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Corporate Research E-Letter No. 60, July-August 2006

IS WAL-MART GOING SOFT? THE GIANT RETAILER EMBRACES STYLE AND SOCIAL RESPONSIBILITY—UP TO A POINT

By Philip Mattera

Sam Walton would be shocked at what’s happening at his beloved company. The founder of Wal-Mart Stores built a retailing leviathan with a simple formula: sell unpretentious merchandise at the lowest possible price to small-town people of modest means in a bare-bones environment. He cared little about the firm’s reputation except as a place to get a bargain on diapers and detergent.

Today, Wal-Mart is getting ready to remodel some of its stores along the lines of an experimental Supercenter in suburban Dallas that features a sushi bar, fancy imported cheeses and $400 bottles of wine. The company is pushing organic foods, sustainable salmon, fair-trade gourmet coffee and children’s clothes made of organic cotton. Its stores are selling high-end electronics and fashionable women’s apparel, and its television ads are no longer dominated by the price-cutting smiley face.

At the same time, Wal-Mart claims to be going green internally. Chief executive Lee Scott, who boasts that he drives a hybrid, has committed the company to major reductions in energy use and output of solid waste. Once shunned, environmental groups are being brought in as consultants. Al Gore was recently invited to company headquarters in Bentonville, Arkansas for a special showing of his film on global warming, which was received enthusiastically.

With the help of an army of public relations consultants, Wal-Mart has over the past year unleashed a barrage of other initiatives—from improving its employee health plans to assisting its small-business competitors—that are meant to suggest good corporate citizenship. Most recently, the company, famous for low wages as well as low prices, voluntarily raised starting pay at about one-third of its U.S. stores by about 6 percent.

The arrogant corporate giant that for years manipulated American buying habits with the siren song of low prices now appears to be preoccupied with style and social responsibility. What has happened to that stalwart proponent of red-state values and free-market fundamentalism? Is Wal-Mart going soft?

THE “PUNCHING BAG” RESPONDS

Only a few years ago, Wal-Mart seemed to think the rules of business and society no longer applied to it. Having reached unprecedented size for a retailer, it used its might to bully suppliers, competitors, workers and communities alike. Despite a growing wave of lawsuits alleging labor abuses, criticism of its reliance on low-wage production in China, charges of predatory pricing and intensified resistance in many of the communities where it wanted to open new stores, Wal-Mart marched on, confident that its mission of providing low prices trumped all other considerations.

Others were not so sure. Social and economic analysts began to regard Wal-Mart not merely as a company but as a transformational force. Articles started talking ominously about “the Wal-Mart economy” and “the Wal-Mart effect.” An October 6, 2003 cover story in Business Week asked: “Is Wal-Mart Too Powerful?” Increasingly, that question was being answered in the affirmative. “Move Over, Enron,” the Christian Science Monitor headlined an article in February 2004,” Wal-Mart is the New Punching Bag.”

At this point, Wal-Mart wavered a bit, showing some concern about its social reputation. In January 2005, the company began running TV spots and full-page newspaper ads insisting it really was a good place to work, with special emphasis on the opportunities supposedly afforded to people of color. In an attempt to reach beyond its usual demographic, Wal-Mart became an underwriter of National Public Radio.

Yet it was too late. Wal-Mart’s image as a ruthless employer was already etched in public consciousness, and the company’s p.r. blitz was too divorced from reality. Only a few weeks after the campaign started, it was revealed that Wal-Mart had quietly paid a fine to settle violations of federal child-labor laws. And shortly after that, the company paid $11 million to settle federal charges regarding the use of undocumented workers in its cleaning crews.

Wal-Mart’s image repair was also complicated by the founding in late 2004 of an organization devoted entirely to reforming the company. The group, which became known as Wal-Mart Watch, was started with union money, most prominently from the Service Employees International Union, but it challenged the giant retailer on a variety of fronts. The same approach was adopted by another campaign, later named Wake-Up Wal-Mart, launched by the United Food and Commercial Workers union, which had been frustrated in its attempts to organize Wal-Mart employees.

