He is the consummate Wal-Mart company man.
Douglas McMillon got his start more than three decades ago at the retailing giant on the ground floor — in fishing tackle. In February last year, McMillon was named the fourth, and the youngest, chief executive in Wal-Mart Stores Inc’s 53-year history.
And in the past week, McMillon oversaw the biggest one-day plunge in the company’s stock in 17 years after the retailer forecast lackluster sales growth for this year and a steep profit dip for next, in part because of the company’s plan to spend billions of dollars to improve its stores and Internet shopping capabilities.
Photo: AP
In damage-control mode, McMillon took to his blog to defend his investments.
“The reaction by the market — while not what we’d hoped — was not entirely surprising,” he wrote. “These investments are critical to our current and future success as a company. Simply put, it’s the right thing to do.”
The problems encountered by Wal-Mart did not appear overnight, nor will a solution. The firm that once redefined the retail landscape with its cavernous, warehouselike stores that sold thousands of items at a discount — pushing small mom-and-pop stores across the country out of business — now finds itself facing formidable rivals in the digital shopping arena.
Moreover, its costs are climbing sharply higher at a time when sales are flat. Its stock is down 30 percent this year. This month, it laid off nearly 500 employees from its headquarters in Bentonville, Arkansas.
With more than US$485 billion in annual revenue (just a bit behind the entire economy of Norway), 5,000 stores and clubs scattered around the world and 1.4 million “associates” (employees), Wal-Mart is still the world’s biggest and most profitable retailer by far. However, its size also makes changing course akin to turning around an ocean liner in a swimming pool.
Among some of the needle-moving maneuvers being hotly debated among Wall Street analysts is whether the company should spin off its lower-margin Sam’s Club unit, exit challenging overseas markets or buy an e-commerce player.
Those decisions and many more are in the hands of McMillon, a 49-year-old whose family moved to Bentonville when he was a teenager.
While McMillon was handpicked by the Walton family and is steeped in the Southern conservative stances, traditions and history of the company, his appointment, nonetheless, has represented a generational, cultural and societal shift within the retailer.
In the past year, Wal-Mart has stopped selling confederate-flag merchandise, as well as assault rifles, has publicly supported gay rights and, after years of criticism, has raised its minimum starting wage to US$9 an hour.
Now, progressives may be cheering, but Wall Street is not.
Investors fear that Wal-Mart’s heavy investments in labor, in the Internet and in discounts will weigh on the retailer’s short-term earnings — and many are running the other way.
“Wal-Mart expects a return from these wagers, [but] it’s unclear if its investment of US$1.5 billion in labor and ‘several billion dollars’ in pricing will push it ahead of others, or just keep pace,” UBS retail analyst Michael Lasser wrote in a note.
Wal-Mart would have an easier time if it were not under siege from multiple directions.
Membership-only warehouse clubs like Costco and hard discounters like Aldi are eating away at Wal-Mart’s price-competitive edge. Hectic lifestyles are driving shoppers to smaller and more convenient dollar stores — even pharmacies — for groceries. Amazon and its vast online catalog, and the advent of seemingly every product imaginable at shoppers’ fingertips, is neutralizing the advantage of Wal-Mart’s supercenter-size assortment.
However, despite declaring a decade-and-a-half ago, in 1999, that it was determined to take on the Web, Wal-Mart has stumbled in its attempts to dominate online as it had brick-and-mortar. In the company’s critical early days online, its insular culture helped drive away a celebrated e-commerce guru. It has been slow to roll out an online grocery store.
All the while, Amazon, armed with algorithms and warehouse robots, has steamrolled the competition online. Wal-Mart’s online sales came to just a sixth of Amazon’s last year.
Wal-Mart.com is set to offer 10 million products by the end of the year. That is impressive, until you consider that a shopper will find an estimated 300 million items for sale on Amazon.com. In July, the e-commerce giant surged past Wal-Mart in market capitalization, making headlines as the world’s new most-valuable retailer.
Last year, Amazon sold almost US$90 billion worth of products online, compared with just US$12.2 billion Wal-Mart sold through its Web site. E-commerce still makes up only about 2.5 percent of Wal-Mart’s annual sales, and its growth online is slowing.
However, its peers have hardly done better; Target, for example, gets about 2.8 percent of its sales through its Web site.
Wal-Mart has promised to marry its fledgling Web operations with its brick-and-mortar footprint of more than 5,000 Wal-Mart and Sam’s Club locations in the US, allowing customers all manner of options: online ordering, in-store pickup, curbside pickup and home delivery.
However, the retailer’s transition to a multichannel operator “is costing more and lasting longer than expected,” Morgan Stanley analyst Simeon Gutman said. “Not sure it’s the last time we’ll be saying this.”
However, for some, it is not surprising that Wal-Mart faces an uncertain future as the middle class is struggling.
Though the job market is picking up, wages and income have grown slowly, especially for the typical Wal-Mart shopper with an annual household income of just over US$53,000, according to a survey conducted last year by Kantar Retail, a consulting firm based in London.
Kantar found that Target’s shoppers tended to make about US$12,000 more annually.
Paradoxically, labor groups say that Wal-Mart, as the nation’s largest private employer, shares the blame for the US’ ailing middle class, and that while it is a step forward for Wal-Mart to increase the pay of its most poorly paid workers, the raise — to at least US$9 this year and US$10 next year — is not nearly enough.
For the company to attribute its recent woes to higher wages for its workers is gratuitous, said Jess Levin, a spokeswoman for Making Change at Wal-Mart, a campaign to improve working conditions at Wal-Mart backed by the United Food and Commercial Workers Union.
“It’s not fair to blame a large profit drop on a US$1 billion wage increase,” Levin said. “If you look at what US$1 billion means to Wal-Mart, it’s a very small fraction of their annual US sales. If they had moved the needle at all on sales, this is a conversation we wouldn’t be having in the first place.”
After falling short of a number of performance goals, McMillon saw his own compensation shrink 24 percent to US$19.4 million last year.
McMillon and his wife, Shelley, live in a house that sits on nearly 40.5 hectares in north Bentonville, according to county assessor records.
The gap between Wal-Mart executives’ lavish pay and lifestyles and the pay barely above minimum wage of Wal-Mart employees has become a sore point in recent years.
Speaking to investors last week, McMillon appeared to acknowledge that Wal-Mart could no longer stick with business as usual.
“We know what we did in the past wouldn’t by itself be enough to win with customers,” he said. “Retail history is very clear. Those that are unwilling or unable to change go away.”
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