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Corporate Research E-Letter No. 55, September-October 2005

DISASTER AS RELIEF:
HOW WAL-MART USED HURRICANE KATRINA TO REPAIR ITS IMAGE

By Philip Mattera

Not long ago, Wal-Mart was down in the dumps. Rising gasoline prices were depressing sales, forcing the giant retailer to reduce its profit forecast. The company’s stock price was near a five-year low. A scandal involving a former executive had the whiff of corruption. And all this was in addition to the usual wave of controversies over Wal-Mart’s labor practices, market manipulation, environmental impact, etc.

The company’s image took a dramatic turn for the better in September. While several hundred thousand people along the Gulf Coast were scrambling to survive in the wake of Hurricane Katrina, the same storm gave Wal-Mart the biggest boost to its reputation in the company’s history. Having provided timely deliveries of donated relief supplies—in contrast to the ineptitude of government agencies—Wal-Mart was hailed as a corporate savior. Its cash contributions to relief funds yielded effusive praise from two former Presidents of the United States. Even its critics felt compelled to applaud. A disastrous act of God for many was a godsend for the world’s largest corporation.

TRYING TO ESCAPE FROM THE QUAGMIRE

For many years, Wal-Mart did not worry much about its image. It spent little on national advertising or federal lobbying. It did not employ the legion of consultants who typically work to shape the way a large corporation is viewed by the world. In fact, the company, which kept its headquarters in the backwater city of Bentonville, Arkansas, seemed to pride itself on being unsophisticated and insular.

That has been changing over the past few years. Wal-Mart established a presence in Washington and started cultivating closer ties to the Republican power elite. It began running a series of feel-good TV image-ads depicting happy employees and satisfied customers. And it sharply increased its charitable contributions, especially to organizations whose members were people of color.

These efforts, however, had a hard time competing with the constant drumbeat of criticism over the treatment of its employees (including the closure of stores whose workers dared to vote for unionization), its purchase of goods made in foreign sweatshops, the impact of its expansion on smaller merchants, and just about every other aspect of its operations. According to the Wall Street Journal, chief executive Lee Scott was shaken by the extent to which the company served as a whipping boy for Democrats during last year’s Presidential race.

Scott concluded that the company could no longer leave these criticisms unanswered. In January 2005 Wal-Mart launched a major media blitz to respond to the negative publicity it was receiving over class-action lawsuits based on charges of sex discrimination and failure to pay workers for overtime. The company took out full-page ads in more than 100 newspapers nationwide. The previously reticent Lee Scott made himself available for interviews with all the major TV news outlets.

But the scandals kept on coming. Soon Wal-Mart was fined for child labor violations. In March 2005 the company paid $11 million to settle a lawsuit charging that it had used hundreds of undocumented workers to clean its stores. That same month, Thomas Coughlin, former head of Wal-Mart’s U.S. operations, was forced to resign from the company’s board of directors amid questions about misappropriation of corporate funds. Coughlin later claimed he had used the funds on covert efforts to thwart union organizing. At the same time, the company found itself the target of two national pressure campaigns to get it to change its business practices.

In April, Fortune reported that Wal-Mart was once again Number 1 in the magazine’s famed list of the largest corporations, but the company was described as “embattled as it has never been before.” Citing the slew of controversies in which the retailer was enmeshed, the magazine said: “Wal-Mart has marched itself straight into a management and public relations quagmire.”

For help in escaping that quagmire, Wal-Mart turned to the experts. In August it retained a team of public relations specialists from the Edelman firm to set up rapid-response, war-room operations at corporate headquarters and in Washington, DC. Edelman’s website says the firm “helps companies anticipate, prepare for and manage complex situations, including poor financial or corporate performance, product recalls, social or corporate responsibility, labor relations, environmental issues, employee malpractice, and high-profile litigation.” That’s just what Wal-Mart needed.

A FLOOD OF PRAISE

When Hurricane Katrina hit, the Edelman teams sprang into action. Initially, Wal-Mart’s old stingy inclinations surfaced. The company contributed a measly $2 million to relief efforts and indicated that workers at stores shut down by the storm would receive only three days of additional pay. Yet it quickly switched gears. A few days later, on September 5, Lee Scott was on hand to make a $15 million contribution when former Presidents Bush and Clinton announced the launch of their private fundraising campaign for hurricane victims. Both Bush Senior and Clinton (whose wife Hillary, now a U.S. Senator from New York, used to serve as a director of Wal-Mart while she was a corporate lawyer in Arkansas) sang the praises of the company for its cash donation. Clinton also commended Wal-Mart for announcing that employees forced to flee their home because of the hurricane would be rehired at their new location.

This was only the beginning of a remarkable wave of not just good but amazing publicity for the company, which also gave away merchandise to storm victims. The fact that Wal-Mart was able to deliver relief supplies to hurricane-stricken areas while government agencies were still fumbling was depicted as nothing short of miraculous, even though it was well known that the company had in place one of the most advanced distribution systems in the world. Speaking on “Meet the Press,” an official from Jefferson Parish in Louisiana said that if “the American government would have responded like Wal-Mart has responded, we wouldn’t be in this crisis.” The mayor of Kenner, Louisiana told National Public Radio: “The only one who could get here was the Wal-Mart Corporation…We are extremely appreciative and grateful for them, and we’d suggest that maybe some of those other folks go over and meet with the Wal-Mart people so they can learn distribution and logistics.”

