The Bully of Bentonville

by Anthony Bianco

  In conspicuous contrast to the federal government, Wal-Mart was well prepared for Katrina, thanks to its Emergency Operations Center. Located just down the road from the home office in Bentonville, the EOC has coped with scores of hurricanes over the years. A full six days before Katrina hit New Orleans, Wal-Mart began shipping bottled water, flashlights, beer, and other essentials to the distribution centers that supplied stores in the storm’s projected path. Like everyone else, though, Wal-Mart executives were stunned by the damage Katrina wrought once it made land on August 29. At the hurricane’s peak, 126 Wal-Mart stores were without power. The company’s reflex response was to make paltry donations of $1 million apiece to the Red Cross and the Salvation Army and concentrate on safeguarding its stores. But as New Orleans descended into chaos, and as the realization sunk in that some of the thugs terrorizing the city were armed with guns looted from Wal-Mart stores, a shaken Scott called a top-level meeting and decreed that a “measured response” to Katrina was not nearly enough.

  Volunteer Wal-Mart truck drivers began hauling emergency supplies to shelters from Texas to Mississippi, often arriving days before relief workers from the Red Cross and the Federal Emergency Management Agency. “We didn’t have looting on a mass scale because Wal-Mart showed up with food and water so our people could survive,” said the mayor of Kenner, Louisiana, a city of 70,000. 20 The company also donated $17 million in cash to others’ relief efforts. In many locations, skeleton crews of Wal-Mart employees fended off looters and distributed merchandise to the needy. A manager in Waveland, Mississippi, cleared a path through her wrecked store with a bulldozer to get at salvageable essentials, which she passed out in the parking lot. By September 16, all but thirteen of Wal-Mart’s Gulf Coast stores had reopened. The company had located 97 percent of the 34,000 employees displaced by the storm, provided a third of them with emergency cash, and offered all of them jobs at any Wal-Mart in the United States.

  After touring the Houston Astrodome with Scott, former Presidents George H. W. Bush and Bill Clinton singled out Wal-Mart for praise. On Meet the Press, the tearful president of the Jefferson Parish section of New Orleans said that if only “the American government responded like Wal-Mart has responded, we wouldn’t be in this crisis.” 21 Even many die-hard Wal-Mart critics complimented the company, albeit grudgingly. Stacks of fan mail piled up outside of Scott’s office while feel-good hurricane tales contributed by employees and outsiders alike proliferated on a company Web log. All in all, this amounted to Wal-Mart’s greatest PR triumph ever, and its uplifting impact within the company was all the greater because it had come on the heels of the worst unnatural, man-made disaster in company history: the Coughlin affair.

  Lee Scott must still have been somewhere near the top of the emotional roller coaster he rode through 2005 when he got up before an overflow audience at the home office in October and let his long-repressed inner idealist run wild in a speech entitled “Twenty-First Century Leadership.” “Katrina asked this critical question, and I want to ask it of you,” he said. “What if we used our size and resources to make this country and this earth an even better place for all of us: customers, associates, our children, and generations unborn? What would that mean? Could we do it? Is this consistent with our business model? What if the very things that many people criticize us for—our size and reach—became a trusted friend and ally to all, just as it did in Katrina?”

  Just two days earlier, Scott had spoken to an audience of suppliers at a business conference at the University of Arkansas and administered a tongue-lashing straight from the gospel according to the Interfaith Center on Corporate Responsibility or Social Accountability International. “Are you running your factories in a way that promotes environmental sustainability? Are you sourcing from people that causes there to be inclusion and opportunity for women and minority-owned businesses?” Scott demanded before homing in on China. “The factories in China are going to end up having to be held up to the same standards as the factories in the U.S. There will be a day of reckoning for retailers. If somebody wakes up and finds out that children that are down the river from that factory where you save three cents a foot in the cost of garden hose are developing cancers at significant rates so that the American public can save three cents a foot, those things won’t be tolerated, and they shouldn’t be tolerated.” 22

  One can be skeptical about management’s desire—and ability—to reform Wal-Mart and still marvel that words like these ever issued from the mouth of one of its CEOs. Was Scott posturing for public relations advantage in these two extraordinary speeches? Yes, undoubtedly, for spinning is part of any CEO’s job, especially an embattled one. However, it is probably also true that his view of Wal-Mart’s societal role really has evolved beyond the doctrinaire laissez-faire beliefs inherited from Sam Walton and David Glass. Tribulation is a powerful teacher, and over the last two years Scott has been through the sort of ordeal that can indeed change a man.

