelievable stories in that book and so he's describing that time period but now from the p uh perspective of of an unbelievably successful and wealthy person my wife made a crucial difference during those two years Tabby never voiced a single doubt her support was a constant this reminds me of Soul Price's wife this is what I'm writing it to you her support was a constant one of the few things I could take as a given and whenever I see a first novel dedicated to a wife or a husband I smile and think there's someone who knows writing is a lonely job entrepreneurship is a lonely job I talk to I'm going to wind up talking to more Founders than almost anybody else alive right and that comes up one again being a Founder is extremely lonely job having someone who believes in you makes a lot of difference they don't need to make speeches they don't have to make speeches just believing is usually enough and so soul in probably life's most important decision pick the right spouse I'm going to uh fast forward he went to law school and it's it's interesting to me there's so much uh about reading Soul's experience uh as a young lawyer that reminded me of Charlie Munger and so Soul has a a line right at the beginning of this this chapter that describes his very short uh law career and he says over a period of time I really learned far more from like clients than I ever learned in law school reminding me of one of my favorite quotes by Henry Ford that true education is gained through the discipline of life and so I just want to pull out one idea that I think is very valuable he's a young attorney has no money doesn't really have a client base so how's he going to build up and like his own like his own business his own book of business right he gets clients for his Law Firm by giving away value for free first so he's working with these other two older attorneys and what he says one thing that they learned that the most valuable thing that he learned from them is not like how to like the technical aspects of running a law practice it's about how everything moves with relationships and so he says I became a lawyer in the community for all the Jewish Charities and obviously I never charged them for it not charging for one's Legal Services especially as a Young attorney with no money uh struggling to earn a living might not have been so obvious his pro bono legal work introduced him to many people in the community some of whom eventually became his clients soul is living and working in San Diego at this time he is 25 years old when the attack on Pearl Harbor happens and that changes everything in his life uh I had developed a reasonably Fair practice and was making a halfway decent living but literally overnight life in San Diego changed Forever After the attack on Pearl Harbor the United States government did not know whether or not the Japanese were capable of attacking the West Coast so the Navy announced that it may be it was considered advisable as a precautionary measure to black out San Diego at any in it so he's describing what going through his life and work with no electricity all of the sudden there were total blackouts every night it's hard to even Recall now how inconvenient it was trying to get around after dark without lights on your car without any lights in the street and trying to figure out where you were going and how to get there it was a very very difficult thing but somehow we still managed to keep moving and I really can't recall clearly how we did it so in addition to having do this legal work during the day he has to work supporting the war effort at night so he's working at this place called Consolidated aircraft that is making airplanes for the war effort and really what I was thinking about this whole section that a little adversity goes a long way this is the start of Soul's unbelievably strong work ethic he really starts to get fulfillment from working hard and being productive and we see him contrast his own work ethic with his fathers again throughout the rest of the war Soul was at his Law Office 8 in the morning until noon then he worked he had to drive across town to Consolidated uh the aircraft company until 11:15 at night so his work day is from 8 in the morning to 11:15 at night he would eat dinner go to sleep and then the next morning Do It All Over Again Soul did not complain and said I actually enjoyed the experience unlike his father who had managed to find ways not to work Soul thrived when he was busy working hard and feeling productive this is what I mean about a little adversity going a long way it's actually good for you his desire to work hard and get the most out of every hour of the day was not characteristic of his earlier years Soul commented that he never worked very hard in school at least not until law school beginning with his early career in law and his work had Consolidated so would continue to live his life working hard and taking full advantage of every hour of the day this is also something that his he teach his grandchildren in his later years Soul frequently spoke about the importance of time his granddaughter talks about what she learned from her grandfather the concept of time was very important to my grandfather I remember on a couple of occasions talking to Grandpa about how I would be able to accomplish certain goals he explained to me that we always have more time than we think then he would take an inventory about how much time you're spending on different things how much sleep do you get he would ask how long does it take you for you to study how long does it take for you to eat your meals so many questions about my day well you have enough time he would say there are 24 hours in a day 168 hours in a week we waste so much of it there is always time I thought it was funny cuz later in the book uh it talks about what he he'd keep one sign on his desk that said do it now and so at this point he's still a young man I think he starts his first company when he's 40 but when he's realizing he's like the value of his legal practice was the fact that he discovered he didn't actually like the law and and he wanted to actually he was much more interested in business so he says over a period of time I really learned far more from my clients than I ever learned in law school and because I involveed myself so deeply in their matters I think this is where I began to accumulate the knowledge and interest in business and he also realized that even though a lot of his clients didn't have the like the higher education levels that he did they were much more wealthy than uh than he was and they just had this like basic common sense I just want to give you one example uh there's this guy named Isidor teacher he was one of Soul's clients he had immigrated to the United States from Scotland when he was 3 years old and he had no formal education but he was very smart and then Soul also saw that okay you don't have to have formal education be smart