That theme was soon echoed in the press. The Washington Post wrote that “Wal-Mart is being held up as a model for logistical efficiency and nimble disaster planning.” The Wall Street Journal declared: “The Federal Emergency Management Agency could learn some things from Wal-Mart Stores Inc.” New York Times columnist John Tierney went even further: “I don’t think Washington needs any more czars. But if President Bush feels compelled to put someone in charge of rebuilding the Gulf Coast, let me suggest a name: Lee Scott.”

The public relations trade press marveled. In a piece headlined WAL-MART’S RELIEF EFFORTS PROVE PRICELESS, PR Week said that “a decade of media summits and press kits couldn’t earn this kind of goodwill from the media.” Advertising Age added: “Millions in corporate-image advertising in the past year failed to do much to help Wal-Mart's reputation, shredded by disappointing business results, news stories about its lowest-paid workers getting Medicaid and food stamps and charges of embezzlement against its multimillionaire former No. 2 executive. But now, in the wake of Hurricane Katrina, Wal-Mart is getting the kind of advertising no marketer can buy.” Actually, Wal-Mart, or at least its representatives, was buying part of the good coverage. Last month, O’Dwyers PR Daily reported that Edelman had hired conservative blogger Michael Krempasky of RedState.org to tout Wal-Mart’s hurricane efforts in the blogosphere.

“GOOD THINGS ACCRUE TO YOU”

Although it was issuing regular press releases about its relief efforts, Wal-Mart made it sound as if good publicity was the last thing from its corporate mind. According to a September 12 story in Investor’s Business Daily, CEO Lee Scott “told a Boston conference that the company reacted as it did because it was the right thing to do. Public relations were not a factor. Still, he admitted it gave Wal-Mart a real boost. ‘When you do the right thing, good things accrue to you,’ Scott said.”

In fact, quite a bit has accrued to Wal-Mart in the wake of Hurricane Katrina. The favorable publicity it has received is certainly worth far more than the $25 million or so it has spent on cash contributions and in-kind donations. And it’s not as if a company of its size had any trouble sparing that much money, which is the equivalent of about two-tenths of one percent of the $10.3 billion in profits Wal-Mart earned last year. The company later announced that its Katrina-related costs would reduce quarterly earnings by only one cent a share.

That dip will almost certainly be temporary. Wal-Mart’s relief costs are tapering off, while sales have actually benefited from the disaster. People in the affected areas need to buy lots of stuff to replace all that was damaged in the storm, and those who have relocated need to furnish their new homes.

Wal-Mart has not hesitated to turn these needs into a marketing opportunity. Last month the company announced the creation of a gift registry for those affected by Katrina. Following the pattern of bridal registries, this new system allows hurricane victims to create a wish-list of items they need by using a kiosk at a Wal-Mart store or the company’s website. Friends and relatives can then purchase items on the list—from Wal-Mart, of course—and have them shipped to the person in need.

Some of the celebrities who organized personal relief missions purchased their supplies at Wal-Mart stores and warehouse outlets. Basketball star LeBron James, for instance, was reported to have spent $120,000 at a Sam’s Club to load four tractor-trailers with diapers, school supplies, food and other items. Increased sales are also coming from government sources. The New York Times reported recently that a FEMA official spent some $66,000 on relief supplies during a single shopping trip to a Wal-Mart store in Louisiana. It appears that no government discount was offered.

It is also likely that Wal-Mart will benefit over the longer term from its investment in hurricane relief. Site-fight activists may have a harder time mobilizing opposition to the construction of a Wal-Mart in their community. New Orleans Mayor Ray Nagin has suggested that residents will need more Wal-Marts as the city is rebuilt.

LAUDABLE BUT NOT HEROIC

Wal-Mart’s efforts on behalf of hurricane relief also have to be viewed in light of what the company had previously received in benefits from the region. The giant distribution centers in Louisiana and Mississippi that were mobilized to provide aid were—like virtually every one of the company’s warehouses—built with government subsidies. The 20-year-old facility in Brookhaven, Mississippi received more than $1.5 million in infrastructure assistance and millions more (the exact amount is unknown) in tax breaks. The newer facilities in Louisiana got much more.  The distribution center in Opelousas, which opened in 1999, received an estimated $33 million in tax breaks and infrastructure help. The one in the town of Robert, opened in 2001, enjoyed subsidies of more than $21 million. In other words, each of these two Louisiana distribution centers received more or less the same amount in government assistance as Wal-Mart has spent on hurricane relief. The company is still far ahead of the game—even without considering the rest of the more than $1 billion it has received in development subsidies across the United States. (For more on development subsidies to Wal-Mart, see the Good Jobs First report Shopping for Subsidies.)

Economic development subsidies are only one of the many controversies about Wal-Mart that will be featured in a forthcoming documentary film about the company by Robert Greenwald that will challenge the company’s newly burnished image.

Looked at in a broader context, the hurricane relief efforts of Wal-Mart, while mostly laudable, come across as somewhat less than heroic. The relatively ordinary accomplishments of the company looked extraordinary only because of the spectacular failures of government officials. Just because political hacks such as Michael Brown could not get the job done does not mean that big business is the solution to all our problems.