PriceSmart：中美洲的 Costco——[Business Breakdowns，EP.244]

Today we are breaking down PriceSmart. If you aren't already familiar with the name Sol Price, I suggest that you take some time to read about the godfather of warehouse retailing. Price influenced many people in the industry. You may recognize the name Sam Walton. He founded a company called Walmart, and he says he borrowed as many ideas from Sol Price as from anyone.

Arthur Blank, prior to founding Home Depot, had a nice lunch meeting with Sol Price about this specific idea. When you look at Amazon today and the Amazon Prime model, that can be traced back very much to what Sol Price did with his original business and this membership model. Now, what many people probably don't realize is that the Price family still has an entity that they created that remains outstanding. The U.S.-based entity merged into Costco, but PriceSmart is essentially like Costco, executed abroad.

My guest today is Markus Hansen, who returns for a second episode. You may remember him from the crowd-favorite Casey's General Stores episode. He comes on to lay out what this business looks like, its history, and many of the similarities and differences relative to this same model in the U.S. It's a name that I think more people should know about.

All right, Markus, it is great to have you back. Your episode on Casey's General Stores was a fan favorite, and, as I was mentioning just before we hit record, I still hear about it today. I'm excited to be talking about another very interesting name, which I expect to pique many listeners' interests, and that is PriceSmart. It has a business model that a lot of people love, but it also ties into a founder who is a cult favorite to many people in the audience. Maybe you could kick us off with a high-level introduction to what PriceSmart is and what they do from a business perspective.

Absolutely, and thanks for having me again. I love the Casey's stuff. They continue to do great, and congratulations on their S&P 500 entry.

1. Sol Price Built The Retail Blueprint

Look, there's nothing better than a hometown hero story. I say that sincerely, in the sense that I cover retail and consumer. I've looked at the large names here in the U.S., from the Walmarts to the Costcos. But really, if you want to go back and understand the novelty of the retail formats we know today in the U.S., there is one name that a lot of people don't realize unless you speak to the guys who follow the industry going back many decades.

There's a gentleman called Sol Price, who was born and raised in the San Diego area and basically created what we know today as the modern club store, or wholesale store, as they called it originally, but now called Club Store. It's basically membership retail, where, as a consumer, you pay an annual membership fee for the right to go and shop at this place because it sells you a limited range of products at great value prices, using bulk purchasing to get cost savings. It's very good at honing in on the stuff that you really need, but more importantly, giving you interesting discounts.

It occasionally adds new product areas, gives you things like samples, and adds services like vision or dental services. When you think about what you're paying, you're getting a lot of value for your money. On top of that, there's a social factor, which is this idea of giving you high-quality, value products at a good price while at the same time investing in the employees and the customer experience and growing this in a sustainable fashion.

The great thing about Sol Price—and a lot of people don't realize this—is that you can trace his impact to some of the major names we know today. Sam Walton, in his book, talks about the one guy who basically opened his eyes a bit to how he should be running a business, and that was Sol Price, with his then-business called FedMart. He then moved on and started Price Club. This is the guy who later merged Price Club with Costco and created what is today's modern-day Costco, and who also influenced the guys at Home Depot and Target, which later bought some of the old FedMart stores.

These are the retail giant names we know, but here's this gentleman, and now we're talking about a business that is in its third generation. The grandson is running the business today, so the DNA is in the family. For those who are wondering about this story, PriceSmart is listed in the U.S. and based in San Diego. It does all its business in Central America, the Caribbean, and South America, effectively replicating the Costco model across those regions.

It's doing very well and, I think, has a runway of growth that is decades in the making. We believe this is a fantastic compounding growth story for the mid-future and one of these small caps that will become a bigger player over time.

It's really hard to overstate the impact of Sol Price. I think you can even look at Amazon and the Prime model and what that represents from a membership perspective. It has extended so far, and Sol Price is a name that should be known by pretty much every investor out there.

On the PriceSmart origin story, you mentioned they were working outside of the U.S. in these emerging markets. Was that a deliberate plan? I'm curious about the origin story and how it differs from what eventually became Costco with Price Club, as well as the decision to have a dedicated emerging-markets-focused brand.

The story goes back to the 1950s. He created this company called FedMart. By the way, there's a book out there about Sol Price. It's no longer in publication, so it's become one of those cult books that's gone up in price. I'm probably talking my own book here. I own a copy of the book, so it's going to go up in value as we read about it.

It's very interesting because a lot of people who are in the industry will say, "Oh my God, this is one of the ones you have to read," along with Sam Walton's own biography. FedMart was initially started with a $2 annual subscription and was mostly geared toward federal employees, who generally were on lower salaries, to come in and buy products.

The other revolution that Sol Price initiated at the time was this idea of mixing grocery with general merchandise. Generally, back in the 1950s, you went to a grocery store to get groceries, and then you went to a department store or something similar to buy clothing; they weren't mixed together. This idea was also revolutionary, and if we look at the big chains today, that's what drives things.

The company was eventually listed, and then a German family owner came in and bought it. They eventually had a bit of a falling out with Sol, who was managing the business, and he left in 1975. He then went off with his son and started a business called Price Club, which is the origin of today's PriceSmart.

This was the idea of a club store that would hone in on between 2,000 and 3,000 SKUs—that is, individual items you sell. Now, it sounds like a lot, but if you think about your average Walmart, you're talking about 25,000. If you go to a general big supermarket, they'll be carrying maybe 30,000 or 40,000 items. Think about all the ranges of ketchups, mayonnaises, and snacks you get.

In a club store, generally, when you're going in, you'll have 2 or 3 national brands and maybe 2 sizes of the packaging, not the 10 different ones you get in there. Very often, you'll have a private label in there as well, which is their development of a cheaper version. This is what the club stores focus on: the idea that if I buy in bulk and sell a limited number of SKUs, I can get those at a cheaper price and then offer them at a cheaper price to my customer coming in.

And there starts the sort of flywheel of why you'd want to join and become a member. Coming back to your question about the Costco side, Price Club then IPO'd in 1980. By the way, Sol Price was 60 years old at this stage, so he wasn't retiring. This is a guy who wants to work his entire life; he's a retailer at heart.

About this time, in the early 1980s, a gentleman called Sam Walton, who founded Walmart, started noticing there was this club-store concept where people were paying to go and shop, and it kept growing. Maybe I should go chat with these guys. At the same time, Costco was coming into existence.

What's interesting about Costco is that the main founders behind Costco started their careers at FedMart. Here, you're seeing the relationship among the different things. Sam Walton was actually interested in buying Price Club, and Sol Price said, "Not interested in selling. This is my baby." They eventually merged to form what we call Costco today.

If you have some older listeners here from the '80s, they'll remember a company called PriceCostco, because you used to get your little card, and that was the name on it. You've got to go back to the '80s. Costco was very big in the US, or growing in the US, and going into some developed markets outside the country, but it had some individual stores in Central America where they'd gone to try and see what happens. It wasn't really going anywhere.

If you think about it in terms of revenues, it wasn't moving the needle, and it was taking up more management time than needed. Those assets—at the time, I think there were 2 or 3 stores—were spun into a company called Price Enterprises, which was then spun out from Costco and taken private by the Price family. That became the original framework for today's PriceSmart.

PriceSmart was then, I think, technically founded in 1996. This all happened in '93, and the first store was in Panama, the country of Panama, and then it expanded further. That was the link, and there is still a link with Costco today. They actually buy some private-label Kirkland products.

Kirkland, for those who don't know, is Costco's private-label brand. It's very successful. I think at Costco it's about 33% of the products they sell. Again, the whole idea of a private label is that you can offer the same quality and taste or feel of a branded label, but obviously at a discount of anywhere between 25% and 30%. You're not messing around with the quality, but the attractiveness is that you control the product, and it's a higher-margin business.

They sell some of that, they do some of their own, but there is this goodwill factor between them. The attraction at the time of setting up PriceSmart, and why he realized it could be interesting, is that in the markets they operate in—which are Central America, the Caribbean, and South America—there are no other club stores. There is no competition.

Going back to the Walmart story, Sam Walton, not to be outdone, said, "All right, I can't buy you. I'm going to start my own thing. It's called Sam's Club." That's how Sam's Club came to be as well. It's a very interesting story, so this is why the allusion is to the idea that this is the Costco of South America. It has lots of the elements, but when we think about today's Costco, it's interesting that Sol Price and the Price family were really the main contributors to developing that concept and the success of what it is today.

Absolutely. I know Jim Sinegal, the longtime Costco CEO, credits Sol Price with a lot of things, including mentorship. You mentioned one of the questions that I had there around private label and some of the approach that PriceSmart takes, and how it might compare to a Costco or a Sam's Club. When you think about memberships versus merchandise, is there anything that looks drastically different from a revenue perspective or an operational perspective versus what the club model in the US looks like?

2. Memberships Power Emerging Market Demand

Yeah. First and foremost, the markets they operate in are different. Whereas Costco is predominantly a North American business, these guys are operating in about 12 markets across a region that has a bit more volatility in terms of differences in per-capita income, population, political volatility, and foreign-exchange volatility.

What's interesting here is that, in a lot of the Caribbean islands where they originally started up and in some of the Central American countries, they're all dollar-based economies. About 50% of their end revenues are in dollar-based economies. The rest are in more volatile local currencies. They don't really do much hedging. They take a product priced in US dollars and sell it in the local currency.

Interestingly enough, and this tells you the strength of the reputation and the brand, very often when you have some sort of wild move in a local currency—for example, today there are about 61 stores, and 11 of those are in Colombia—the Colombian local currency has been a bit wild for political reasons, oil-price-related reasons, and so forth. When there's crazy inflation and the local currency moves, there is a near-term impact, but very often they keep the pricing as is, and the customer keeps coming back and buying. Sometimes they'll raise prices for sudden moves in foreign exchange if needed, but based on the numbers we're seeing, it has an almost de minimis impact on revenue.

This may give you an idea of the size of the company. We're talking about a company right now that has a market capitalization of just over $5 billion. They do just over $5 billion of total revenue, so this is not the biggest thing around. We're talking about a couple of hundred billion dollars of revenue at the Costcos of the world.

They have a customer base—these are paying customers, members. That's the same thing. You can only shop there if you're a member. They have 2 tiers of membership. It varies by country, but the average price is $45. The higher one is $90. That's lower than what we see here in the US for a Sam's Club or even a Costco membership, but for a local emerging market, that's a relatively high number.

What you're really appealing to here—and this was part of his thinking, going back to the origin—is the growing middle class that you're seeing emerge in these emerging markets. You're thinking about the top 10% or 15% of the population, which is growing over time. That population base is seeking very similar shopping experiences to what they've seen, and these are the people who come and travel to the US.

I've spoken to customers of this company and actually spoken to management. A lot of people send their kids from South America to school in the US, experience the US, come back, and get corporate jobs. They want exposure to US products that they saw in the US when they came for vacation or visited family who are over here.

Very often, people who've come and worked in the US to make some money and then go back love the experience of going to their Walmart, going to their Costco, going to BJ's, and all this stuff. They love the benefit of the products, and they're getting good, US-style quality products. Again, most of the competition tends to be local SMEs and local supermarkets, where the quality can be different, the cost can be different, and so forth.

You're paying what you're getting. You're getting access to stuff from the US that you may not find locally. The nature of how you're shopping as well—the big-box style of the store—is air-conditioned, with parking, and it's safe. You're getting good value for money.

As you mentioned, one of the attractions of the club store—and this is what they use here as well—is that if you're paying the premium rate, you're getting some added services. That might be 2 or 3 free vision checkups a year. Maybe I need to get to my club store and get my eyes fixed as well. You might get some dental checks. In some of their markets, they're offering a basic doctor checkup. In some regions of the world, that is both expensive and hard to come by, and that more than pays for the actual membership, so that's seen as an added benefit.