in business but you can be smart in business and bad in other aspects of your life soul is very akin to like Ed Thorp where he was able to be unbelievably professionally successful not and without really messing up other parts of his life Isidor teacher had a problem picking wives and he also says some funny stuff here so it says a teacher was very successful uh real estate investor and business person he wasn't very successful however when it came to his marriages Soul represented teacher in a divorce that ended up in the court and so his wife's divorce attorney was threatening to have the court take all take over all of teacher assets soul went back to teacher and told him about the threat teacher's response is something that Soul said he'd always remembered and this is what teacher said well that's okay if if my wife wants to syn the ship let her sink the ship I can swim better than she can teachers gutsy response made a big impression on Soul because over the years Soul was never afraid to hang tough in a negotiation and so it's through Soul's legal practice that we see the very first like konal of this idea that's going to eventually turn into Costco and so a major driver of the San Diego economy at this point in history was the Navy and so Sam sees or excuse me soul sees this very focused Niche business that is unbelievably valuable uh Navy regulations required Sailors to depart from their ships and come back to their ship in uniform because the sailors wanted to change into their civilian clothes once they were on Shore they needed a place to store their uniforms and to purchase clothing in response a few enterprising entrepreneurs opened these things called Locker clubs so a locker Club is stores that not only had lockers where salor could store their uniform but offered a wide range of goods and services for Sailors to purchase the most successful of the locker clubs was this business called the 7 C's Locker club and so Soul starts studying the business he says the 7even C's was another learning experience for so it was an opportunity to see how a large store selling a variety of goods and services all Under One Roof could be successful catering this is the most important sentence could be successful catering to a focused segment of the marketplace focused segment of the marketplace is what you and I today would describe as a niche this entrepreneur made a very successful business understanding a Navy regulation and then solving the problem and narrowly focusing on one segment of the market so that's the first Colonel this is the second one his father-in-law dies he's trying to help his mother-in-law like settle their estate they own they own a bunch of like commercial real estate and so her name is Bera and it says uh so Soul was faced with the challenge of finding a tenant for Bertha's Main Street property Soul's client remember this is all this is it's amazing how all this relates like all the relationships that he built uh when he was practicing law winds up is is what launches his like business career but he's also paying attention and so in the back of his mind he's like okay well this is a very interesting like uh business that they they were able to build focused on Navy regulations and and sailors and then he's introduced to another example of this because he's trying to find a tenant for his mother-in-law's commercial property and one of his clients is like hey why don't we go up to Los Angeles and we check out this thing called fedco fedco is a membership retail store remember you and I know where this ends up right this ends up with in Costco but we are three decades in time before Costco is founded and and so this is the first time that Soul sees an idea which generations of entrepreneurs after him are going to use it's like okay well wait a minute there is a membership retail store targeted to a specific niche in fed CO's case they only sold to federal employees so he's going to see a lot of ideas that he's like oh I can use this idea he's also going to see one that he can actually uh change and one example this the fact that since fedco was sold only to federal employees it was a nonprofit corporation and there's going to be all these warning signs that hey this is probably a good idea that people are not paying attention to and this is one of them the fedco store was doing a Brisk business with customers coming from as far away as San Diego in fact 5,000 fedco members lived in San Diego and were driving 200 miles round trip to take advantage of fed CO's bargain pricing you and I have seen this I think it was episode 234 that I did on Sam Walton's autography when you have people driving far distances to save money that is a very very good sign and that is something that Walmart had in the very early days as well another parallel with Walmart is so and his two clients are like oh wait wait a minute this a Fed C type business could be successful in San Diego we know that because there's 5,000 people in San Diego they driving two 200 miles round trip just to save some money and we have a spot where we can put it because we can put this store in my mother-in-law's vacant commercial it's like it's it's a commercial warehouse basically and so since soul and his two clients didn't have any experience this is something that Sam Walton uh did as well where they call fedco and they're like hey why don't we do a joint venture and fedco is like no we don't want anything to do with you and soul said in retrospect we were lucky if you go back and study the early of Walmart he eventually he he initially purchased uh pitched the idea the idea for Walmart to a larger company in fact let me read uh let me pull up the the the quote from made in America uh it says this is Sam Walton WR writing many of our best opportunities were created out of necessity the things we were forced to learn and do because we started out underfinanced and under capitalized in these remote small communities this contributed mightily to the way we've grown as a company had we been capitalized or had we been the offshoot of a large corporation that way I wanted to to be we might never have gone into all these other uh towns that we went into in the early days it turned out the first big lesson we learned was that there was much much more business out there in small town America than anybody including me had ever dreamed of and so in other words Sam was forced to do it himself operating under more constraints because he didn't have as much resources we see the same thing with soul price and his Partners like well fedco was a bigger company they already know what they're doing okay they said no we're still going to figure out how to do this and so talked about this fact that ignorance sometimes is bliss for an entrepreneur he says fortunately most of us had backgrounds that were alien to retailing we didn't know what we we didn't know what wouldn't work or what we couldn't do I was just listening