Sean Allen Fenn
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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:
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.
The following is Methods of Prosperity newsletter number 49. It was originally deployed May 23, 2024. As of January 30, 2025, original subscribers have received up to issue number 85: Sam Zell (conclusion).
Part 49.
TL;DR
Sam Walton faced a significant setback. He lost the lease to his successful Ben Franklin store due to not having a renewal clause. His landlord pressured him into selling. Learning from this, he sold his smaller department store. With his wife Helen, he left Newport for Bentonville. There, he innovated retail with a self-service model in his new variety store. Which became the foundation for Walmart. Sam and his brother Bud went all-in on a Ben Franklin franchise. It served as the anchor for a shopping center development in Kansas City. Shopping centers were the next big thing. Sam lost $25 K after backing out of another shopping center deal. A tornado hit the Kansas City shopping center. It was later rebuilt. He expanded his retail empire by reinvesting. He hired talented managers, making them limited partners. Discount retail pioneers inspired Walton. He adapted and integrated these concepts into his strategy. He wanted to partner with his existing franchise, pursuing the discount model. Butler Brothers and other potential partners turned him down. Sam opened the first Walmart on his own in Rogers, Arkansas, in 1962.
Key lessons:
Invent your flywheel but don’t reinvent the wheel.
What got you here won’t get you there.
Give ownership to your managers.
Reinvest back into your business.
It’s alright to start over.
Seek bigger problems.
Use debt to grow.
Learn how to fly.
Do you know about my livestream podcast? It’s called Hidden Secrets Revealed Live (HSRL), and I record it live on 𝕏 every Wednesday.
Sam had no alternative but to give it up. The lease he had signed for his successful Ben Franklin store ended after five years. He neglected to make sure there would be a clause which would allow him to renew after the first five years. His landlord refused to renew Sam’s lease at any price. Instead, he bought the franchise, its fixtures and inventory at a fair price to give the business to his son. After that incident, Sam would read the fine print of his leases from that point on.
Competition from a local store fueled Sam Walton’s early retail experience. John Dunham ran the Sterling Store. Sam and his wife had nowhere else in town to relocate. Sam sold his smaller department store lease, the Eagle store, to John Dunham. The Sterling Store could finally expand into that space as John had wanted.
Sam’s wife Helen would remark about this time, “When we left Newport, it was a thriving cotton town, and I hated to leave. We built a life there, and it was so disturbing to have to walk away from it.”
While that was a difficult learning experience, Sam made more than $50,000 from the exit. He had a chance for a brand new start, and this time, he knew what he was doing.
Bentonville, Northwest Arkansas, May 1950. Harrison’s Variety Store would become the home of Walmart and the Walmart Museum. Helen’s father negotiated a deal to acquire the business from the previous owners. It was a small, old, country town store. They also acquired the lease from the connected barber shop. It was a 99 year lease.
Sam tore out the wall between the old store and the barber shop. He installed lights and fixtures, and turned it into a huge new store for Bentonville. At the time, 4,000 square feet was pretty big. There were no clerks with cash registers around the store. There were only checkout registers up front. This was a new concept. Self-service would be the way customers began to shop going forward. Sam’s new variety store was the third self-service variety store in the country, and the first in the local area.
Walton’s Five-and-Dime in Bentonville was a Ben Franklin franchise. It opened during the summer of 1950. Right away, Sam started looking for opportunities. He wanted to open another store in another town. He didn’t want all of his eggs in one basket again. By 1952, he found an old Kroger grocery store in Fayetteville. It was on the square in between a Woolworths and a Scott’s store. Sam moved in. This time it wasn’t a Ben Franklin franchise. He named it Walton’s Five-and-Dime, the same as his store in Bentonville. Local codgers didn’t expect Sam to stay in business for very long.
There’s one common trait that many great successful entrepreneurs have. That’s finding talent and hiring well. Sam is no different. His first significant hire was a manager for his Fayetteville store. Willard Walker managed a TG&Y store in Tulsa, Oklahoma. This was a chain of variety stores in the United States, founded in 1935. Sam offered Willard a job managing his new Fayetteville store. He gave Willard a percentage of the profits. The first year the store opened, Bentonville made $95,000 and Fayetteville made $90,000. Willard would borrow money to buy substantial stock in Walmart. He did very well in the years to come. That lure of partnership helped Sam attract many outstanding managers.
