Wall Street, NY. Wal-Mart Dreams of Clean Floors and Friendly Associates
On October 14th, Wal-Mart conducted its 22nd Annual Meeting for the Investment Community, featuring 5 of its top management, and 14 analysts from companies like Morgan Stanley, Merrill Lynch, and Wells Fargo. It was a bizarre performance by a damaged company.
Here are some Sprawl-Buster highlights from that event:
The Cost of Investing in Workers: The Wal-Mart narrative for this event repeatedly focused on what CEO Doug McMillon called the “significant commitment” the retailer had made to its “store associates.” Wal-Mart had announced several months ago that starting wages at Wal-Mart would be pegged at $9 an hour this year, and $10 an hour next year. But retail workers today are campaigning for a minimum of $15 per hour, leaving Wal-Mart workers at 66% of the goal.
McMillon said increasing wages was necessary to “get the talent we need,” and it was “the right thing to do.” But the timing for $15 per hour is apparently not “the right thing” yet. Company CFO, Charles Holley, made it clear that raising wages has hurt Wal-Mart’s stock value: “This program will result in increased cost of about $1.2 billion this year and an incremental $1.5 billion next year. Now this is $2.7 billion of investment over a two-year period. In fact, in fiscal year 2017 this wage investment represents approximately 75% of our earnings per share reduction.” But research has suggested that Wal-Mart could increase wages with almost no impact on its profitability, and, as Wal-Mart itself has noted, paying workers more leads to increased sales.
Worker Ownership: In a particularly bad choice of words, CEO McMillon referred to creating “more ownership among our associates.” He is not talking about actual financial ownership, but an attitude of motivational buy-in by the workforce. McMillon described “ownership” this way: “When our department managers take ownership and run a store within a store, that part of the store looks better and runs better, it drives more sales, has happier customers. That ownership is what we are after.”
Missing Rungs on the Career Ladder: CEO McMillon describes the salary structure at Wal-Mart which “Ideally...starts to look like a ladder…We want people to join the Company and have an opportunity to move up. We want to create a meritocracy…some of the longer-tenured associates, we are trying to guide them towards running one of the departments because that gives them an opportunity to move up…We really want to develop a pipeline of talent and to some extent have. But with our growth we have stretched that and needed to come back and put some of the rungs in the ladder in the right place.”
Greg Foran followed up that answer with a different metaphor: “So what is happening is that as we are making these changes it is cascading down. And we are seeing turnover in some of the areas, which, once again to be candid, we are forcing in some cases.” In other words, some workers are being knocked off the ladder through "forced" reductions.
Slowing Down Superstore Growth: “The Supercenter is the greatest format in retail history,” McMillon declared, “and it will continue to be a huge driver of our growth in profits.” But he admitted that Wal-Mart has to “re-imagine the Supercenter to refresh it, to ensure that the format remains strong long into the future.” CFO Holley added that Wal-Mart’s capital expenditures in U.S. stores will be drop around $800 million, “driven by the moderation of Supercenter and Neighborhood Markets growth while we focus on assessing the format to ensure it meets our customers' needs for price, assortment, access and experience.”
Greg Foran, chief of Wal-Mart’s U.S. store division, quantified Wal-Mart’s growth plans. “We’re continuing to moderate our Supercenter buildout next year to ensure long-term success. We will build 50 to 60, which includes relocations and expansions.” Moderation is also the growth mode for the smaller Neighborhood Markets. “We will moderate growth this year and build 85 to 95 new [Neibhborhood Market] stores,” Foran predicted, “and that's deliberate as we focus on improving profitability and the productivity of this format through enhanced fresh and access to services. We're working to make them more inviting and to get them in the right locations relative to Supercenters.”
This growth slow-down is sweet news for Sprawl-Busters. Holley said capital expenditures will be approximately $11 billion next year and will remain relatively flat for the next two years after that.
Clean, Fast and Friendly: Greg Foran also noted that when the retailer ranked its 4,597 American stores last February, based on a metric they call their “clean, fast and friendly scores,” that only 16% (735 stores) were at their initial goal. As of October 1st, Foran boasts that 67% (3,080) meet their initial goal. That means 1,517 Wal-Mart stores don’t meet Wal-Mart clean, fast and friendly measures. “I want to be clear,” Foran said, “we've still got lots of room to improve.” Is the world’s largest retailer admitting that 33% of its stores are dirty, slow and unfriendly?
Foran concludes that his research has found “a really good correlation” that “the higher your score is in clean, fast, and friendly, the higher your sales.” Any shopper could have correlated that.
New Name Badges Make the Difference: Greg Foran described for the assembled Wall Street analysts what they would find if they visited a Wal-Mart store “on one busy afternoon”:
“I think you'll see we've got clean floors. We've got better fresh…There's a better in-stock. Store managers and department managers are visible on the sales floor. Associates are more friendly. They are wearing their vests and they've got their new name badges on that say Our People Make the Difference.” Will shoppers notice, or care, what the name badges say?
Bulking Up on Managers: Greg Foran explains Wal-Mart’s strategy for success: “We have added in the last few months 8,000 department managers who are empowered to run their departments and be great merchants. Next year, we will roll out…programs that will be giving our people better training and a clearer understanding of what they need to do to get promoted…If you pay your people competitively, if the managers are really engaged and they are good, if you train people, you give them the right schedules, you're going to see happier associates, you will see a marked improvement in the shopping experience.” There are too many "ifs" for most workers in this scenario.
Markdowns on Damaged Goods: Halloween shoppers take note: Greg Foran explains how Wal-Mart marks down damaged goods: “Here's how it works. If a Halloween princess costume is missing its crown, our stores will mark it down to a lower price instead of just throwing it away. A customer is happy to get the great item at a lower price.”
What you can do: Reading Wal-Mart management’s narrative from a Main Street perspective, not a Wall Street perch, the retailer appears much like that damaged Halloween princess who has lost her crown. The company has to defend paying its worker’s more—but far less than workers want. It has to justify for stockholders its falling share value. It seeks to validate its catch-up spending on e-commerce, where its performance is just not clicking like Amazon.
And it has to slow-down its growth of new brick-and-mortar superstores, which look more like confused dinosaurs facing an advancing retail ice age.
To read Wal-Mart's Annual Meeting report for analysts, go to: