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PriceSmart Struggles to Regain Once-Profitable Venture

PriceSmart Struggles to Regain Once-Profitable Venture

Retail: Warehouse Club Store Model Doesn’t Always Fit in Foreign Markets

BY MIKE ALLEN

It’s been a year since PriceSmart Inc. chief executive Gil Partida left the company but the San Diego-based operator of international club warehouse stores has yet to find his replacement.

Interim president and CEO Robert Price still wears the “interim” tag, though he has been saying for months the company is close to finding a replacement. In a recent interview, Price, son of Price Club founder Sol Price, said, “We know who it’s going to be, but we’re not in a position to make an announcement just yet.”

Looking at PriceSmart’s performance in recent months, the company is in need of a turnaround specialist.

Robert Price, 61, admitted he isn’t pleased with the company’s results in the past year, but was circumspect about the reasons for the net loss and declining sales.

“A lot of it relates to the fact that we have not had as good a flow of merchandise as we had in the past,” he said. “There are certain markets that are particularly weak.”

Since Partida resigned to take a job in a company that transmits funds from individuals in the U.S. to people in Mexico, PriceSmart has struggled.

For its last fiscal year ended Aug. 31, 2003, the company had a net loss of $32 million on revenues of $660.7 million, compared to a net profit of $11.8 million on revenues of $648.5 million in 2002.

For the first six months of this fiscal year, PriceSmart lost $11.4 million on revenues of $313.5 million, vs. a net profit of $2 million on sales of $347.4 million.

The company was forced to restate its financial results for seven quarters after it discovered it had inflated its sales by more than $29 million during the period. Following those revelations, the company was hit with seven class-action lawsuits alleging it mislead shareholders about its prospects. The suits are still pending.

PriceSmart has lost money in four of its seven years of its existence. Last year, the firm closed four of its club stores in Guatemala, the Dominican Republic, the Philippines, and Guam. It now operates 25 club stores in 12 countries, down from 32 stores in 13 countries and two U.S. territories about two years ago.

Reflecting those numbers, shares of PriceSmart, traded on Nasdaq as PSMT, sunk last week to just above $5 until rebounding back to $5.39 on May 27. Its range over the past year is between $4.89 and $15.60. In mid-2002, it was trading above $40.

Foreign Markets

While the warehouse club business model created by Sol Price soon after World War II at Fed-Mart Stores, and later, the Price Club, has become wildly successful in this country, the jury’s still out whether the model can work in Third World economies such as El Salvador, Nicaragua, and the Dominican Republic.

In the Philippines, the company launched a campaign a few years ago selling telephone cards to bring traffic into the three stores in Manila.

The cards sold well, but the margins were so thin, the impact on the bottom line was negligible and didn’t boost sales on other goods. Soon after Partida left, the company discontinued sales of the phone cards. In April, the company said card sales for the first eight months of this fiscal year was $20 million, but excluding that amount, overall sales were down 6.8 percent from the same period of 2002.

Price also changed some of the product mix at many of the stores, bringing back more costly, quality goods to replace an inventory of cheaper, lower-quality merchandise. The shift in lower quality goods was done after the Sept. 11 terrorist attacks decimated the economies of many of the nations that rely heavily on tourism and trade with the United States.

“We have to get the company back to the basics,” Price said.

He’s proud of bringing the concept and benefits of club warehouse retailing to countries that didn’t have it before. In many Latin American nations, the retail segment was dominated by two to four family-controlled chains that would charge the highest price the market would bear.

“In some cases, they were charging 30 to 60 percent above their costs and were getting away with it because there wasn’t any competition,” said an employee who requested anonymity. “After we came in and began selling things a lot cheaper, they were forced to cut their prices.

“By our presence, we were responsible for cutting prices by 20 to 30 percent. They had more money to spend on other things, and I think by what we did, we contributed to their quality of life.”

PriceSmart’s initial success in finding customers wasn’t lost on much larger competitors, and both Sam’s Club and Costco have opened stores in Mexico, the strongest economy among those that PriceSmart operates.

To better its odds for success, PriceSmart joined forces with Grupo Gigante, Mexico’s largest supermarket chain, to open three stores, but the joint venture has yet to turn a profit, according to the company’s most recent financial report.

Last year, PriceSmart lost $377,000 on its Mexican stores, compared to a loss of $648,000 in the prior year.

Tough On All

George Whalin, president of Retail Management Consultants, a San Marcos- based retail expert, said the Mexican market has been difficult for all outsiders, not just PriceSmart. And Gigante has had problems in a number of other business ventures beyond its core supermarket business, he added.

A longtime admirer of the Prices, Whalin said the club warehouse model could work in Third World economies.

“But it’s difficult to take a model that works perfectly well in the United States and take to any country without some serious modifications to the model,” he said.

Some critics say the Prices haven’t made sufficient modifications to their strategy and resist any attempts to change what’s worked successfully in this country.

A former employee who requested anonymity said the reason for PriceSmart’s downward spiral can be blamed directly to a lack of leadership and the inability to find a new president.

Price has a reputation as controlling and stubborn and is certain to have a say in the new president, said the former employee.

Price said finding a new president has taken longer than anticipated because there aren’t many candidates with the type of skills and experience the job requires.

“It’s not an easy fit,” he said.

Despite continued losses and the closure of one store there last year, PriceSmart plans to open another store in the Philippines in June. “Our performance there is still not what we would like,” Price said. “It was great when we opened.”

The firm relocated its main purchasing office from Miami to San Diego last year, which will make the buying operation more efficient and save money, Price said.

It also moved its headquarters office from Morena Boulevard to Sorrento Valley.

“It’s a better office environment,” Price said.

Price still consults with his father on running PriceSmart, particularly on financial matters. In a filing with the Securities and Exchange Commission in November, the firm said the elder Price invested an additional $5 million into the company on Oct. 22 last year. Robert and Sol Price own shares individually and in partnership that constitute 47 percent of the total outstanding.




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