to an interview with Daniel e the founder of Spotify on choir he said the same thing like if IID known how painful and how difficult this was he's like I'm glad I went through it but if I had known upfront how difficult and painful it was I would have never done that idea or that that experience is very common in the history of Entrepreneurship and so he he says later on that uh I think they opened the first store for like $50,000 and they didn't know what they were doing and later on when they knew what it was doing it would cost 5 million which is funny uh but I do want to go to this idea that Soul like you and I are these just these learning machines constantly studying and learning from other Founders and so he has these two stories he's like oh seven se's Locker Club that's interesting o fed fed code that's interesting then he starts studying this guy named EJ I don't know how to pronounce his name so we're just going to say he's the founder of EJ Corvette there's a new type of retailing discounting was launched by this guy named Eugene who founded this company called EJ Corvette he opened the first Discount Store in 1948 and this founder did much to Define define the idea of a discount department store what he would do is he would sell products at deep discounts from the manufactured suggested fair trade prices this is very important at this time and soul is one of the people that gets these ridiculous ridiculous laws overturned there was these things called fair trade prices that said you had to charge the customer even if you could sell cheaper because you had a better cost structure because you were more efficient did not matter there was these artificial like floors on prices that Soul thought was ridiculous and so the founder of egj Corvette figured out a way like a loophole to get around these fair trade prices the way Corvette circumvented the fair trade laws was by requiring that Shoppers become members in order to shop the membership was really just a way of outsmarting the fair trade loss this is incredible I love how these like little weird decisions that happen think about this happened 1948 that is 40 years before Costco is invented or founded rather but this idea this like this obviously the the one of the benefits are the benefit of Costco is like almost all their profit comes from the the the reoccurring membership right and the fact that they use their size just to buy products so inexpensive and then barely Market mark it up just mark it up to cover like their their their very low operating expenses and so you go to Costco I mean you already know this you go to Costco and you just find a TV that's $500 cheaper than anywhere else ever they could be because it's like we're not making money on the TV we're making money on membership fees and this idea that the membership club for Discounter started out as a way to get around a random regulation and this regulation lasts a long time this 1948 the regulation's already been uh established for quite a while then I think it's in like the 1970s where soul and a bunch of other people play a role in getting these ridiculous fair trade Laws repealed it's incredible how the these things like Echo throughout time and so this is the reason he was doing this because customers could realize significant savings at Corvettes you could say the same thing customers could realize significant savings at Costco a refrigerator might sell for $400 at Macy's and Corvette sold the same for $300 okay so let's go to the beginning of fedmart now here's the crazy thing fedmart is literally fedco right it's just like okay let's make a membership discount store that's available to only to federal employees only so it says fedmart followed uh the fedco template in almost every way including membership uh so raised $50,000 from a handful of investors including his own $5,000 at seed money for most of the investors a 5,000 investment was not a lot of money but for soul $5,000 was a significant amount of money at the time so at this point that he starts his own company he's still practicing law doesn't have a lot of money he's very concerned this is something he's concerned with his entire life that I think a smart is capping the downside capping his downside risk um so he negotiates the lease he's like okay we negotiated lease for 10 years we were so uncertain as to the future of this Enterprise that we reserved the right to cancel the lease at the end of one year if it didn't work out and then this is what I mentioned earlier soul is also hilarious as you saw with the the introduction with Jim Sagal so he's very has like this very sharp wit and he says I used to say afterwards that when we didn't know what we were doing it only took $50,000 to start a business and 5 years later when we were really experienced at running fed Mars it took 5 million to open so they open a membership retail store in a warehouse in an industrial area of San Diego this broke just about all conventions in 1950s retailing Shoppers had to be military or government employees and they had to purchase a membership card and they needed to show their card in order to shop just like you and I do today when we walk into uh Costco and we go back to this idea it's like hey I have an idea that this will work because we have 5,000 people literally leaving our city going to Los Angeles they'd probably shop here if they just had them and other people would shop here so it says from the day that fedmart opened for business uh the store was an immediate and spectacular success we had an anticipated that we might do a million in the first year and we did three times more than that so the customers are happy but his competitors are not and we see that Soul price is a fighter he did not shy away from fighting at all uh some of the downtown Merchants try to cause problems right before we were about to open a guy came to the fedmart and he said he he was a bedding inspector for the State of California who's responsible for seeing that things like pillows and mattresses do not have any deleterious stuff in them he comes here comes this bedding inspector and he has this long list of questions and the questions had nothing to do with pillows and mattresses I politely and firmly told him to get the hell out and if he wanted to close us down take your best shot we never heard from him again and this is the first part of the book where we see that Soul's business philosophy uh you're going to see you obviously see this with Costco today Soul described his business approach as a professional fiduciary Rel relationship between us the retailer and the member the customer if you're buying as inexpensively as possible and only marking up to cover your cost and making the vast majority of your money money just on membership fees you're in perfect alignment with the customer as opposed to the person that you're buying goods from and the way Soul demonstrated this is obviously a markup of