Sam’s brother Bud owned a Ben Franklin franchise in Missouri. They hadn’t been doing business together. Until one day, Sam learned about a new shopping center development in Kansas City. It was a new concept at that time. There was to be a Ben Franklin store to anchor the shopping center. Sam talked Bud into going all-in on it. They borrowed as much money as possible and went in on that Ben Franklin store together 50/50. That first year, they made profits of $30,000 on sales of $250,000, which rapidly increased to $350,000. That inspired Sam to double down on shopping center development deals. Which was an expensive mistake. He lost $25,000 backing out of a deal involving Kroger and Woolworth. Sam went back to focusing on retail operations instead of commercial real estate.
On May 20, 1957, a tornado hit Kansas City. It leveled the whole shopping center. No one suffered serious injuries, but the store was gone. They had insurance on the fixtures and merchandise, but it was a hard blow to Sam and Bud. They were proud of that store. So they rebuilt it.
Driving so much between every store was time consuming, and Sam was opening more and more stores. That’s when Sam entered his aviation era. He bought his first two-seater airplane. He paid $1,850 for it. It allowed Sam to get to his stores in a straight line. Many of them were Ben Franklin franchises. He had locations in Little Rock, Springdale, Siloam Springs Arkansas, and a few in Kansas. They were all separate partnerships. Sam’s partners included Bud, and other family members. They reinvested money from existing stores into new stores. Managers received offers as limited partners. They would own two percent of the business on an investment of $1000.
Every entrepreneur learns that what gets you to the first level won’t get you to the next. It was only 15 years for Sam and his partners. They became the largest independent variety store operators in the USA. With 15 stores they were earning $1.4 million in 1960, but there was a limit on volume. For low prices to be worth the effort, something had to give.
There was a new way of doing business. Sam acknowledged this in his autobiography: “Marty Chase is generally considered the father of discounting.” Chase co-founded the Ann & Hope department store chain, which was an early pioneer of the discount retail model. Walton studied and drew inspiration from Chase’s discount merchandising concept.
In 1954, Sol Price founded FedMart. It was one of the first discount warehouse retail chains. He later founded Price Club in 1976. Price pioneered the membership warehouse club model. Costco and Sam’s Club followed that model. Price had an innovative customer-centric philosophy. He saw his role as a retailer to be the customer’s “greatest friend and advocate”. Sol Price provided the best value and fair treatment. Sam Walton acknowledged Sol Price. He learned and “borrowed” many retail ideas from Sol Price’s discount models.
Sam called his stores “family centers”. He needed to increase the size of his family centers to a certain magnitude. They could generate $2 million a year per store in revenue. That is, if his new competition didn’t beat him to it.
A few other stores started implementing the discount model. Herb Gibson was one competitor. Herb opened discount stores in Northwest Arkansas. He did this with a franchiser named Howard’s in 1959. Howards competed with Sam’s Fayetteville store. Understanding the discount model, Sam immediately knew what Herb Gibson was doing.
Sam decided to take action. Starting a whole new organization would be daunting. That’s why he started with his franchiser, Butler Brothers. He approached them to be his wholesale arm for a new discount venture. If they agreed, it would have been a smooth operation. Sam would avoid a big problem.
You always have a choice. Problems are inevitable, no matter what. You can either deal with small problems, or seek out big problems. If you choose to deal with small problems, chances are you can stay small. If you choose to stay small, then you can’t complain when your competition surpasses you.
In those days, Sam wasn’t 100% committed. He could have compromised. Having Butler Brothers’ backing his discount venture would have made a reasonable partnership. That would have been easier than starting a new company. Sam’s family could maintain their small town lifestyle without publicity. Butler Brothers wasn’t interested. In that case, Sam approached Gibson. Only what did Herb Gibson need Sam Walton for?
Sam knew he was at a crossroad. The oncoming discounting wave about to hit the variety store business. He could either stay in the variety store, or he could open a discount store. He wanted to go into Rogers Arkansas, but couldn’t open another Ben Franklin. Max Russel over in Rogers owned that franchise. Sam approached Max to go into business with him, but he wasn’t interested either.
Nevertheless, Sam decided to build a new discount store on his own in Rogers Arkansas. He funded 95% using debt to open that store, leveraging everything he owned. In 1962, Bob Bogle, the first manager of Walton’s Five-and-Dime in Bentonville flew with Sam to Fort Smith. Sam handed him a card with a few possible names for the new discount store and asked him which he liked best. Bob had been buying the letters for Ben Franklin stores, and knew how much each one cost. So he wrote down seven letters, “WALMART” and informed Sam, “To begin with, there’s not that many letters to buy.” A few days later, the sign maker was installing the letters: W-A-L when Bob noticed he was heading up the ladder with an M.
“You don’t have to be Vanna White to know what the name was going to be.” – Bob Bogle
To be continued…
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– Sean Allen Fenn
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