On top of that, you have some added things, such as seasonal products they come up with. They're constantly innovating and bringing new things in. That equates to a similar story. If you pop into a Costco today, why are you going to Costco? Firstly, you're going to do your regular shop. Secondly, they always have stuff you're trying, which is always cool. I mean, you could do a whole meal if you walk around the place.

I remember my first visit to a Costco in America. I was like, "I love this place. This is great." On top of that, maybe you get your eyes checked, get your dental check, and it's all in one quick trip. It's a bit similar, actually, to what we talked about in the Casey's story. The power of convenience at the right price is probably one of the single biggest drivers of retail demand, and particularly of that recurring customer who's going to come back.

I just had a visit to the tire center because I needed new tires and went to Costco. You see the gas lines there, particularly when gas prices are where they are. A good club membership pays for itself many times over, and it certainly seems like that's the approach that they take.

In terms of the footprint today, and maybe tracing it back in some way, you mentioned it started more Caribbean-focused. What has that looked like in terms of the build-out to the 61 stores today? Have there been periods of material expansion, or, thinking about where they've been over the past couple of years, are they interested in increasing the footprint or exposure to different geographies? How would you frame that?

Yeah.

3. Expansion Starts In The Caribbean

Most of the early stage of expansion, in the 1990s, was really in the Caribbean. This was interesting because there are 3 types of customer base in the Caribbean. One is the expat community, which is growing. I don't have the exact number to hand, but the number of Americans who are retiring outside of the U.S., particularly in Central America and the Caribbean, is growing because they're looking for a lifestyle that's both luxurious and lower-cost.

The weather's nicer, the facilities are available, and you're seeing this in the growth of medical services being moved there. Panama is a great example. It might have the largest percentage of the American community, along with Costa Rica, living outside of the U.S. in Central America. It's easy to get back and forth, there are airports if you have to come and visit, and people like it because their families can come and visit. So that customer base is looking for American-style shopping.

On top of that, you have a tourism industry that's looking for good-quality products at a scale that they may not be able to find from local providers. The Caribbean plays very nicely to that. Think about all the high-end hotels, or even mid-level hotels, which are driven primarily by American tourists. So it was an easy, symbiotic thing to do. Finally, most of the countries in the Caribbean will have some sort of dollar-based economy, so from an FX perspective, it's very easy to manage and set forth.

The next thing was moving into South America, and the biggest single move they made there was going into Colombia. I'm going to double-check my numbers here, but the Colombia story is about 10 years old now. For those who don't realize, Colombia is a pretty sizable economy. It's overtaken Argentina, and I think it's the 2nd- or 3rd-largest economy in South America now in terms of GDP. It has a pretty large population—we're talking about 45 million to 50 million people—young, dynamic, and growing.

It went through turmoil with civil war, and there was obviously the drug side of things. But along the way, it has really emerged as this go-to place, developing technology and becoming an important consumer market as well. The idea there was to move into the growing middle class in South America who, as I mentioned, have had experience with the U.S. These are people who've come and studied in the U.S. to get their degrees, have gone back to form businesses or work there, send their kids, who come back and tell everyone about it, and/or have come here as tourists, spent some time, and realized there's this opportunity.

But the club-store idea doesn't really exist, and it's the right pricing: for $45, you get this. As I mentioned, if you move up to the Platinum, which is the high-end one, that's $90. That gives you some cash back as well. The ability for a system to run had to come from outside because internally, that concept wasn't there.

As I mentioned, the actual nature of the store—the big box and how it's set up—if you go to a PriceSmart, it's a very similar layout to a Costco. Nothing too fancy, but good lighting and big, wide aisles. Everything's clear. You can be in and out very quickly because you can find what you're looking for. You don't have to sit there and figure out, “Of the 10 ketchups, which one do I want?” There are 1 or 2.

Yeah.

“And by the way, have you tried our private-label one, which is, on average, 25% to 30% cheaper and generally has the same attributes?” That drives interest as well, and you can only find that there. Once you're hooked on the private label, you go back for it.

There's also a good mix, as I said, of staple foods and fresh food. They're doing very well on the fresh-food side, by the way, expanding very nicely. Chicken is a big one as well; they were commenting on that in the recent numbers. You're talking about 45% of sales being related to food, and the other 55% is general merchandise, which is a combination of clothing and seasonal products.

You have gardening products and the different holiday seasons, particularly Easter, Christmas, and various other occasions, where you bring those things in. You bring a lot of American products down there—Halloween products and the famous holidays we celebrate here. That is resonating well in South America.

I'll give you a little teaser here. To give you an idea, of the 61 stores today, the biggest single market right now is Colombia. They have about 11 stores there. If you look at the average consumption versus the population potential and the targeted market, Colombia itself—and they don't give you guidance on this—very much fits with their algorithm and could easily be about 25 stores. So even if they don't grow in the other markets, you can see the growth, but they're obviously growing in the other markets as well.

The next one is Chile. Chile, further south, is, from a GDP perspective, the 2nd-largest economy, but it has a slightly smaller population. If you haven't been to Chile, it's very developed. It actually should be up there with developed markets. It has a fantastic banking system, pension system, and savings system, with per-capita figures that are among the highest across the region.

Again, when they go in, this is the other thing about PriceSmart: it reminds you of these family companies that grow at a sustained but manageable pace. They like to own the real estate, or, where they can't own the real estate, enter into long-term agreements because they go and build the store format very much to the same standard as they do everywhere else. It's at a U.S.-type level in terms of safety and solidity of construction, with its own distribution backup behind it.

Once they get to about 4 or 5 stores, they actually go and set up their own DC. They're very much controlling the logistics here. I think we talked about this in the Casey's call, but if you look at Sam Walton's history, the 1 thing he realized is: control your logistics and you control your future. Inflation comes and goes, prices go up and down, supply chains change, and truckers go on strike.

