Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.
Last week on Methods of Prosperity:
In 1985, Forbes Magazine declared Sam Walton the richest man in America. He drove an old pickup truck. He wore a Walmart trucker hat. He got regular haircuts at a local barber shop. Walmart lost half a billion dollars after the stock market crash in 1987. To which Walton responded, “It’s only paper.”
Sam Walton was born in 1918 in Kingfisher, Oklahoma. His father was Thomas Gibson Walton, a natural negotiator and banker who avoided debt. His mother was Nancy Lee, who started a milk business during the Great Depression. Growing up during tough times, Sam learned the value of money early. He contributed to his family’s income by selling magazine subscriptions. He raised and sold rabbits and pigeons. Walton graduated with a BA in economics from the University of Missouri. He worked for JC Penney before serving as a captain in the U.S. Army Intelligence Corps during World War II. After the war, he ventured into retail. Walton purchased a Ben Franklin variety store in Newport, Arkansas. He borrowed a $20,000 loan from his father-in-law. It didn’t take long for Sam Walton to discover limitations with that franchise. The store’s competition across the street did better than his store. Sam had the awareness to “learn from everyone”.
The following is Methods of Prosperity newsletter number 48. It was originally deployed May 6, 2024. As of January 23, 2025, original subscribers have received up to issue number 84: Sam Zell (continued).
Part 48:
TL;DR
Sam Walton opened a Ben Franklin variety store franchise in 1945. He engaged in fierce competition with the Sterling store across the street. His main tactic was undercutting prices on items like ladies’ underwear. Sam Walton innovated by buying direct from manufacturers. Thereby saving 25% and passing those savings to customers. Which laid the groundwork for Walmart’s business model. It was against the rules not to buy wholesale from his franchisor. Sam went around them, buying direct from alternative suppliers. His store became one of the top performers in the region. He attracted customers with a popcorn machine. He took out a loan for an ice cream machine, which proved to be profitable. His strategic moves included intercepting a lease for expansion before his competitor could. This led his store to become the largest in Arkansas with annual sales reaching $250,000. After five years of success, his landlord did not renew his lease. Instead, he offered to buy Sam out. The landlord wanted to give Sam’s store to his son. This setback ended Walton’s venture in Newport, Arkansas. He learned the hard way to always read the fine print.
Key Lessons:
Always read the fine print.
Keep experimenting.
Sell more for less.
Bend the rules.
Take up space.
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It was a franchise named Ben Franklin owned by Butler Brothers. Sam Walton’s typical variety store opened for business on September 1, 1945. Back then, the clerks would wait on the customers from behind a counter. No one had invented Self-service yet.
Across the street from Sam’s Ben Franklin store was his competitor. John Dunham managed the Sterling store, and Sam studied his every move. Sam was always looking for a way to do a better job. They competed on price, going to war on ladies’ underwear. If Sterling was selling panties 3 for $1.20, Ben Franklin sold 4 for $1.
Butler Brothers wanted everything done by the book. They assembled merchandise in Chicago, St. Louis, or Kansas City. They instructed Sam what merchandise to sell, how much to sell it for, and how much they would sell it to him for. The rule was that Sam had to buy eighty percent of Ben Franklin merchandise from them. That would qualify Sam to get a rebate at year end.
Sam figured out how to go around corporate. He’d buy direct from manufacturers. It cost him twenty five percent less than buying from Butler Brothers. When he could get away with it, Sam could pass the savings on to his customers. That was the start of what Walmart would make fundamental to its business model.
Now the Ben Franklin franchise wasn’t getting their percentages of merchandise. They couldn’t compete with the deals Sam was able to get from going elsewhere for suppliers. Sam could sell three times more than his competition. His competition included Butler Brothers. Selling high volume at low prices. This was innovation. An item which cost him 80¢ would sell for 3X more when priced at $1 than it would sell at $1.20. He made less profit per item, but more overall profit. This is the essence of discounting. By cutting your price, you can boost your sales. You earn far more at the cheaper retail price than you could have by selling the item at the higher price. In retailer language, you can lower your markup, but earn more because of the increased volume.
At that time, the Ben Franklin system wouldn’t permit the discount model. Sam went around them as much as possible. He bought around seventy percent of his merchandise from Ben Franklin. He bought as much as he could direct from other suppliers. Ben Franklin required Sam to buy eighty percent of his merchandise from them. Otherwise he wouldn’t get his year end rebate. However, Sam’s Ben Franklin became one of the top performers in their district.
The first loan he ever obtained from a bank was for an ice cream machine for the astronomical sum of $1,800. He also had a popcorn machine in front of the store. This was not only exciting, this was innovation that paid for itself. It only took two or three years to pay off the ice cream machine.
Sterling across the street was making twice as much and was smaller in size. This was before Sam’s Ben Franklin store opened. In his first year, Sam’s Ben Franklin store made $105,000 in sales, compared to $72,000 under the previous owner. The next year, it made $140,000. Then $175,000 the third year. Ben Franklin finally surpassed Sterling the fourth year. Next door to Sterling was a Kroger grocery store. Sam’s competitor was John Dunham. He wanted to buy Kroger’s lease and expand Sterling into that space. Sam found out.
Sam intercepted his competition. He bought the lease for that Kroger instead of letting John expand Sterling. Sam installed a small department store there, which he named The Eagle Store. Now, Sam had two stores in Newport, Arkansas. Ben Franklin was doing well, around $250,000 in sales per year and turning $30–40,000 per year in profit. It became the number one Ben Franklin store in the region. It was the largest variety store in Arkansas. The Eagle never made much money. But a small profit was better than allowing his competitor to have that space.
Sam had been in business for five years. He went from a struggling new franchisee to the top retailer in Arkansas. No experiment failed. He made no mistake that damaged his business. However, there was only one thing he neglected: the fine print. He’d signed a five-year lease for the Ben Franklin store. There was no clause which gave Sam an option to renew after five years. His success had attracted attention. The success of Sam’s Ben Franklin store impressed his landlord. His landloerd decided not to renew the lease at any price. There was no other place in town where Sam could relocate his store. His landlord made Sam a generous offer. He would buy the franchise, fixtures and inventory at a fair price. He wanted to give the store to his son. Sam had no choice other than to give it up. He sold the Eagle store to John Dunham, his worthy competitor and mentor. Sam’s competitor could have that expansion he’d wanted.
It was the low point of Sam Walton’s business life. It didn’t seem fair. He had done everything right, and now he was being kicked out of town. His wife Helen was heartsick at the prospect of leaving Newport now that they had a family of four kids. It was time to leave.
To be continued…
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– Sean Allen Fenn
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