say 12% over your costs compared to 36 or 50% as some other retailers obviously that's better for the customer and so I wrote on this page because this Jim Syle says the same thing that soul and Jim Syle Soul price and Jim Syle are so and so Soul price says our first duty is to our customers our second duty is to our employees and our third duty is to our stockholders and so by the time fed Mart expands Soul has left practicing law now he's full-time in the business that he founded he's 40 years old and it said Soul made his decisions from the point of view of his own experience the fact that he was an attorney and not a retailer and that he was an entrepreneur and not a chain store executive he 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 Fed Mar's employees and so Soul price would constantly pay his employees more than his competitors because he thought it was the right thing to do I was listening to a speech by Jim syal who's who uses a lot of these same ideas and he said that um Costco had 22,000 people apply for 200 open positions I think that that was when they were opening a new store at this point fed Mar's expanding they're into San Diego or excuse me San Antonio which is a cheaper cost of living than where the other fedmart stores are but Soul price thought it was unethical to pay them less than he was paying other fedmart employees employers were paying their employees 50 cents per hour he decided the wage should be a dollar per hour and so what's the result of course everyone wanted to work at fedmart that's same idea that Costco has 22,000 people apply for 200 positions why would he require fedmart wages to be twice as much as competitors fedmart was paying a dollar an hour to employees in San Diego in Phoenix the wage decision in San Antonio was simple employees in San Antonio worked just as hard as the other fedmart employees fedmart had excellent profits in San Diego and Phoenix while paying good wages why just not apply the same wage philosophy in San Antonio and what I wrote here is just keep it simple I've seen other companies like compensation structure and it's like you need like a PhD and math to figure it out just keep it simple oh we pay them a dollar an hour in San Diego okay we're opening new store dollar an hour there less time to think about it move on to actually things that are more important and one thing that you have to love about soul that he always felt that he had to do the right thing no matter what and so at this point there's still a lot of segregation in the United States and he's just not with that he's like there's no way that I'm putting these Provisions in any lease so it was negotiating mortgage for the property when with a major insurance company when he noticed that the mortgage agreement stipulated that fedmart must maintain separate bathrooms based on race Soul told the lender that the separate bathrooms provision was unacceptable and that he would not enter into the mortgage agreement unless the provision was removed the lender removed the provision once again Soul chose the right way and was able to achieve a victory in the battle against segregation and I think this idea is like hey I'm just going to do what I think is right and I'll suffer the consequences and I'll fight back if because I think it's important to me is really uh like affect it can affect future Generations so like Costco to this day sells like drugs prescription drugs cheaper than almost all of his competitors uh if you re if you research the early history of fedmart they were the first ones to sell to use like this heavy discounting to to prescription drugs as well that's been copied over and over again the important part is that human nature never changes last week on episode 303 I told you when Mrs B was selling carpet cheaper than her competitors she was literally sued they called her like a bootlegger or something like that and the it winds up getting thrown out but people do all kinds of crazy things again that are not they're good they may be better shortterm for the business because you're able to charge more but they're not better for the customer and I think what soul price realized what Jim Syle realizes what Jeff Bezos realizes what Mrs B realizes like you should just always go for what's better for the customer so Soul winds up saying you know I'm going to fight these regulations these fair trade laws and he's he opens the first Pharmacy inside of a discount store ever and he hires this guy named Wayne mallerie who was a pharmacist and then he comes over and starts selling drugs cheaper and his profession and other important businesses in that profession treat him like a Trader look what they do to this guy it says Wayne mallerie with stood numerous obstacles in opening the very first Pharmacy pressure from local and State Pharmacy organizations pressure placed on the wholesale companies not to deliver or Delta fedmart exactly what happened to Mrs B difficulty in obtaining a permit from the State Board of Pharmacy he was expelled from this is insane he was expelled from the local and State Pharmacy organizations he received numerous death threats what the hell is wrong with our species a rock was thrown through his living room window and he was treated like a traitor to his profession and so Soul fights this battle on multiple fronts and they come around they come up with an idea of another way to get around these ridiculous fair trade uh laws think about they're going to have their own White Label Company like own products think about how valuable like the Kirkland white label brand for Costco is now because fair trade laws impacted so many products fedmart developed a line of private label merchandise the FM brand was of laundry detergent was about 1 half the price of the national brand and so this goes back to his Misfit likee nature when he was a kid you don't want us to sell your products for deep discounts that's fine we'll make our own and then again version of Costco before Costco fedmart like Price Club after it and like Costco after that one of the most important factors is that soul soul price believed low price merchandise with limited selection Soul calls that an intelligent loss of sales which I'll get his idea of intelligent loss of sales which I'll get to in a minute but I wanted to bring up this part this is what I mentioned that he was he helped uh get these ridiculous laws overturned because again at the end of the day it's just better for customers it's all we really need to focus on by 1975 consumer demand for lower prices convinced Congress that it was time to repeal fair trade laws only liquor remains subject to minimum price maintenance in some states so what does soul do Soul told the fedmart liquor buyer to purchase National Brand liquor and to price the liquor at a 12% markup the state of California challenged fed Mar's pricing as a violation of the State's liquor price maintenance regulation think about