(FORTUNE Magazine) – At 87, retail's living legend is still very opinionated about the warehouse-club business. We spoke with Sol Price at his office in La Jolla, Calif.

You thought outside the box with Fed-Mart. What was the idea?

After [World War II] there was tremendous demand, and manufacturers pretty much controlled pricing. So there was an opportunity. We called it "getting under the umbrella." The price is up here, and the question is, Can we get under it? Well, we could, because conventional merchandising was set up with very high margins to cover advertising, credit cards, the enormous selection, the delivery costs. We focused on bare bones: limited hours, limited selection, fast turnover.

Tell me more about how you did it.

First, I never allowed anybody at Fed-Mart to use the word "discount." The whole philosophy was: How do we sell stuff at the lowest markup rather than the deepest discount? I never allowed them to use superlatives or comparative pricing or to have sales. All those things were gimmicks. We tried to look at everything from the standpoint of, Is it really being honest with the customer? If you recognize you're really a fiduciary for the customer, you shouldn't make too much money.

What about other principles?

I believed the business broke down into three categories--personnel, product, and facilities--and that the same six rules applied to them all. You've got to have the right kind, in the right place, at the right time, in the right quantity, in the right condition, at the right price.

Once you got going, many retailers wanted to start warehouse stores. Tell me about Sam Walton's visit.

He came out to look at a Price Club, and he was very complimentary. He spent all this time telling me how impressed he'd been with Fed-Mart and how he'd never have all these Wal-Marts and be worth $700 million without that model. "I owe it all to you," he said. "I told him, 'Then don't you think I'm entitled to a finder's fee?'"

You turned down a feeler from Walton about combining Price Club and Sam's. Why merge with Costco?

We were good at innovating, but when it came to expanding and controlling, we weren't so good.

Are you surprised that the discount retailers have become so big?

I always felt department stores and conventional retailers were doomed. They lived and died trying to take advantage of customers, and they were inefficient. The more I studied it, the more it seemed the cost of getting goods to consumers was way too high. I'm surprised the department store has survived this long.