If you control your logistics, you control your future, and some have argued—and actually, look at another great company like Coca-Cola—that these are effectively logistics platforms that have something on top of them. In the case of Walmart, it's Walmart. Coke is a beverage company. I can't remember if it was these guys or someone else. It may have been the guys at Casey's, but for the history buffs, General Pershing led the American Expeditionary Forces during World War I and learned his lesson in the Mexican incursion in 1916.

He has a famous quote, which is, “Soldiers win battles, but logistics wins wars.” Controlling your supply chain, particularly when you're stressed out, is the single most important factor in determining your margins and your costs. A buddy of mine in private equity told me that story. It's very important because this is why it's maybe growing at a slower rate than some people would like. Lord knows they've had consultants come in and told them, “You could grow so much faster,” but they grow in a very controlled manner.

One area where this comes back and is very important is in the Caribbean, which is subject to some pretty heavy weather conditions sometimes. In Jamaica, they have 2 stores right now. When the hurricanes hit Jamaica, they were very bad this last season and pretty much wiped out everything else. Their level of construction is such that their stores survived and remained open. They're opening another 2.

Again, I mention this because they're very focused on the longevity of the products, the store, and the ability to service their customers through any ups and downs. When you're a customer, when you're paying to be a member, you suddenly understand how important that is going forward. These are the less tangible benefits of this offer, but they also explain why the credibility of the brand and the products in the store to the local customer is very important.

It certainly makes sense in terms of also being very thoughtful and calculated about how they approach growth. On the logistics point, having this international presence requires import logistics as well. How much do they control in terms of that and import logistics? I'm thinking 5 billion in terms of size. I'm not sure how much they can do in that regard. So how far does it extend?

4. International Logistics Protects Margins

When they started out with this, they basically had 1 big distribution center out of Miami, and they've since expanded in recent times. They're opening one in San Diego as well, but Miami was the main center, primarily for their Caribbean expansion at the time.

Locally, they'll have distribution for bringing stuff in. They ship it using someone else's shipping; they're a major customer for those shipping companies, so they tend to get good pricing, and then they send it down. It's interesting, actually: they were asked recently about tariffs. They're effectively an exporter from the U.S., so they don't bring anything into the U.S. that they don't sell. There's no real impact there.

Generally, in a lot of the markets they're operating in, there are some local tariffs. It's funny: when the tariff tantrum happened, when you speak to international companies, in a lot of parts of the world, there are tariffs. They've been around for a while. It was just new to the U.S. coming in. So a lot of these companies have a playbook for how they manage tariffs and pass them through.

For these guys, it's really about setting up, and they're now setting up on the western seaboard of Central America as they expand their capabilities. What's interesting in terms of the products they sell is that, on average, in most of the stores, close to half of the fresh food will be sourced locally.

Let's say fresh is about 25% overall. The other stuff tends to be things like staples, so they sell private-label peanuts. The mixed peanut, a big thing. They're called Members' Club, but it's very similar to the one you find at Kirkland. Those things are shipped from the US—nonperishable kinds of foods. They do bring stuff in from Asia, particularly lower-cost but good-quality clothing and toys and so forth, and then the seasonal products on the gardening side.

More often than not, particularly in a place like Colombia, generally one of the larger economies they're going into, or Costa Rica, where there is a farming base, they're able to work with local partners to get scale and bring local product in. You're seeing a mix of local and US stuff. The other thing they're learning is that they're taking stuff they're finding sells in Costa Rica and Panama and bringing it to Colombia. We think of Latin America as one entity, but if you go to each economy, there's a different taste vibe, and they're finding stuff that works well.

Again, not to go back to our previous one, but one example they're discovering is the interest in spicy foods. They're learning that from their Texas and Southern stores and bringing it further up north, closer to the colder borders, where people are discovering it. Really smart retailers are very good at finding the SKUs that can differentiate and keep that cost within their system, and every little bit they're doing on that side is margin-accretive.

Yeah. Tell an Argentinian and a Chilean that they're similar, and they'll argue with you for a long time. But yes, I think it makes sense in terms of what translates across geographical lines. On the point about expansion, the impression I'm getting is that, yes, there is an opportunity and there are markets that over time they can enter into, but it is very much about being thoughtful and calculated and not overexpanding too quickly before they have the logistics figured out.

5. Ownership Supports Controlled Expansion

One of the key things we talk about is whether they can own the land and the property. We've seen this before, going back to logistics: if you're in control of that operation, yes, it's slightly asset-heavier. But once you can do that, the fact is that your retail operation will evolve over time in terms of how that's set up.

For example, right now they're still doing more on the omnichannel side, where they have an e-commerce platform. Most of the time, we've seen this success outside the US. Here in the US, we're used to getting a lot of stuff delivered. Actually, if you go outside the main city areas, we're seeing this interesting thing, like we saw in Europe, which is the idea of ordering and then picking it up on your way home as you drive home—click-and-collect.

That's the same thing we're seeing in Central America. They're doing some of that, but they're using part of the store, which they can now remodel because they own it and run it, as a distribution center, where they set that up separately without impacting the rest of the store. If you're leasing that, you then have to speak to the owner: “Can I do this? Can I not?” So controlling that logistics backdrop is actually a key moat going forward, and it gives them lots of optionality in-store in terms of how they do layouts and control that.

Coupled with the fact that, as a customer, in certain markets there's parking, it's safe, and there's a security perimeter around it, you're more than willing to bring your family to go shopping. If you bring your family, guess what? The kids are going to want to go buy this. So making it a convenient, safe, tidy, clean, air-conditioned environment can be a big driver in markets where a lot of that is actually harder to come by. We take it for granted here.

And then access—the locations are important. You tend to be near major roadways, so people can head off home, but it also plays into your distribution because you can get that in from the port. A country like Colombia, if you ever travel there, is very mountainous, so the geography is much harder. Being particularly selective around that makes a lot of sense.

They're also very much aware of things like property rights, so there would be certain economies that, naturally, they're stepping back from right now. Once you invest money, particularly if you're going into ownership of hard assets, you want to make sure that if there are any legal issues, there is some sort of right to come back again.