that soul is getting being just like Mrs B soul is getting sued for selling to cheaply fed Mar's attorneys argued in court that federal law preempted state law the judge cided with fedmart so remember at the very beginning of the book Jim was saying hey there's this guy affect positiv affected thousands of people's lives and part of it is because he viewed himself as a teacher and so at the beginning of this chapter there's a fantastic quote by Jim synal and he says if you're not spending 90% of your time teaching you're not doing your job and that's something he learned from Soul Jim Syle Costco's founder started working for soul in 1954 at the age of 18 Jim recounted the time that he received a call from a reporter to answer some questions you knew soul for a very long time you must have learned a lot now this is Jim talking my response was no that's inaccurate I didn't learn a lot I learned everything everything I know this may be my favorite part of the entire book Soul focused much of his attention on teaching he had a favorite adage that he frequently found appropriate to repeat you train an animal you teach a person Soul really wanted all fed fedmart employees to think about and understand why their jobs were important to the the success of fedmart he was not a big fan of procedures and training manuals because he believed that manuals were a substitute for thinking Soul's emphasis on teaching was expressed in his phrase Alter Ego so it really clicked for me when I read this for the second time that there's a great line that talks about the importance of like essentially the culture of a company is the large part of the personality of the founder and that uh apple with Steve Jobs with 10,000 lives he is making at this point in the book he's making 10,000 Soul prices right so it's like this importance of teaching Soul's emphasis on teaching was expressed in the phrase Alter Ego a rather simple concept he used the following example if the owner of a store was able to do all the jobs himself greet customers order and receive merchandise do the accounting sweep the floors Etc he would but the reality is that normally the owner can't do all the work himself therefore he must hire people to help then he must teach his employees to become his alter ego so that they understand the importance of their jobs and perform their their jobs as well or better than he the owner would if he had the time he is creating 10,000 alter egos he is creating 10,000 sold prices just so happens that one of the alter egos that he created is one of the greatest Founders to ever do it in Jim cical and so one of these ideas that he spread to his alter egos uh this is something Costco uses this is something when I read the the biography or the autobiography of the founder of Trader Joe's like he used as a differentiator in the grocery uh Department this idea of limited skews and so this entire section is about the logic of limited selection and intelligent loss of sales which is the term that Soul put on it and again this is one of Soul's ideas that is widely widely used today Soul proved that it was possible to do more sales with fewer merchandise items also known Skuse why does limited selection result in higher sales part of the answer lies in what's soall the intelligent loss of sales conventional wisdom in retailing is to stock as many items as possible in order to satisfy every customer's needs and wants the intelligent loss of sales turns that theory on its head postulating that custom demand customer demand is most sensitive to price not selection got to repeat that customer demand is most sensitive to price not selection how does the intelligent loss of sales work Soul's classic example was threein one oil so this is oil that would You' use around your your house to like lub lubricate clean and like prevent rust the manufacturer produced the oil in three sizes most stores carried all three sizes of three in one oil even though the large 8 O size was a better value per ounce than the smaller sizes most people who need 3 in-1 oil would buy the 8 O size if that was all that was on the Shelf the price is far better per ounce it is acceptable for most customers what about the customer who doesn't buy the 8 O size that was the intelligent loss of sales what does limited selection have to do with efficiency because payroll and benefits represents Approximately 80% of a Retailer's cost of operations fewer items result in reduced labor hours throughout all the product Supply channels ordering from suppliers receiving them at the Distribution Center stocking them at the store checking out the merchandise and paying vendors put simply the co this is so what an excellent obs ation by Soul put simply the cost to deal with 4500 items is a lot less than the cost to deal with 50,000 items and why is low cost so important the success of fedmart and later Price Club had a lot to do with being the lowest cost operator okay so I want to fast forward in the timeline to where Soul gets kicked out of his own company at this part this goes back to the idea where like one of the main ideas of the book is like it's so important Soul was unbelievable at everybody around him said his ideas and his creativity of starting business was was you know maybe the best ever but his execution he just by his own mission he's like I'm just not a good executor not a good operator it's why after he gets C of fed kicked out of fedmart starts Price Club and once he real like grows the idea for Price Club realizes hey we we got to sell to Costco because Jim's just the best operator in the world so fedmart because in part because Soul shared his ideas widely they have a ton of competition from world class operators so you have Walmart that's already been existence for almost 10 years now Target Kmart and these operators are just operating a lot better than fedmart is so he has this idea where he's like man we're running into all these problems business has been going on for I think almost 20 years at this point and so he's looking for like new ideas or maybe eventual buyer uh he's like considering a sale or emerger of the business uh some investment bankers hook him up with some some uh retailers over in Europe so he flies over to Europe this is important because one of these winds up being a buyer and the other one winds up giving him an idea that he uses for Price Club which is really what we're talking about is like this is the still the the prehistory of Costco this is why I'm holding the book in my hand why I'm talking to you about it why I reread it because I just have a strong desire to understand Costco at a more fundamental level than I do and there's surprisingly not a lot of material out there so if you have any material about Costco please get it to me I'll read everything and listen to anything you find as well uh so it says he goes to Amsterdam and Germany this is hilarious the first meeting is this guy that's the founder