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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:
He worked so hard to build his first business, only to have it taken away. Sam Walton wouldn’t have lost his first Ben Franklin franchise. If only he hadn’t neglected to read the fine print of the lease. His landlord refused to renew it. Sam sold his other, smaller store and, with his wife Helen, left Newport for Bentonville. He made sure to sign a 99 year lease on his next building. Sam’s new store opened in 1950. He named it Walton’s Five and Dime. While most variety stores operated the old fashioned way, Walton’s was self-service. That store became a predecessor to Walmart. Sam and his brother Bud went all-in on a Ben Franklin franchise. Which anchored 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 pursued the discount model. Wanting to partner with his existing franchisor, Butler Brothers turned down. So did other potential partners. Sam opened the first Walmart on his own in Rogers, Arkansas, in 1962.
The following is Methods of Prosperity newsletter number 50. It was originally deployed May 30, 2024. As of February 6, 2025, original subscribers have received up to issue number 86: Andrew Wilkinson.
Part 50.
How to Undercut Your Competition
Sam Walton (continued).
TL;DR
Sam Walton’s franchiser, Butler Brothers, rejected him. This pain fueled determination to create his own discount retail chain. Sam had no sophisticated systems, processes, or organization. He focused on offering merchandise at the lowest possible prices. Selling a product for next to nothing is a counterintuitive way to make a profit. That tactic only works under the following circumstances. Your product attracts attention and customers buy additional products. Walmart had an unsophisticated buying program and limited back office support. Walmart’s team excelled at promoting products, and developed effective merchandising programs. Sam learned from competitors like Kmart. He incorporated successful strategies into Walmart’s operations. Walmart experienced rapid growth from 1958 to 1970. There remained a need for better inventory and sales tracking. That would support further growth and maintain low expenses.
Key lessons:
Low prices only work at high enough volume.
Promote products your customers want.
Copy what your competition does right.
Your vision is worth pursuing alone.
Anger is a valid motivator.
Do you know about my livestream podcast? It’s called Hidden Secrets Revealed Live (HSRL), and I record it live on 𝕏 every Wednesday.
His original franchiser, Butler Brothers, turned Sam down. His desire was to open a discount store with them. The anger he felt was motivation. The future of retail was at stake, and discounting was the way. Regardless, Butler Brothers didn’t see it that way. Sam felt like he had no choice but to pursue it alone. He didn’t have systems and processes. He didn’t have computers. He wasn’t organized in any way. What he did have was determination to sell merchandise for as low prices as possible. Which would undercut his competition.
“The idea was simple. When customers think of Walmart, they should think of low prices and satisfaction guaranteed. They could be pretty sure they couldn’t find it cheaper anywhere else, and if customers didn’t like it, they could bring it back.” – Sam Walton
In today’s retail vernacular, discount stores call it a loss leader. A discount store will mark down a basic necessity at cost, for instance, toothpaste. The store makes next to zero margin on it. At a large scale, this attracts customers. The trick is to make a spectacle of these items by literally stacking them from floor to ceiling. Now, if the store does this well, they make a profit from additional products that the customer buys. For Walmart, they only mark up their merchandise 30%. Word gets around that they have low prices. That ripple effect brings in more and more customers.
Promoting products which generate high sales per square foot sounds easy, doesn’t it? Not if you have a lot of square footage. The team he hired was great at promoting products in their stores. It made up for other shortcomings the team had at the time. An unsophisticated buying program. A less than ideal merchandise assortment. No back office support. They developed great merchandising programs. When they made a mistake, they dealt with it and moved ahead. Sam would phase out previous Ben Franklin and Walton’s stores in favor of Walmart stores.
To keep improving, Sam and his team paid a lot of attention to the competition. They didn’t look for the bad. They looked for the good. Sam incorporated what his competition did well into Walmart’s operation. Kmart was actually superior to Walmart back then. Today, there are only a handful of Kmart physical stores left in the United States. When Sam discovered something that Kmart was doing better, Walmart would copy it. That’s one way to improve operations. You don’t have to be original. You didn’t have to be a genius, either. Walmart had a similar name and business model as FedMart, which Sol Price founded in 1954. Walmart was still small. Kmart and Target started to become major players in the discount retail space.
From around 1958 to 1970, Walmart experienced rapid growth. In the late 1960s, there were more than a dozen Walmarts and 14 or 15 variety stores. To get to the next level, Walmart would need to expand its organization. At the rudimentary level Sam was on in 1966, he couldn’t expand unless he had the ability to capture information. He was putting stores in places where he as an owner couldn’t be in person (absentee ownership). To get more technical, Walmart needed a way to control inventory turnover. To service these stores, he needed timely information. How much merchandise was in the store? What is that merchandise? How much of it is selling? Walmart needed to be able to track orders, mark downs, and replacements. Walmart had no way to track the ratio of sales to inventory. Without that information, Sam couldn’t keep expenses low enough. Something was missing that was in the way of Walmart becoming a great business.
To be continued…
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– Sean Allen Fenn
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