DECEMBER 2005 :: COVER STORY : BIG BUSINESS

Against the Wal
Retailer's Size and Power Make It a Frequent Target for Critics

By Ann Zimmerman
Staff Reporter of The Wall Street Journal

When Wal-Mart Stores became the world's biggest public company, it also became one of the world's biggest targets.

An Upscale Wal-Mart? Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

How Wal-Mart Weathered the Storm: Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

Against the Wal: When Wal-Mart Stores became the world's biggest public company, it also became one of the world's biggest targets.

The Wal-Mart Effect: Wal-Mart, itself one of the largest grocery chains in America, is changing the way food is sold at other supermarkets as well. Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart and other discounters.

The Lucky 2% Getting into Wal-Mart is an entrepreneur's equivalent of making it to Broadway. Even a short run on the shelves there can help transform an invention from niche product to household name.

In recent years, Wal-Mart has been accused of offering substandard wages and insufficient health benefits. It has been sued for discriminating against women and for forcing employees to work beyond their shifts. It is blamed for hastening the decline of American manufacturing by buying products from overseas and for ruining local downtowns by putting smaller shops out of business.

A couple of years ago, Wal-Mart decided to wade into the controversy it creates, and it put CEO Lee Scott in charge of the offensive. Over the past year, he has crisscrossed the country as Wal-Mart's defender-in-chief. "Over the years, we have thought that we could sit in Bentonville, take care of customers, take care of associates and the world would leave us alone," Mr. Scott says. "It just doesn't work that way anymore."

Mammoth Force

Wal-Mart's own missteps haven't helped. In March 2005, Wal-Mart settled with the U.S. over allegations that it knowingly hired contractors that provided illegal immigrants to clean its floors. Several days later, a former executive resigned from Wal-Mart's board amid allegations that he misappropriated up to $500,000 from the company. Even Wal-Mart's own image campaign may be partly to blame. During a recent get-together with financial analysts, Mr. Scott conceded that Wal-Mart's recent advertising has focused too much on its community contributions and not enough on its merchandise and prices.

Mr. Scott rose to the CEO position after five years heading Wal-Mart's merchandising division, the unit responsible for selecting and buying goods. When he started there in 1995, Wal-Mart was struggling with several acquisitions and was distracted by rolling out gigantic new supercenters. That year, the company reported its first quarterly profit decline in 25 years.

Mr. Scott cut $2 billion of excess inventory by reducing the number of products Wal-Mart sold in each category, zapping slow-moving merchandise and persuading suppliers to ship smaller amounts. His success helped secure his ascension to the CEO position in January 2000.

By that time, Wal-Mart's biggest problem wasn't financial. Without much notice, the retailer had become a mammoth force in the U.S. economy. Only two years later, one out of three diapers, one out of four tubes of toothpaste and one out of five CDs bought in the U.S. would be sold by Wal-Mart. That made the company a highly visible target for mainstream criticism.

One of Wal-Mart's critics was the United Food and Commercial Workers Union, which had struggled in vain to organize workers at the company. Starting in 1999, when Wal-Mart became serious about selling groceries, the union stepped up its campaign. It accused Wal-Mart of paying poverty-level wages and pushing workers to rely on government health benefits. Wal-Mart rarely responded directly to the union, dismissing its complaints as propaganda.

In 2001, author Barbara Ehrenreich wrote "Nickel and Dimed: On (Not) Getting By in America." For the book, she spent a month folding clothes at a Wal-Mart for $7 an hour. Employees, she wrote, often didn't make enough to afford even marked-down merchandise. That same year, Wal-Mart was hit with a discrimination suit alleging that women were paid less and promoted at a lower rate than equally qualified men.

In 2002, the media began paying more attention to the growing number of suits filed by hourly workers, alleging they had been forced to work off the clock. It would be another two years before Wal-Mart implemented store-level controls, such as cash registers that lock up, which prevented employees from working through their breaks.

Wal-Mart's initial reaction to criticism was to dismiss it as the work of opportunists or propagandists. In retrospect, Mr. Scott says, the company's attitude was "naive."

From the outset, Mr. Scott was more willing than his predecessor to address the growing criticism. Wal-Mart rarely, if ever, settled lawsuits and was frequently fined for withholding, hiding or destroying evidence in legal disputes. Mr. Scott asked his legal team why the company had been fined so often. "They kept telling me, it was all the liberal judges that had been appointed," he says. Six months later, an executive appointed by Mr. Scott to investigate told the CEO that Wal-Mart deserved many of the sanctions. The company then hired a corporate attorney and a prominent law firm to review the way Wal-Mart handles evidence in court cases. Last year, Wal-Mart wasn't hit with any sanctions or fines for its conduct in litigating cases.

Mr. Scott also began reaching out to critics. Starting in 2000, he met occasionally with Sister Barbara Aires, a Catholic nun who sits on the board of the Interfaith Center on Corporate Responsibility, a group that often sponsors resolutions at Wal-Mart's shareholder meetings. The ICCR raised a slew of topics from gender discrimination to low pay and benefits. Wal-Mart agreed to improve its monitoring of labor conditions overseas and insist on standards for its suppliers.

In April 2002, Wal-Mart became the world's largest public company, ranked by sales. As media headlines asked, "Is Wal-Mart Too Powerful?" Wal-Mart's board began to worry that the backlash was changing public sentiment and could hurt its business. At the board's suggestion, Wal-Mart conducted its first reputation survey. It found that workers "were more positive about the company than critics would have you believe," says Jay Allen, a Wal-Mart senior vice president. Workers also wanted the company to stand up to its critics.

'Sincere Questions'

Consumers were a different matter. The study found that 10% of all consumers hated the company. An additional 30% said they had "sincere questions about Wal-Mart," based on what they heard about its treatment of workers, Mr. Allen says. As a result, the board determined that the company had to do more to combat its critics.

In 2003, Wal-Mart began running television ads highlighting workers' opportunity for advancement as well as the retailer's community contributions. In addition, Wal-Mart concluded that Mr. Scott needed to be the single, high-profile spokesman defending the company to the public. In an election year, the need was even more acute. In 2004, a congressional committee released a report titled, "Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart."

Earlier this year, Wal-Mart bought a series of ads in national newspapers to defend itself. In recent months, Mr. Scott has met with members of the Congressional Black Caucus and hosted a reception for members of Congress. He also convened a series of meetings with an environmental group. Wal-Mart is now exploring requiring suppliers to use more cotton grown without pesticides.

There are also clear limits to Wal-Mart's willingness to compromise. "We have an obligation to be socially responsible," Mr. Scott says, "but that is not the same as being a social enterprise." He refuses to publicly engage in debate with the food workers union, which Mr. Scott accuses of lying about working conditions at the company. A union spokesman denies the charge.