of this they're called macro m a k r o stores he this guy lives in a castle in Amsterdam and his business is a membership warehouse but these are gigantic much bigger than the FED Mars where they're over 200,000 Square ft and it's a similar concept where to shop in the store you have to purchase what they call a passport membership and so it says Soul must have been impressed because when he returned to the United States he talked about uh the store at length and in particular the passport membership concept for business customers to shop at macro you had customers were required to prove that they were owners of a business you have to prove that you're owner of a business then you can buy the membership so that idea he's like oh I come back he's like man this is a really interesting concept what if we had a membership discount retailer but you had it was only for business customers that is that is the idea for Price Club which is going to come after this so again Soul price is literally doing in the story what you and I are doing right now which is learning from entrepreneurs that came before us then he goes to Germany and meets with this guy named Hugo man Hugo man owned a chain of these things called hypermarkets so hypermarkets is what you and I would know as like a Walmart Super Center today but this is way before a Walmart Super Center uh existed where it's groceries it's everything including food and groceries and perishables and so the issue that's going to happen in the future that Soul doesn't know what's happening now is like Hugo man the founder like whes and dines them takes them on this beautiful vacation spot in Germany turns on the charm this is the biggest thing where time is the best filter you can fake being a scumbag for 6 months for a year you can't for 5 10 15 years your true personality and who you are is going to eventually come out they had this idea though they're starting to negotiate with man and some of his people and they really don't like them but they got caught up in the Euphoria of a big deal uh the other way I've heard other entrepreneurs say this in the past is like you should have a no Rule and that and another way to put this is like you can't make a good deal deal with a bad person and this guy winds up being a bad person the negotiation sessions provided plenty of opportunity to gain insight into the characters we were dealing with but Soul had decided that fedmart had much to gain by reaching a deal with man and his group later on looking back on our times with man the warning signs seemed so obvious but at the time we were caught up in the Euphoria of making a big deal and so man is going to to buy 64% of the company was like this merger eventually just like this takeover really and cuz he he needed money cuz he like okay well I'm I'm facing some serious operators if we get a big influx of money we can expand and we can kind of fight that's not going to happen I mean you have to avoid this mistake you can't sell 64% of your company and then be surprised when you get fired which Soul does get fired the first indication of real trouble occurred at the first meeting of the new board this was the first time that soul and I experienced the real Hugo man rather than the friendly person we had seen man launched into a 90-minute TI raade criticizing soul and fed Mar's performance we were finally seeing Hugo man's true character aide of him that Executives in Germany saw every day and so immediately after he gets fired from fedmart he starts what he's going to call the price Club so he's like what what what do I want to do after fedmart and he realized well I can just take that macro like business in Amsterdam and and do it here uh macro operated a membership wholesale business in a warehouse they sold products to small businesses in a No Frills Warehouse environment its strategy was to offer a wide range of business products at very low prices Soul thought maybe there's a way to have a wholesale business selling to Independent business owner so he's going to have a membership based Warehouse business it's going to have no frills and it's going to sell business products at low prices to business owners and if you think about the price Club idea Costco is this but for everybody the price Club idea was finally conceived a wholesale business selling merchandise to small independent businesses the business owners would come to a large Warehouse select the products from a steel rack displays and pay either by check or cash thousands of small businesses would pull their buying power for shopping at our wholesale warehouse now there's Millions I don't know tens of millions what 100 I don't even know how many Costco members are let's say 100 million in this case there was thousands of small businesses pulling their buying power together in Costco's case there's a 100 million or whatever 50 million customers pulling their buying power together that is a very very powerful idea and this may be the main idea of the book everything thing that made Price Club different is what made Price Club successful Price Club differed from its competitors because of the number of items offered for sale the typical grocery or Discount Store carried about 50,000 different items compared to price club's 3,000 items Price Club was a warehouse with rack storage High ceilings and concrete floors and most importantly the prices for the merchandise were far less than prices available anywhere else the operating efficiencies of the warehouse concept and the Direct Delivery of product from the suppliers to Price Club made it possible to sell merchandise for less and so the value proposition to the business owner is real simple for $25 membership fee a year you have your we can pull together the buying power of thousands of you eventually tens of thousands of you and then you have your own Warehouse we will handle the buying and the delivery Logistics you just have to drive to your the warehouse that you're a member of and pick it up and so the great thing about reading rather obscure books like this I don't know how many people have read this book is you C uh the origination of like a like a cultural phenomenon so there's this funny thing like in in Costco lore is the fact that they sell a hot dog and soda for $150 and they have forever and if there's just one of my favorite stories about Jim Cagle is what happened one of the guy that was working for Jim tried to Tred to convince Jim to increase uh the price of the hot dog which I'll get to uh in a minute it's the it's he's just my kind of founder he's just like that is Jim is my kind of founder and we realized like that's that idea came originally from Price Club Price Club was selling a uh a hot dog and a can of soda for $150 the price of a Costco hot dog and soda has remained the same $150 36 years later this but the thing is now it's 46 years later because this book was punished or published about 10 years ago so the reason