  That said, it would be naïve in the extreme to think that Wal-Mart is going to do anything to benefit generations unborn or anyone else at the expense of its immediate business prospects. The company has taken such a pounding in the court of public opinion of late that for the first time ever it is inclined not to ignore its critics but to try to placate them—some of them anyway, labor unions being the most emphatic exception. As ever, though, it is Wall Street that Wal-Mart seeks to please, for it is only by restoring the company to the stock market’s good graces that Scott and his Bentonville cohorts can turn their plethora of out-of-money stock options into personal fortunes and restore the $27 billion in net worth that the Walton family has lost in recent years.

  By the end of 2005, Scott was gamely, if belatedly, trying to recast himself from dutiful Walton legatee to bold corporate reformer. “I hope the thing you take with you most of all is that this company, although it is successful…is changing today as radically as it ever has in its history,” Scott declared in October at Wal-Mart’s twelfth annual conference for Wall Street analysts in Bentonville. 23

  Wall-Mart is indeed making substantive changes in some areas, but the retailer certainly is not doing anything as radical as abandoning its low-price sales proposition or downsizing its operations. To the contrary, the company is looking to open as many as 600 new stores in 2006, or about eighty-five more than it added in the previous year. Surprisingly, Wal-Mart managed to get a dozen more Supercenters up and running in 2005 than it had predicted it would, even as the local resistance it encountered across the country doomed scores of projects and put the company far behind schedule in the key state of California. The company managed this feat by putting more building proposals into the hopper than it really needed, anticipating that some would fail to win governmental approval.

  In California, Scott acknowledged, Bentonville erred at the start by specifying how many Supercenters—forty—it intended to build. “It was like holding up a red flag to a bull.” However, the fourteen Supercenters that Wal-Mart did get into operation in California by the end of 2005 were all “extraordinarily successful…some of the best stores we have,” he added. Each additional California Supercenter will require winning a lawsuit and will take two to three years to build, but build them Wal-Mart will, the CEO vowed. “It’s going to take us much longer to develop California with Supercenters than any of us would have hoped, [but] I think we will get all the stores we need.”

  The most dramatic changes afoot at Wal-Mart are in the areas of marketing and merchandising. In essence, the company has decided that if it is going to go after middle-income, white-collar, urban-dwelling Americans by emulating Target, it now should do so wholeheartedly. Scott underscored his commitment to taking Wal-Mart upscale by punching a hole in the home office’s protective bubble and pulling into Bentonville a handful of experienced outsiders from such sophisticated consumer marketers as McDonald’s and Pepsico. John Fleming, whom Scott named Wal-Mart’s chief marketing officer in the spring of 2005, had spent nineteen years at
Target.

  Fleming commissioned a study that divided the U.S. population into three broad categories: the 45 percent of Americans (“loyalists”) who shop Wal-Mart stores frequently and in their entirety; the 39 percent (“selective users”) who shop far less often and tend to buy only basic commodities when they do; and the 16 percent (“skeptics”) who never set foot in a Wal-Mart. Fleming affirmed home-office orthodoxy in insisting that Wal-Mart will never abandon the loyalist. “We will always be the place for low prices,” said Fleming, a native Minnesotan who, according to Scott, required heavy persuasion to move to Bentonville. However, it is the selective user who now preoccupies Wal-Mart’s brain trust. Said Fleming, “We have a tremendous opportunity with this customer to sell them other things, to get them to shop other categories in the store”—particularly in apparel, home furnishings, electronics, and baby goods. 24

  The first fruits of this effort were laid out on Wal-Mart’s shelves in time for the year-end shopping crush, including Egyptian-made 400-thread-count sheets for $49, an oversized inflatable snow globe for $129, a Motorola RAZR V3 cell phone for $250, and a Toshiba Libretto laptop for $1,997. Wal-Mart also had changed the look and layout of many of its stores, from the imitation hardwood floors and sleek new fixtures designed to give apparel departments a boutique feel to the massive “digital TV walls” showcasing flat-panel plasma screens. Supercenter interiors are being designed in earth tones, with wider aisles and displays that end a bit above eye level instead of being stacked high with inventory. No doubt Sam Walton would be amazed and probably appalled to see how much capital his company is now investing in the infrastructure of ambience.

