This Price Club security guard was just doing his job. Little did he know he’d soon apprehend one of the wealthiest people in America.

Dozens of unassuming customers wandered the aisles of the San Diego store. But one of them stood out. A man in his 60s was scrutinizing different products, taking notes, and speaking into a tape recorder.

The guard approached him and confiscated the device. (That was Price Club’s store policy.) He also warned that the content would be destroyed.

The mysterious customer didn’t protest, but he did want part of the tape back. He had recorded some important content outside of the store.

The man also offered to write a note to Robert Price—the son of Price Club founder and discount-retail legend Sol Price —to explain exactly what he was doing.

That should’ve tipped the guard off right there. This was no ordinary customer. In fact, it was none other than Sam Walton, the founder of Walmart.

Back in the late 1970s, Walmart was on the rise. The business was catapulting from a regional discount store to a national chain.

Walton was building a billion-dollar retail empire. But he craved more. Walton also wanted to own a piece of the wholesale business.

To that end, he often conducted “corporate espionage” by visiting and surveying competitors’ stores. Walton chatted with stock boys about products and shipments and even got on the floor to measure aisle widths.

He would then implement the things he liked best at his own stores. Walton claimed to have stolen more ideas from Sol Price than from anyone else in the business.

The foundation of wholesale retail is simple: Sell bulk goods at low prices.

Stores like Costco (COST) and BJ’s (BJ) do this by eliminating the typical retail frills. Costco, for example, nixes tidy shelves in favor of pallets. And it offers a limited number of high-quality products.

Usually, when entrepreneurs create a successful business model, they’re deeply protective of it.

Sol had a totally different perspective: He wanted everyone to embrace his framework. (Seventeen years after its launch in 1976, Price Club merged with Costco, creating the retail giant we know today.)

Sol practically invited Walton to copy the Price Club model. He didn’t care if Walton opened up a competing business because he was the visionary, the innovator… Sol always kept his finger on the pulse of the retail industry.

So it’s no surprise that Walton got his tape recorder back in the San Diego Price Club with all his content untouched. And tacked on was a personal note from Robert Price that wished him luck. (Walton eventually opened his first Sam’s Club in April 1983, in Midwest City, Oklahoma.)

Since then, many other companies have adopted the wholesale business model. It’s easy to see why. The economics of wholesale are incredibly powerful.

Buying in bulk drives down per-unit cost and selling in bulk drives up volume. Meanwhile, membership fees generate a stream of recurring revenue before a single product is sold.

The no-frills approach isn’t just about cutting cost, either. It allows these businesses to reinvest those savings into even lower prices which drives more volume.

This is the “flywheel” that makes the wholesale model so difficult to compete against. Traditional retailers spend heaps on marketing and store layout designs.

Wholesale operators skip all of this and pass savings on in the form of prices that traditional retailers can’t match.

Wholesaling is one of the most durable models in all of retail, and it’s not limited to Sol Price and Sam Walton. Companies today still work to adopt the model and when they do, it’s a sign that higher profitability is on the horizon.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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