I say it's my kind of founder is said there's this great back and forth where it's like okay Jim we need to we need to raise the price of the hot dog and Jim's response was if you raise the price of the hot dog I will kill you figure it out that is a Founder that is obsessed with delivering value to his customers the price Club is so successful before it sells it's it's going to wind up ping her out before Costco buys it in large part because of competitors that Soul price actually created for himself Bernie Marcus the one of the co-founders of Home Depot comes and visits Soul so has this fantastic reputation with worldclass entrepreneurs so it says in 1978 Bernie Marcus came to see the price Club and to visit soul soul took Marcus on a tour of through the warehouse he suggested to Marcus that he open his own home improvement business using the knowledge and experience he had gained at Handy Dan handy Dan was had just fired Bernie Marcus I had done this book if you don't know what I'm talking about I think it's episode 45 it's called built from scratch how a couple of regular guys grew the Home Depot from nothing to 30 billion and I think now Home Depot since that book is published was like 300 billion it's a fascinating story but handy dam was this place where Bernie was uh working at that got fired from so he says hey why don't you take the the the hardware knowledge that you had that you gained at Handy Dan and then combine it with my idea and that is what Home Depot is Marcus took Soul's advice and with his partner Arthur Blank opened the first Home Depot in Atlanta Georgia in 1979 blending what Marcus had learned in the traditional Hardware business with price club's Warehouse format another competitor that Soul price made was Sam Walton Sam Walton is on record saying hey I stole more ideas from Soul price than anybody else and considering that that soul that Sam Walton had studied more retailers than anybody else that's a hell of a statement Sam Walton who had created Walmart by using fedmart as a model called Soul Walton wanted to come out and have a look at Price Club Sam was interested in learning as much as he could about the warehouse Club business Soul was open and generous with information Sam thank soul and returned to Bentonville and in 1983 Walton opened his first Sam's Club in Oklahoma City Soul was a real believer in the importance of competition the competition gave the consumer a better deal and sorted out the strong operators from the weak ones but soul may have had second thought about sharing so much information with future competitors because his ideas were used by so many startup Warehouse businesses and so if you think about one of the main maxims of the history of Entrepreneurship that you and I have gone over over and over again is that bad boys move in silence when they find something that's working when they find something that's lucrative they shut up about it Soul price did the opposite it all works out in the end because he sells to Costco but I bet if he could go back and do it all over again he would have kept his mouth shut and so then we fast forward into the story and now you have by this point in time you you have a bunch of people doing the same price Club Playbook the same it's just price club with a different name and the problem is that two of these people that are doing this are some of the best operators in the history some of the greatest operators in history in gy Syle and in Sam Walton and so Jim says here we owe Costco's Legacy to the retail concept that soulle pioneered with fed Martin Price Club as do our competitors in the industry and big box retailing in general the price company had a 7-year head start on Costco's and Sam's Club but Costco and Sam's were expanding aggressively while Price Club remained tentative Costco and Sans were beginning to expand into Price Club markets and they were outpacing Price Club that is the difference between being good and ideas and being good at execution something I do on a lot of mornings is I listen to a rendition of General paton's speech to the third Army to get me fired up and going in the in the day and something I'm trying to be uh for to make sure that as many people as possible are aware of Founders existence is to be very default aggressive on promotion and just making sure that people are aware that hey you have this fantastic tool that I hope you use for that through your entire career that in an hour you can download in your brain some of the best ideas of History entrepreneurs that you can use in your career and so there's something that I I keep on a Post-It note and I have saved in my phone as well it's a quote from this this speech by pattent that I probably heard I don't know 200 times 300 times it's hard to say and he says I don't want to get and this is the difference to me when this is what came to my mind because it's like what I'm about to read for Patton Patton's uh perspective is very similar to Sam to Sam Walton and Jim Syle and patton says I don't want to get any messages saying I am holding my position our basic plan of operation is to advance and to keep advancing regardless of whether we have to go over under or through the enemy and so in this case in this story Costco and Sam Walton are going over under and through the competition to the detriment of Price Club Soul price is also making some operational mistakes I said don't look have giant letters on this page don't lose your focus this is a mistake Soul always love real estate uh the better idea was to dedicate those resources in that time to your core business the company's management made some poor decisions by op by opening new locations and markets where either Costco or Sams was already firmly established so they're getting out competed there in the meantime Soul was pushing for the price for the price Club to become more involved in real estate development many retailers wanted to locate next to Price Club to take advantage of price club's customer draw so wait a minute are you a warehouse club Are you a real estate developer which one are you going to do you can they own the real estate which is smart but now he's saying hey let's build real estate next to our location become landlords what the hell are you doing some of the company senior Executives and most of the investment Community frowned on the company's directing so much of its Financial Resources into real estate development real estate development was a diversion from the company's Core Business uhuh big big no no focus on your goddamn core business real estate development was a diversion from the company's Core Business the immediate financial Returns on real estate were much lower than Returns on the price clubs operating business don't lose your focus back to this idea Soul had better ideas but Jim Sagal and Sam Walton executed better having pioneered the warehouse concept the price company had lost the initiative to competitors