  Just in time for Christmas, Wal-Mart also introduced to decent notices “Metro 7,” its first proprietary line of apparel for “fashion-conscious” women. “The outfits are, in two words: ‘Not bad,’” one reviewer opined. “They don’t scream Wal-Mart, but they don’t whisper Vera Wang either.” 25 To promote Metro 7, Wal-Mart teamed up with teen magazine ELLEgirl to sponsor its first-ever fashion show. It was held in New York’s Times Square, which is a long way in every sense from Bentonville’s town square. The company also signed a two-year contract for 116 pages of advertising in Vogue, a sister to the women’s fashion magazines Wal-Mart so recently had forced to wear blinders. “Wal-Mart and Vogue—three months ago, who would have thunk it,” Fleming quipped. 26 Equally startling, Wal-Mart contracted to buy the entire output of an organic cotton farm in Turkey for a new premium line of baby clothes to be introduced in the spring of 2006 as part of “Project Rattle,” an attempt to create what senior Wal-Mart style maven Claire Watts calls “the baby store of the future” within the Wal-Mart of the present. 27

  Can a retailer that has defined itself for five decades as America’s house of basic bargains now convincingly traffic in fashion, novelty, and discount luxury? Can Wal-Mart restyle itself as “Vogue Mart” without making its loyal blue-collar legions feel unloved and unwanted? These questions will be years in the answering. In the meantime, it’s worth noting that for the first time in a long time Wal-Mart is following, not leading, the retail parade. If it is going to get deeper into the wallets of all those “selective users” who now fairly sprint through its aisles to the checkout counters, it is going to have to learn a game that many other retailers already have mastered.

  While it chases the upscale American retail dollar with new zeal, Wal-Mart also is pursuing accelerated sales growth abroad, both by adding stores in the nine countries in which it operates and by acquiring its way into new markets. With the United States still accounting for four-fifths of its total sales, Wal-Mart remains much less internationalized than such big foreign competitors as Carrefour SA, which has stores in thirty countries outside its native France, and Metro AG, which is in twenty-eight countries other than Germany, its home. Furthermore, Wal-Mart’s foreign business is heavily concentrated in just three countries: Mexico, Canada, and the United Kingdom, which by itself accounted for 47 percent of Wal-Mart’s $56 billion in international sales in 2004.

  Although Wal-Mart still has miles to go to transform itself into a true multinational retailer, it is heading pretty rapidly in this direction. Sales abroad have risen at a robust 20 percent a year under Scott, double the company’s slowing U.S. growth rate. Even so, Bentonville’s progress has been erratic, its performance spotty. Only in Mexico, Canada, and Puerto Rico has Wal-Mart been able to establish itself as a potent, solidly profitable operator. Asda, now the UK’s number-two supermarket chain, initially thrived after Wal-Mart acquired it in 1999, but lately it has come out on the short end of a price war with Tesco, still the number-one chain by far, and has been shuffling executives and laying off workers. In Japan and Germany—the world’s two largest economies after the United States—Wal-Mart has piled up hundreds of millions of dollars in losses in fiercely competitive markets that differ markedly from the United States’, each in its own confounding ways.

  Basically, Wal-Mart has succeeded to date where it has been able to more or less impose its U.S. model and has struggled to varying degrees everywhere else, including South Korea, Brazil, Argentina, and China, as well as Japan and Germany. The first waves of homegrown executives that Bentonville dispatched abroad were so many missionaries sent to instruct the heathen in the Wal-Mart Way—through translators, of course, since so few of them spoke anything other than English. The sort of arrogance and cultural cloddishness Wal-Mart displayed in Québec have proven especially costly in Germany, which strictly regulates many aspects of retailing—prices included—and allows workers’ councils input into all corporate decisions relating to working conditions. “We just walked in and said, ‘We’re going to lower prices, we’re going to add people to the stores, we’re going to remodel the stores because inherently that’s correct,’ and it wasn’t,” Scott acknowledged in 2001, four years after Wal-Mart entered Germany. 28