Corporate campaigns were nothing new for the U.S. labor movement, but they were typically linked to a particular organizing drive or contract renewal. Once the dispute was resolved, the campaign would end. Wal-Mart, by contrast, was now facing two well-funded national organizations that were aggressively seeking fundamental changes in the way it did business across the board.

These groups, along with other critics, found particular resonance on the issue of health insurance, specifically the fact that many low-paid Wal-Mart workers who were ineligible for company-sponsored coverage (or couldn’t afford to enroll) ended up in government-funded programs such as Medicaid. Wal-Mart found it difficult to shake the charge that its employment practices were creating a burden for taxpayers. “Fair share” proposals to compel it (and other very large employers) to expand coverage were taken up by state legislatures across the country.

Put on the defensive, the company announced last year that it would make available a less expensive type of coverage, with monthly premiums as low as $11 for individuals. The plan’s hefty $1,000 deductible came in for some criticism, but the move marked the beginning of a series of measures in which Wal-Mart has sought to improve its social-responsibility standing not merely with public relations but with concrete measures.

GOING GREEN

A blueprint for these measures was presented last October by Lee Scott. Sounding more like a radical green than the chief executive of a massive corporation, he said that Wal-Mart would pursue three environmental goals: to be supplied 100 percent by renewable energy, to create zero waste and to sell sustainable products. Scott admitted he wasn’t sure how to fully attain these goals, but he said the company would pursue them by sharply increasing the fuel efficiency of its truck fleet, slashing conventional energy use in its stores by installing solar panels and wind turbines, and working with suppliers to eliminate excessive packaging.

In the same speech, Scott said Wal-Mart would promote more responsible business practices by its foreign suppliers and would improve the “community engagement process” of its domestic stores. Embracing a position that has long been anathema among retailers, Scott urged Congress to increase the minimum wage.

The company’s intended moment of glory was largely ruined when Wal-Mart Watch leaked an internal company memo suggesting that employee benefit costs could be kept down by not hiring job applicants who were in less than perfect health. The same memo confirmed that nearly half the children of Wal-Mart workers were either uninsured or covered by taxpayer-financed health programs. As in the past, Wal-Mart’s old sins overshadowed an effort to project a new enlightened image.

Scott tried again in April 2006, when he announced an initiative that was apparently meant to sound like a government program. As part of a planned expansion into urban areas, Wal-Mart would create ten “Jobs and Opportunity Zones” in neighborhoods with high rates of crime or unemployment. After opening stores in these areas, the company would help existing small businesses by featuring some of them in local newspaper advertising and by holding seminars in which they would “learn how to thrive with Wal-Mart in their neighborhood.” Scott said that a total of $500,000 would be donated to local chambers of commerce, including many minority chambers, in the ten zones.

It was no accident that the first such zone was planned for the West Side of Chicago. Wal-Mart regarded the city as a beachhead for its planned invasion of urban America—a vital move, given that the company has saturated suburban and small-town markets. Chicago’s unions and community groups responded to Wal-Mart’s plans by launching a campaign to require all big-box retailers in the city to pay a living wage. Wal-Mart apparently hoped that the Opportunity Zone plan would take support away from that campaign. It was wrong. In late July, the City Council voted 35 to 14 in favor of the living-wage measure, which also established minimum spending requirements for benefits. Wal-Mart then warned that, if the law goes into effect, it would ring Chicago with Supercenters that would draw shoppers from the city while generating tax revenues for suburban jurisdictions.

Wal-Mart’s urban policy forays in Chicago—both the carrot of Opportunity Zones and the stick of draining tax money—are being accompanied by experiments in marketing. At the company’s annual meeting in June, Lee Scott highlighted the Wal-Mart store in Chicago’s Evergreen Park, which has adjusted its offerings in a way it thinks will appeal to city-dwellers, especially African-Americans. The store, for example, carries an expanded range of ethnic hair care products and has a wider selection of gospel and rap in its music section.  