But one interesting economy I mentioned is Venezuela. Venezuela, with all the political action going on right now, is sparking a lot of interest. It's a large-population country that, if you include the people who've left and might eventually come back, used to be a very dynamic and rich economy right next to the border with Colombia. That would be the kind of economy with the right political backdrop that they might look at. They're not saying anything right now, but it makes a natural kind of fit with what they're doing, and there is no club-store system there either.

Chile—they were looking at it for a while, and they never give you the exact details, but I think they've been working on the Chile opportunity for the last 5 years. It's really about getting to know the market: they'll send people down and learn, and they'll get to know the regulator. What they're looking for is a regulatory environment where there's someone they can actually speak to and understand the rules, where it is a rules-based economy, and where they have the ability to find the right locations.

Then they work on, “Get me to the first 5 or 10 stores, put a DC in, and once I'm there, hire and teach local management.” This comes back to Sol Price's original idea. One of the things he was a big fan of was retaining and training a lot of employees and bringing them up through management as well.

That idea is very strong at these club stores. The relationship between the employees and the ownership is extremely strong. Keep in mind, in these markets, these are good, very stable jobs that bring many benefits with them, including pensions, health care coverage, and so forth. Driving that helps bring management up through the ranks. Then there is a symbiotic effect: the families of all the employees become customers because there is a loyalty factor as well. It works very well. In Central America, they've done very well.

The only other thing, if you go back to the difference as well, is dealing with FX. There are some economies they're in where they actually have some inability to get their cash. They're doing so well that they like to bring the cash back in dollars to headquarters, and a place like Trinidad has some FX constraints, in the sense that you can't find enough dollars to convert the local currency. So again, there's a bit of savviness here: keep what you need there, run it from there, and then try not to put too many dollars in, even though your business is very profitable and doing very well.

For a company of its size, it does seem a lot more complex. The fact that they're able to do this in this type of environment, with that added volatility, and be successful gives me even more confidence that this is going to be a good success story over time as they get larger.

Absolutely. In terms of revenue and earnings volatility, as you deal with countries where there's just more underlying macro volatility sometimes and different dynamics than with pure US exposure, how has that trended historically? Are there major swings in cycles, and how much macro sensitivity exists? Obviously, taking into account that there's some diversification just in terms of regional exposure.

6. Store Economics Compound Over Time

Exactly. Right now, the scale of the company, given that it's in these 12-odd markets and has $5 billion of revenues, means that if you have one market go through a bit of volatility, it's more than managed by all the others. Colombia is interesting because it has the largest single-market footprint.

Like I mentioned, this is a market where I think, based on the analysis I've done of GDP, the addressable market in terms of middle-class and upper-end spending and the ability to broaden across a large economy could easily be 25 stores by itself, so that could more than double. Then within the group, it gets bigger. That market could actually be a bit more volatile, but a place like Chile, which is less volatile relative to it, could offset that, which I think is how they're thinking about it.

So far, they've generally managed it. There'll maybe be 1 or 2 quarters where you see a bit of a wobble, but over the course of the year, the actual comping is relatively stable. Part of that, I think, is that they are targeting a less volatile part of the consumer complex, whose members generally have the wealth and are going to shop anyway.

Remember, this isn't the only place they'll shop. For a lot of other things, they're going to go to other supermarkets, but this is going to be their core go-to. The beauty of this is that the single biggest driver of operating earnings right now is the upfront payment of the membership. About 40% of their operating earnings come from that, so already at the beginning of the year, as members subscribe, they've locked in about 40% of their earnings. That's great visibility to have as you're managing the rest of the year.

The real driver, I think, Raoul, of the earnings continues to be this idea of not just recruiting new members, which is growing quite nicely, but getting members to move up to the higher tier. Right now, to give you a mix, just under 20% of their membership base is in the higher-paying $90 tier, what they call the Platinum Card, and then the rest is $45. But that has grown from 12% just 5 years ago, and what they're doing there is more and more explaining the benefits of this—that it pays for itself with the cash back.

There’s about 2% or 3% cash back you get on top of the added benefits. Where this is really resonating, though, is that they’re becoming a go-to supplier for small and medium enterprises. Think little restaurants and small hotel chains that are looking for quality and really targeting American tourists or people who like a Western-style standard. They’re bringing stuff in from Europe, but mostly American-type snacks or food products as part of that offer they’re getting, and that’s driving another area where they’re leaning in more as well.

So right now, $5 billion in revenue, I think, is very manageable across the diverse base. Hopefully, we’re having this conversation 5 years from now and there’ll be $10 billion, $15 billion-plus. Then I think, once we get to that scale, it could be. But right now, it is manageable, and they’ve done very well in this. The only thing has been this trapped-cash issue. It’s a high-class problem to have: you’re producing way too much cash in a market you want to get out of, but they’re managing it in a good fashion.

Is it a similar story in terms of gross-margin stability and the general approach or sensitivity on margins? You mentioned some of the FX dynamics and how they approach these things, but how would you compare it to the U.S. price clubs?

They’re trying to put in as best they can on that number. The idea is that by owning the logistics, in terms of the distribution center all the way down to delivering to your actual local store, the more they control that, the more they can, A, as a bulk buyer, get the benefits of that. That’s coupled with the fact that they start to become a sizable local customer for a lot of their suppliers, who generally are dealing with a lot of SMEs.

They do emphasize that they’re not out there to get the lowest price possible. They really want to work with the local farmers and the local fishermen and get them to scale. This is a company that, I think, if you were to be a full-on capitalist, probably under-earns specifically to ensure that its supply chain is sustainable over the long term and can grow with them over time, bringing a good-quality product. They’re not looking to get the best margin possible, just to deliver a product at good value for money for their customer.

That’s relative to what they see in the market, obviously, but they understand that this is more long-term and sustainable, as opposed to just going for a hit-and-run approach: let’s make as much money as we can. That again comes back to this DNA. If you get the chance to read the book or the reviews of the book, Sol Price was also very much driven by being a good member of the community, and that ties in with the philanthropy they do outside of this.