rather than sticking to a well-planned business strategy many decisions were being made reactively in response to what the competition was doing so they're getting beat up on competition and then the worst possible thing that can happen to a human happens and remember this book is written by Robert Price Robert price is Sam is Soul's is Soul's son they worked together for 45 years uh Robert price was a huge hugely important into the development of The Price Club learned everything from his dad and Robert's son his teenage son gets a brain tumor and winds up passing away and so Soul price is going to lose his grandson Robert price is going to lose his son at the exact same time where they're getting hit from all angles and she just like this is what leads them after this like realizing what is actually important in life really pushes them to to to sell the business Aaron's illness changed soul and me in ways that we did not fully comprehend at the time it is not clear when Soul began to consider seriously the sale of the price company it may have been prior to Aaron's Illness but in the days weeks and months after Aaron's death I came to believe that Soul must have agonized over how to approach approached me about the subject on the one hand he had a strong sense that it was time to sell he had always believed that his and my business strength were in the creative area and not in the management side of operating a big business he was tired of the constant pressure from Wall Street for more growth and perhaps most important he was concerned about the burden that I had the Dual stress of losing the person you love most in the world and your business like struggling imagine like the pressure and how difficult this was what Robert had to go through so I'm gonna fast forward they identify they're like listen there's only two buyers here it's either Sam Walton who had already offered or Costco and obviously soul soul tells Robert you're going to want do all the negotiating but do do the deal with Jim Jim was more predisposed anyway because he had deep love and affection for soul price as I said at the beginning he's like I'm 70 years old still wanting approval from this guy still can't believe how impactful this handwritten letter I got after our lunch was and so uh Jim synal talked about the first time that he meets Soul price I think this this little story is good to give you an idea of who Soul was as a person uh so he says he began working for soul in 1954 at the age of 18 and considered Soul his mentor Jim vividly recalled the first time he met soul I was given a call by somebody who was working in a new story in San Diego and they had some mattresses to unload and asked me to help out I would get paid a dollar a quarter an hour and so I said sure the next day I'm carrying a mattress into the store and I hear a voice what in the hell are you doing there put that thing down before you break your back or worse yet you break something in the store so I turned to somebody who was there and I said what ticked him off and who the hell is he they said he's Soul he's not mad that's just soul and so then the book goes on to what happens eventually Price Club and Costco merge but really this is the most impactful part of the book about life outside of all the great ideas for business that Soul had and so I want to get to the end where I said it's one of the best ending paragraphs of any book that I've ever read because of it's his Souls passed away by the time his book is published he died about three years before the book is published and now you have the son his son honoring his life and so as with every biography you just can't help but put your yourself in their shoes and him imagine living a life and succeeding a life like this where long after you're gone this is what your son or your daughter the way they honored you that's more impressive than any of the wealth he built as much as Soul's public accomplishments represent a tremendous Legacy his more enduring Legacy may be on the impact that he had on the lives of the many people who knew him all of us can honestly say that there's at least one person who has had a transformative impact on the course of Our Lives for me that person was my father whatever I have learned about business I learned from my father everything he taught me how to think and how to question and how how to fall into the Trap of assuming rather than checking things out for myself he also taught me to be humble to appreciate the unpredictability of life to care for people to remain hopeful and always to be there for people who are in need working alongside my father for nearly 45 years I came to appreciate how unique our relationship was my father was a strong man man who told me that he had to be tough to grow up and survive he was very smart opinionated and could make his case with anyone I had grown up arguing with my father our business relationship was not any different he often said to me that I could drive him nuts my natural tendency was to frequently take the opposite side of an argument just because I knew nobody else would as he and I aged we had fewer of those arguments my father was so competent so responsible and protective that as he withdrew from day-to-day activities I wondered whether I could ever carry on without him the truth is that my father and I were very different people but the greatest tribute I can give him is that he taught me so much sometimes without my even realizing that a lesson was taking place when it was time for me to step up I was ready what greater Legacy could there be from a father to a son than leaving the gift of love life skills necessary to carry on Soul was a poster child for the American dream his immigrant parents were born in a small Russian village he was raised in the Bronx and was the first of his family to graduate from college he earned a law degree he became an exceptionally successful businessman and philanthropist he celebrated 70 years of marriage to his beloved wife Helen he was a good father who instilled High values in his sons and he never walked away from responsibility it doesn't get much better than that and that is where I'll leave it for the full story highly recommend buying the book if you buy the book using the link in the show notes you'll be supporting the podcast at the same time another way to support the podcast is to sign up for Founders premium subscribers can ask me questions directly listen to the 22 or 23 AMA episodes that I've already made I'm also making bonus episodes for a bunch of other things I read and I have a lot of plans to add other things to Founders premium that link is down below and available at Founders podcast.com if you are not already on my email newsletter for every single book that I read I email you the top 10 highlights of every book that link is down below and available at Founders podcast.com that is 304 books down 1,000 AO and I'll talk to you again soon