There’s No Business Like Shoe Business

In last week’s Methods of Prosperity, Phil Knight saved his company from the Marlboro Man. That was the name he gave to his nemesis. This guy used to be a model in the ad for Marlboro cigarettes. Now he was a high school wrestling coach. The Marlboro Man claimed exclusive American distribution rights for Tiger shoes. He served a notice to Phil accusing Blue Ribbon Sports of “poaching.” Blue Ribbon Sports, only two months old, faced a legal threat. Phil, who had worked hard to introduce Onitsuka’s shoes to the USA, felt disheartened. He took up an accounting job. By Labor Day, he decided to resolve this in Japan. Mr. Morimoto had replaced his contact, Miyazaki. Morimoto met Phil at a hotel. Phil explained his situation to Morimoto. After some tense moments, Morimoto said he’d discuss it with Onitsuka. The next day, Phil got an invitation to Onitsuka headquarters. There, Onitsuka himself declared that Phil would retain rights to the western states. Onitsuka limited the Marlboro Man to the east for track shoes. Phil placed a $3,500 order and ran skipped and jumped back to his hotel. The next day Phil climbed Mount Fuji.

Part 65. Phil Knight (continued)

You can find this week’s TL;DR here.

Key Lessons:

• Make disciples from your product.

• Don’t do everything yourself.

• Growing pains are inevitable.

• You need equity.

• Be transparent.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 28 is available to collect as of September 5, 2024. If you’re so inclined you can permanently own it!

Phil had a lot of work to do. He hired his sister to help part time. A track friend of his had been working for Adidas the year before, selling their shoes. His name was Jeff Johnson. Phil gave Jeff a pair of Tigers as a gift. In 1965 Phil received a letter from him. Phil wrote to say that he tried on the shoes and went for a run. He liked them. Other people liked them. Jeff said that people stopped him to ask about them, wondering where they could buy a pair. Jeff also said that he’d gotten married and had a baby on the way. He was looking for ways to earn more cash apart from his job as a social worker. Phil’s Tiger shoes seemed to have more upside than Adidas.

Phil wrote him back, offering him a position as a commission salesman. Phil would pay Jeff $1.75 for each pair of running shoes he sold. $2 for each pair of spikes. Phil was beginning to form a part time crew of sales reps. That was the standard rate he was offering. Jeff wrote back right away accepting the offer. And then the letters didn’t stop. They increased in length and in number. At first they were three pages, then four, then eight. At first they arrived every few days. Then they arrived faster until Phil received letters from Jeff every day.

Jeff wanted to open a retail store in Los Angeles. He wanted to start placing ads in running magazines. Then he went ahead and placed those ads in running magazines. Responses were good. Jeff wanted to know why Phil hadn’t responded to any of his previous letters.

Jeff was selling Tigers part time but kept his day job as a social worker. By April 1965, Jeff quit his day job. He lost faith in social work. He didn’t believe in it anymore. In the same way, Phil didn’t believe in selling encyclopedias or securities at his previous jobs. Jeff and Phil believed in running. They believed in running shoes. They were doing God’s work.

Back then, running wasn’t a popular sport. Very few people ran for the love of running. The ones that did, loved it. Runners inspired Jeff to create a community for them. Above all, he wanted to make a living doing it. That seemed impossible at the time. But in Phil, and Blue Ribbon, Jeff thought he saw a way. Phil did everything he could to discourage Jeff from the idea.

In one of Phil’s rare replies to Jeff’s letters he was blunt. “Our growth has been good. I owe First National Bank of Oregon $11,000. Cash flow is negative.” Jeff immediately wrote back asking Phil if he could work full time for Blue Ribbon.

In the late summer of 1965, Phil wrote to Jeff with an offer to become Blue Ribbon’s first full time employee. They negotiated Jeff’s salary through the mail. He was making $460 a month as a social worker, and agreed to live on $400. Phil the accountant was aware of the risk. Phil the entrepreneur knew the possibility.

Phil had bigger problems. He was in trouble with the bank. Blue Ribbon posted $8,000 in the first year. Phil projected $1,600 in the second year. According to the bank, this was a bad trend. Why would a 100 percent increase in sales be troubling? The rate of growth was too fast for the equity. How could such a small company grow too fast? Phil’s banker insisted that it’s the same principle regardless of size. Too much growth on the balance sheet is dangerous. You may as well tell a runner that he’s running too fast.

In those days, banks wanted cash on the balance sheet. They wanted a business to never outgrow its cash balance.

This was a dilemma for Phil. If he failed to grow the business, he would lose favor with his supplier. If he lost favor with his supplier, the Marlboro Man would get his business. His supplier, Onitsuka, was always late delivering his shipment. Each order doubled, which Phil had to borrow for. Before the next order arrived, his previous order sold out. Phil had to borrow double for the following order. The bank was about to cut him off.

Blue Ribbon needed more equity.

To be continued.

I like you,

– Sean Allen Fenn

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.