It’s not just dealing with charities, but also developing local areas. Those people who live in San Diego probably know him better because he was instrumental in redeveloping the downtown area of San Diego, which had been through ups and downs with industry and the spending on all of the Department of Defense, to make that a nicer place to live, but also open to the community and the social side. They do a lot with kids.

It’s a very sad story. His grandson died young, and it affected him in the sense that he felt there was a part of society that didn’t have access to the right kind of healthcare. But on top of that, there was this idea of embracing the notion that if you do well for your community, the community will do well for you as well.

Again, these are the stories that I think we often forget about. You’ve got a guy down in Hershey, Pennsylvania—I think there’s a movie coming out, actually—who talks about that story. These are the do-good capitalists who realized that in times of crisis, or when times are tough, if you invest in your local community, they’ll stick with you through thick and thin. Again, this comes back to the kind of nature of what’s going on in a more modern society.

Yeah. Become staples of that community and represent something inside of it. You’ve touched on some of the decision-making around real estate and CapEx, but at a high level, what would factor into capital-allocation decisions? What has been their historical track record in terms of dividends and buybacks, and reinvesting in the business? Obviously, they have some cash that might be trapped in certain spots, but that’s a good problem, as you mentioned. What’s been the historical track record around capital allocation?

When they go to scale in a market, initially, the returns on capital tend to be at the lower end of the range. Generally, the store paybacks are pretty quick, so a store can become profitable within 2 or 3 years. To give you an idea of the size of the store, if you think of a traditional Costco you go into today, they’re about one-fifth the size of the larger ones. So, it’s a lot smaller of a box, but big for where they are locally.

Those stores, if they add a distribution center around them, very often will take maybe an extra couple of years to bring back the returns. But once they get to 5 stores, there’s a densification effect in a local market. You then start to see operating-leverage improvement. They design the distribution center with the ability to expand it fairly quickly.

Again, I’ve seen this playbook with Casey’s, and certainly with Walmart or Costco as well. This is where key ownership of the store land or the actual store box is important, because they build in redundant flexibility, which can allow them to expand. This is why they’ve confirmed they’re working on Chile, but Chile will be interesting for your viewers if they want to follow this over the next couple of years.

Once they announce the location and the start of that, the discussion in the first 2 years will be how quickly they get the distribution center open and so forth. Generally, though, you’re looking at a business where, through this controlled period of time, the top-line growth is strong. On average, they’re adding between 3 and 4 stores per annum across the network. If that store is in a more densified area, it probably kicks in a lot quicker. But on average, they’re spreading these around, so there’ll be 1 store in 1 market and 1 store in another.

This is off a base of 61, so that gives you some underlying growth. On top of that, they’re growing the core same-store sales at a mid-single-digit growth rate. One in 5 of those customers is converting right now to increased Platinum spending. So you’ve got these drivers: the mix is improving while it’s growing, and the actual store size is growing as well. Then there’s the operating leverage once they get above a certain level in each market from the distribution-center side.

This is a business right now that is doing $5.5 billion of forecast revenue, about $350 million of EBITDA, and about $250 million of EBIT. It’s pretty consistent. As I mentioned, close to 40% of that on the EBIT side is money paid up front in terms of the membership. So there’s good visibility and the ability to turn that into cash flow generation. Cash conversion is fairly decent, running at close to 90%-plus.

Keep in mind, this is mostly food. Yes, there’s general merchandise, but it’s pretty quick-turnover merchandise. So the cash-conversion rate is very attractive, like any retailer would want it to be. Again, their supplier terms tend to be very good as well. As they get bigger, they don’t lean into that. I like that.

Like I said, these guys could print more money if they wanted to. They deliberately decide not to because they see the long-term benefit of growing their business with their suppliers. To get bigger, you need a supplier that you can rely on, and you grow together. The alignment here is very powerful. We’ve done some work speaking to suppliers, and they speak extremely highly of this.

This is why the runway, if we look at both the population areas—right now, as I mentioned, they have about 2.5 million core paying subscribers—gives them a lot of room to grow. Their core population area is about 70 million. So if you think about the tangible size of the middle and upper class in those markets, particularly if we get a place like Chile coming on board, the number of customers they could get to is a multiple of that over time. Coupled with the fact that those customers are more likely to be higher-paying ones as well, that gives you a very attractive mix.

If we go from 2.5 million to 5 million or 6 million, half of those could be higher-end-paying customers within a decade or so. That’s going to give you very nice earnings growth over time. We’re looking at double-digit growth here right now, about 11% or 12%. Dividends are a bit smaller right now. The yield is not big; it’s about 1% or 1%-something.

The balance sheet is pretty much unlevered. They carry very little, if any, debt, and it’s really more about investing in the business going forward. This is why I think this is a company where you have a very nice path to sustainable growth, assuming none of the bigger countries hit any sort of large macro dislocation.

That’s why I think they’re being very careful in terms of the larger markets they’re going to. They’ve been very good in terms of diversification. You never want to go through a tough time. The good news is that if you navigate it well, it reinforces the model.

Hurricanes impact a lot of the Caribbean. They’ve designed their stores to be hurricane-proof. Each time, it actually gives them more share because people come to recognize, “That guy’s still open 24/7. I can go there.” They help out with local emergencies, but they really garner a lot of goodwill.

The same, I think, we’ll see in places in South America, where they’ll start to deliver this idea of a great everyday-low-price-type offer through the club membership. When you go into an economy and say to someone, “$45—that’s a lot of money,” you can say, “Look what you get for it, by the way.”

You get healthcare, basic healthcare, and health checks for your kids and family in that price. You would pay that already. And by the way, you also get to come in and shop at a discount. That's pretty powerful, and getting the word out there is pretty good.

One thing I would add: people have asked about the impact from e-commerce. There are some very smart e-commerce operators in the markets where they are. Amazon is in a couple of these markets. For listeners who don't know, the Amazon of South America is called Mercado Libre, and they're doing a very good job.