This “urban and multicultural” experiment, as Wal-Mart calls it, is one of several new formats that the company is trying out, as is the upscale model tested in suburban Dallas.  Changing “concepts” is not uncommon among retailers, but it is a radical departure for Wal-Mart, which has based its phenomenal growth on serving a homogenized mass market. The fact that a company with more than $300 billion in sales has to rethink its identity suggests that something very serious is wrong.

IS IT REAL, OR IS IT SPIN?

The past two years have been a remarkable period of transformation for a company at which change long consisted only of finding more efficient ways to carry out a static business model. A corporation that used to think it could ignore the wider context in which it operated now feels a need to pay attention to issues such as environmental quality, workplace fairness and community vitality. That, in itself, can be considered a coup for Wal-Mart Watch, Wake-Up Wal-Mart and the company’s many other critics.

Yet there is still a question as to whether the recent flurry of activity by the company on social issues amounts to real reform or cosmetic changes. Consider the three main arenas in which the company has taken initiatives:

“Community engagement.” Wal-Mart’s new-found concern over its community impact seems particularly shallow. The Jobs and Opportunity Zone program comes across as nothing more than a public relations gesture meant to assist the company’s attempted entry into urban markets. The fact that Wal-Mart proposed creating only ten zones and spending a total of only $500,000 by itself makes it hard to take the proposal seriously. Even if more money were being committed, it is doubtful Wal-Mart could provide meaningful assistance to small businesses whose very existence may be threatened by the opening of a Supercenter in their neighborhood. If Wal-Mart were serious about helping local merchants, it would set up a multi-billion-dollar fund to compensate the ones it puts out of business.

Workplace fairness. Wal-Mart’s record on workplace issues is so bad, it is difficult to believe it could ever be a model employer. Whatever changes the company has made have come under pressure from class-action lawsuits, investigations by regulatory agencies and general public protestation. Wal-Mart executives still don’t seem to think it a problem that many of the company’s workers have to depend on taxpayer-funded health plans. And they apparently don’t realize that providing coverage with low premiums but sky-high deductibles is little different from providing no coverage at all. Wal-Mart’s recent changes in its pay structure will help new workers, but the plan also includes wage caps that will hurt veteran employees. The company’s fierce resistance to living-wage and fair-share health initiatives show that it will not tolerate any workplace reforms outside its control. Besides, nothing Wal-Mart does on the labor front will ever have any legitimacy until it starts respecting the collective bargaining rights of all workers—not only those in China. Dropping its anti-union animus in the United States is one reform that Wal-Mart has not yet announced.

Environmental consciousness. This is the one aspect of Wal-Mart’s new image that cannot be dismissed quite so easily. Lee Scott seems sincere in claiming to have had an environmental epiphany, and the company appears to be undertaking meaningful changes in the way it uses energy and handles waste. Yet these measures are not entirely altruistic. In his speech last October, Scott made it clear that he regarded efforts to increase energy efficiency and decrease waste output as cost-cutting measures: “This will be good for the environment, it will save us money, and in some cases, it will actually add profits to our bottom line.” In other words, Scott sees green reforms as an extension of the company’s legendary penny-pinching ways.

The fact that Wal-Mart can treat conservation as a profit center highlights a critical difference between environmental concern and other aspects of corporate social responsibility, especially workplace reform. Being more respectful of the environment can enhance profitability, whereas being more respectful of the rights and well-being of workers can harm the bottom line, as Scott and other low-wage employers never tire of telling us.

Over time, high-road employment practices can raise productivity and even profitability, while raising living standards in the economy as a whole. But that will take a much bigger change in business practices than Wal-Mart is willing to consider. Until Lee Scott has that kind of epiphany, his company deserves to remain a corporate punching bag.