  Although Wal-Mart has moved more indigenous managers up into executive positions in many countries in the last few years, the Bentonville-knows-best reflex is not easily suppressed. In the spring of 2005, Wal-Mart caused a furor in Germany by distributing to employees its U.S. ethics manual translated into German. Most American employees wouldn’t have thought twice about the manual’s caution against supervisor-employee dating. But to Germans, it came off as a presumptuous corporate intrusion into the private lives of employees. Or, as a headline in Bild, the largest German newspaper, screamed: “Sex Ban for Wal-Mart Employees.” The code also stirred outrage by requiring employees to report violations of company rules by their colleagues or face termination. “To inform anonymously on co-workers reminds most Europeans of the times of dictatorship and repression gone by,” commented a German labor confederation. 29 Some months later, Wal-Mart replaced the American woman who had headed its German subsidiary for four years with…an Englishman.

  Although Wal-Mart has closed a few stores in Germany, Bentonville has repeatedly insisted that it has no intention of pulling out of the country. In Japan, too, the company continues to try to adapt its formula to a country where consumers put more importance on freshness and quality than price. Many Western retailers, Carrefour included, have given up trying to solve the puzzle of Japan, but not Wal-Mart, which gingerly entered the Japanese supermarket business by buying into Tokyo-based Seiyu in 2002. Three years later, Wal-Mart sank another $600 million in Seiyu, lifting its minority stake in the company to a controlling 50.1 percent.

  At the same time, Wal-Mart slipped into Central America by purchasing a one-third interest in Central American Retail Holding Corp., a $2-billion-a-year retailer with about 360 supermarkets spread throughout Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica. When it closes in early 2006, the deal will boost the number of markets in Wal-Mart’s international portfolio to fourteen. Bentonville is expected to move next into India, Russia, and Spain, possibly by the end of 2006.

  Wal-Mart already has a toehold in what in the long run might prove to be its ultimate growth market�
��China. With fifty-five stores in China at year-end and plans to open new ones at the modest rate of a dozen or so a year, Wal-Mart has fallen behind other Western rivals, notably Carrefour, which has displayed greater political savvy and willingness to take risks. However, enthusiasm for China is definitely on the upswing in Bentonville. Scott has traveled there with increasing frequency, and in 2004 Wal-Mart’s board of directors held a meeting in Shenzhen. “You can build an enormous-sized company in China if you make some fairly aggressive assumptions about what’s going to happen to it,” David Glass said after returning from Shenzhen. “It’s the one place in the world where you could replicate Wal-Mart’s success in the U.S.” 30

  China’s great potential is a function not only of its great size and the sizzling pace of its economy, but also of the odd cultural affinity between the world’s largest Communist country and its largest capitalist corporation. While Wal-Mart associates in Germany hide in the bathrooms to avoid the mandatory morning meeting, in China they put on their red shirts and ID badges and cheer like they mean it. “Wal-Mart’s management practices have required little tinkering for China,” observed one American reporter who toured its Chinese operations in mid-2005. “If anything, the red shirts, mass cheering, incessant pep rallies and veneration of a deceased founder seem characteristics far better suited to the People’s Republic than the American South.” 31

  China also might well be the one country in the world where Wal-Mart’s workers mistrust labor unions as much as Bentonville does. Chinese unions do not negotiate with managements on behalf of workers but rather are arms of the central government that collect dues for the party and monitor the activities of their members. Even so, Wal-Mart resisted growing pressure applied by the All China Federation of Trade Unions, the only entity permitted to organize workers in China. When the Communist Party-controlled federation threatened toward the end of 2005 to sue Wal-Mart unless it permitted unions in its stores, Bentonville apparently concluded that there was no advantage in going to the mat with the ruling party of a country that supplied it with so much of its merchandise. Wal-Mart announced a compromise agreement with Beijing that was largely symbolic but would have rattled the windows and shaken down the walls had it been made in the United States. “Should associates request formation of a union,” the company declared, “Wal-Mart China would respect their wishes.” 32