Keep in mind that they're predominantly geared toward merchandise, very much around electronics and fast-moving stuff. So they are a competitor, but again, very different in terms of the food side of things. And then think about the heavier, bigger stuff that you're going to pick up, like garden furniture and things. That's still harder to do.

But they're aware of this. They are looking at the idea of some sort of e-commerce down the road, using their stores as the pickup side of things. But that still is an area where—

I'll come back to what you mentioned. There was a change in management in the last 2 years. It was interesting: the grandson, who'd been working his way through, took over officially as CEO, and they brought in a new CFO who comes with a strong track record of management in South America. That again adds to this understanding that South America is where we may see them lean into places like Chile as new markets.

He has some experience on that side, particularly in a place like Chile, where e-commerce is a bit more developed. So I think 2 or 3 years from now, we'll hear a bit more of that CapEx going into that side of things. But right now, CapEx really is just building more of these stores, bringing the DC along, and leaning into this operating leverage over time.

Yeah. It's interesting when you have a proxy in the US. I'm going to beat it to death, but Costco and its ability to thrive throughout the e-commerce revolution is an interesting case study relative to this, too. Everything you mentioned there has some added credibility when you look at how things have managed here.

In terms of looking forward and the risks that do exist, you've referenced many risks that theoretically exist, but what would stand out, if anything, the most to you in terms of what's most important to get right to fulfill what's possible in the future?

7. Disciplined Growth Protects The Thesis

Yeah. Really, keep doing what they're doing. Don't rush anything or change anything dramatically.

I think private label certainly continues to be an area. If you look at best-in-class US companies, Costco is about 33%. Sam's Club, I think, is just above 30% from the disclosure I saw. They're right now at 19%. The ability to maybe do more of that going forward tends to be more, if we think on the fresh side, the ability—

One area they'll talk about on the call right now is developing a private-label chicken offering. This is going out and finding some large farmers they can deal with locally. A lot of that's sourced locally, so it's building goodwill with the local guys, but getting the type of quality which is consistent, rather than just being one little store where you can come in, and getting this across 10 stores.

In the bigger markets, I think that's feasible. We'll see more of that. That's margin-improving, because generally you enter a private-label transaction because it's margin-improving for the same type of thing you're offering. It also builds your reputation. Once someone is buying something from you on the fresh side for the first time and it's really good quality, you're more likely to go and try their other stuff.

As we know, Costco is renowned for its famous shrimps. Obviously, then you do things like the chickens, the hot dogs, and all this stuff. Most of the time, when it goes to something fresh, we really want a brand at first. We're going to go try something which is local but of really good quality. So I think there's more they can do there.

The other part, I think, is some of the other services they can offer. I'm pretty sure you talked about how you were going to the auto center to get your tires. They don't do that right now. That is an area where auto is an interesting one, given how they're located. They have the parking area. It might be something they might do in some of these larger economies as well.

It's an added service, and most of the time what they're looking at is areas where there is fragmented competition, but where, coming back to this idea of convenience, if you can go and get all this done and say, “Remember we talked about Casey's? We sell you time”—the most valuable commodity you just cannot get enough of—“make sure they're even better,” and that's very powerful.

Also, getting the benefit of these being the kind of things where you can think about bulk supply, whether it's tires or auto parts. That could be something down the road. They haven't talked about that, but it's interesting. From both a dollar point of view—the ability to offer discounts—and the type of customer they're going for, that would make a lot of sense.

These are still avenues of growth, so I think this is more once we get to a certain scale. But really, it's bringing this great, consistent, good-quality, solid reputation to these local markets, and it's working very well.

Then it's really leaning into this long-term structural growth of US citizens moving to these markets to live, sometimes for work and then staying there. But also, people from a lot of these countries come to the US, work, and go back, and that experience immediately kicks in. The more and more communication they're doing on that side is working very well.

The final part was really this ability to lift up the membership number. People at first thought that maybe they would move from the average. When they started, it was like $30 going to $60. It's now $45 to $90. It's a big number going locally, and it's working very well because I think they're emphasizing, “Yes, that's a big number, but look at all the benefits you're getting when you do the math.” It makes a lot of sense.

This is why we're seeing very low churn. You've almost got a 90% or 91% renewal rate. It's higher at the higher end. It's almost close to 100%, but granted, that's a smaller base. That's telling you that those who are doing it really are seeing the benefits, and it's working because this is just general spending anyway. People do maybe have another option, but this is really bringing them in.

Fascinating. I'm curious: do you have a valuation framework for this business? What is the market? How do they approach this where there's a growth story, it's broad, but I would just love to hear you talk about that.

8. Valuation Rewards Consistent Execution

Tougher in the sense that valuation is always a tough one, right?

Absolutely.

This used to be a lot cheaper. This used to trade in the teens. It's now trading—I'm looking at forward numbers—in the low 20s.

The US peers, which are peers to a certain extent in terms of the business model, are trading at much higher multiples. One would argue maybe fuller multiples. Now, to be fair, having followed the US retail market for a while, the market pays for sustained, consistent growth, maybe a bit too much. It tends to punish you very harshly when your growth hits a speed bump.

Look at the differentiation between some of the department store companies versus the Walmarts and the Costcos of the world. There's a bit of tech in there as well. That's true.

This shouldn't trade up there with the US peers because there are 3 fundamental differences. One is that with a US player, you're looking at 1 homogeneous market. There are benefits of scale, deep size, and much larger things.

This one does have some added volatility from the markets it operates in. There will be some volatility. However, that hasn't shown up just yet, and they continue to execute.

This is a mid-cap name as well. Let's be clear: mid-caps tend, in theory, to trade more volatile. This one, around earnings, you notice with mid-caps can trade up or down 6% or 7%, and then it goes back to its normal, consistent growth, and it tends to make news flow.

I think this is still being discovered as a stock, though. This is a weird one because it's a US company which does all its business outside of the US. So this is one where we have it in our emerging-market fund, but we're also able to, as it gets bigger, put it in some of the other funds.

