How to be a be a legendary entrepreneur? Story of Walmart
Hi everybody. If you want to be a legendary entrepreneur then this episode is for you. Because the story that I’m about to tell you today is the story of a man who went from being an ordinary salesman to becoming the retail billionaire of America.
This is a story of a man who started his business with a small loan from his father in-law and built so much wealth out of it that today, his family is worth $215 billion. This iconic businessman that I’m talking about was none other than Mr. Samuel Moore Walton and the company that he started is what we know today as the retail giant Walmart.
Today, Walmart is so huge that Americans spend $46 million dollar at Walmart every single hour. for 24 hours a day and for 365 days a year.They employ about 2.2 million people and in 2021 alone Walmart generated a profit of $1.5 million dollars every single hour!
The question is What was so special about Sam Walton that he was able to build such a humungous business empire and most importantly, as aspiring entrepreneurs what are the lessons that we need to learn from this legendary businessman.
This is a story that dates back to late 1940s America when World War II had just ended. And just like any other post-war situation, the economy was bad and the Walton family (just like many other people) was struggling to make ends meet in a recovering economy.
And since his family was not well-off Walton all throughout his teenage and early 20s had to work at multiple jobs just to pay for school and college. He sold newspapers, worked at retail stores and even waited tables.And because of the nature of his job he had to interact with a lot of people from diverse backgrounds.
And through those conversations Sam Walton was able to understand the operations of several businesses operating in the market. In fact, while he was working at a retail store, he used to go the extra mile and study the rest of the competition although it was never a part of his job.
But this ability of his to go the extra mile helped him understand the retail market.
and when he gained enough confidence he saved up some money, borrowed some from his father in-law and took up a franchise of a retail chain called Ben Franklin.
And this is where his retail journey began. Now, people, just like with any other franchise model even with Ben Franklin although he had the liberty to use brand name they came with a lot of restrictions. He had to buy 80% of the products from Ben Franklin otherwise he wouldn’t get a rebate. he had to spend a certain amount of money in advertisingand he even had to hire a certain amount of people.
And all of this gave him only 6-7% profit with a revenue of only $72,000. But right in front of him was his competitor who was generating a revenue of $150,000/year. And this ignited a fire in his belly because of which from the next day onwards he started visiting every single store in town and spent hours at his competitors’ stores.
In fact, a few store owners even used to get creeped out because Walton was acting as if he was trying to dissect their business and he’s trying to steal some business secrets or something. And in this tedious process of examining the competitors and studying the retail market Sam Walton learnt 3 very important things that helped him become the richest man in America.
The first thing that he learnt was the power of something called discounting which is a technique of selling products at a lower margin in order to maximise the volume sales. For example, If 100 T-Shirts are sold for $3 dollars each with a profit of $1 then the total profit is about $100.
But if the same T-shirts are sold at $2.5 although the profit is only 50 cents the volume of sale used to shoot up to 200 T-shirts. Now, although this might sound like the same $100 profit it had some incredible benefits that very few people realised.
The first benefit was that discounting resulted into more volume in sales which meant more people brought products at the store and hence resulting into more footfall which means more visitors. Secondly the inventory moved in a flash, so if you’re the retailer who can quickly sell your current T-shirts, you can get new T-shirt designs in stock which would again attract more customers.
And last and most importantly, you as a retailer could get a better bargaining power with your sellers if you’re inventory moved faster. For example if the other players buy about 10,000 units you could buy 20,000 units because of your accelerated sales volume.
And using this bigger purchase order you could ask the seller to reduce the price by another 10% which could give you 10% extra profit even with best prices. Now, for a small store that’s only 10% increase in margin along with discount for customers. But when Walmart scaled up using the same principle they became so powerful that they started dominating the sellers.
For example, in the present day, if the wholesaler sells 20,000 units to small retailer for $5 with $2 profit Walmart will place an order for 2 million units and will ask the seller to sell it at $3.5. And because it’s such a huge purchase order it gives the seller more profit so they usually agree. Now, when the normal retailer priced their $5 purchase at $7 Walmart puts a price tag of only $4.9.
Let us understand the Power of Discounting.
The selling price of Walmart is lesser than the cost price of the retailer making it practically impossible for the retailers to compete with Walmart. And hence Walmart walks away with a healthy profit of $1.4/unit and generates millions of dollars in profit without competition. This is the power of discounting.
Initially, Sam Walton could apply discounting to only 20% of the goods because of the franchise restrictions. But later on when he opened his first Walmart store this aggressive pricing strategy of discounting was a game changer that accelerated the growth of Walmart and made them millions of dollars in profit.
This is the first reason why Samuel Walton became super successful and that is the power of discounting. Now, the obvious question is, Sam Walton wasn’t the only one who knew the power of discounting, right? There were other bigger players in the market. In fact, those people had more capital than Sam Walton then why did Sam Walton specifically succeed?
And this brings me to the second attribute of this legendary businessman and that is market research. People, you know, even I couldn’t believe it when I read this but this man was so persistent that he literally visited every single retail store in America that he could find. And he started taking notes about what they were doing well and what they were not.
And in this process he observed that every successful retailer, knowingly or unknowingly, had something that attracted more people to their store. For example, some people had an ice-cream candy machine that attracted a lot of kids so when the parents wanted to shop they specifically chose to go to the store with an ice cream machine so that they can shop without being annoyed by their kids.
While others applied something called the loss leader principle wherein they sold basic comodities like tooth-paste in an ultra-low margin so that they can lure shoppers into making a visit. For example, if the price of tooth paste itself was $1 some stores used to sell it at 50 cents and that would give them 2 benefits that very few people actually understood.
If you want to find a comprehensive information I would highly recommend you to read this book called ‘The Culture Code’. And last and most importantly if you want to read further about the modern day Walmart or if you want to know better about Sam Walton and his business principles I would highly recommend you to read this book called the Walmart effect and Sam Walton- Made in America.
That’s all from my side for today guys. If you learnt something valuable please make sure to hit the like button in order to motivate and make me happy. And for more such insightful business and political case studies 🙂