There's a liquidity issue. As I mentioned, about 25% or 30% of the company is pretty much controlled, so that $5 billion becomes less in terms of what you can trade. This is really much more of a longer-term story—not too different from Casey's, by the way, when we first started talking about it.

But it's a great story once you get it and see it perform and do well. Therefore, from a valuation perspective, this is not something you should be saying could get to a Costco-type multiple in the midterm.

However, the nature of the visibility of the sustainable top-line growth, combined with the ability to manage through volatile times and still execute on earnings, is very strong for a company which has exposure to a more volatile region. So as an emerging-market manager, this actually looks like one of the more interesting dynamic names I'd want to have in the portfolio on the retail side.

Finally, there's definitely worthiness for a premium here from the DNA of the management. It doesn't get better when you have these guys who've proven it and know it. It's a family business. Generally, you find some great, long-run family businesses taking a long-term approach and view to where they're going to be.

Those tend to be the ones that, through the volatile times, are less driven by the ups and downs of sentiment and really, actually, more often than not, take advantage of the opportunities of the volatility to improve the business and their exposure going forward.

So that gives me a feel that this can trade up to the mid-20s and it's still fairly valued. Then we have to see, obviously, the execution keep coming through. But like I mentioned, if I'm looking at store count, revenue potential, earnings upside, all of these things are moving up and to the right.

And in retail, retail generally is a tough business. I know we talk about the success stories, but speak to anyone. This is why I always come back to Sam Walton—he hit it on the head when he said, “The more you can control within your margin, that logistics”—coming back to general purchasing—“logistics is what wins retail wars.” It's very important. They get a lot of consultants coming in saying, “Go asset-light. You can generate...” It comes back to bite you in the tough times. You've got to have that consistency. So I think they're right up there.

Absolutely. And I like the very holistic breakdown of that valuation approach, too. That was extremely helpful to hear. This has been very interesting. You're, I think, instructing a lot of us again on a business that probably many weren't familiar with. We close these out with the lessons that you can take away, potentially apply elsewhere. It seems like there's a lot that could be applicable elsewhere from this one, but what would you say stands out the most?

9. History Reveals The Retail Playbook

First and foremost, I love history. I'm a bit of a history buff. My son, who's 19 now, is heading off to college, and I'm recommending some books to read. Firstly, the Sam Walton one is a great one. I just want to read about the ups and downs of retail, the business model, how he got there.

Sol Price's book—if you can't get it, you can find some online reviews—is definitely one worth reading because... Speak to anyone from an older generation and ask them about FedMart. If you go online, you see the older club members who have the original card, and they talk about it and laugh about it. But it is very interesting, this idea of the dynamic of a club. If someone had told you, starting out fresh, you didn't know anything, you have to pay to shop here, you're like, “I'll just go shop next door.” But you understand if you pay what you're getting on the other side. The whole concept is an interesting one, and a very interesting dynamic.

So again, it's a reminder that there are people who are able to come in and change industries in the way they look at them and set something up for others going forward. And like I said, Sol Price arguably influenced the likes of Home Depot and these other giants we know. So his impact, or the impact of their ideas, is very prevalent across the board.

It ties in also with this idea—I think the Europeans call it ESG—but very often, some of the greatest companies have also thought about their customer base in terms of their image, but also what they're bringing and adding to the community. And that's in a good way, in terms of jobs, local jobs, and supply chains coming in. I think more and more, if you look at the younger-generation customer base—I know we keep saying they love their stories and stuff—but these are fantastic stories to follow.

And very often capitalism gets a bad name. This is good capitalism, and I think that's important in an era where—I'm not being political here—but it gets thrown around, good or bad. America is a capitalist society. At the end of the day, this is important: to understand how these things can combine and work very well.

The final part is, it's fun when you talk about these things. I have a bunch of friends who are from South America, and actually anyone you mention from the Caribbean—you know, anyone from... And there's a lot of people in... I'm in New York. I mention PriceSmart, and I get big smiles, like, “Oh, my mother shops there.”

One thing I love about research is the anecdotal side, and with retail it's great to do it. I mentioned how, when I first went to Casey's, I went out and checked it out. I took my son along, actually. He's my test bed. He was out there playing hockey with his hockey buddies. “Try the pizza. Tell me what you think.” Loved it. So, feedback—yeah, good. Now they're doing chicken wings. He talks about it.

So you understand that, particularly with something like retail, which is consumer-touching, that word-of-mouth marketing can be the most important thing above and beyond the actual product, and that still is very important. This is an area in which, until we have robots going and doing the shopping for us—I know we have e-commerce—at the end of the day, most of us still like to go shopping at the supermarket. It's an event we do with family and stuff.

This continues to be a key area where product, good quality, and value matter. And yeah, look, supermarkets will still be around for a long time. Club stores are amazing. These are the kinds of things I think you can tie in with just your daily life as well. So this is—who's the... I forget the name of the guy at Fidelity.

Peter Lynch.

Yes, Peter Lynch. It doesn't always work with everything, but this is one where you can experience the product, understand it, and start to see how it works. I think this falls in that remit.

And like I said, this is an interesting one because I love learning about new countries. All the countries they're in—there are a lot. We know the names. I think a lot of people, for instance, after our conversation will maybe go and check out Colombia. Colombia is a very dynamic economy. It's come a long way. Argentina used to be the big guy, and Venezuela... These guys are really developing. It's pretty amazing.

And so learning that—and if you go as a tourist, you'll see these things—it is interesting to see there is another part of the world. So we're big fans of global investing, international investing, looking for great opportunities that are similar to the great U.S. peers. The U.S. market's great, but there are other opportunities out there which mimic what we see in the U.S., and sometimes you can find them at valuations which are even more appealing. So adding that to your diversified portfolio is a great long-term compounder as well.

I love it. This has been a pleasure again, Markus. I appreciate it and enjoy these conversations quite a bit, so thank you very much for your time and for coming on.

Thank you for having me. It's always great. Thank you, Matt.