The Branding Crisis at Wal-Mart
by Allen Long

Some business strategists insist that companies have to employ "hardball" tactics constantly on all fronts to succeed. Some of these strategists point to Wal-Mart as a company that has achieved great success by following this strategy.

However, companies that play hardball often grow market share and revenue at the expense of poisoning their brands. And a toxic brand can cause significant damage to a corporation. Is this tradeoff financially worth it, or does playing hardball at the expense of brand image eventually cause more harm than good?

This article will examine Wal-Mart's strategies and explore what the company has gained and lost from playing hardball. It will also address how Wal-Mart has attempted or is attempting to resuscitate its brand and whether these efforts have paid off or appear likely to be successful.

Wal-Mart's Accomplishments
Wal-Mart has achieved considerable accomplishments. Wal-Mart is the #1 retailer in the world, with 6,300 stores worldwide employing about 1.8 million people. Annual revenue is over $300 billion. By comparison, annual revenue at archrival Target is over $50 billion. Sales and net income growth at Wal-Mart both are about 9.5%. Approximately 138 million customers shop at Wal-Mart weekly.

Wal-Mart has a very strong brand attribute of providing everyday low prices. Wal-Mart advertises that it saves the average working family about $2,300 a year. Wal-Mart grocery prices are 15% to 25% lower than traditional supermarkets. An MIT study found that competing grocery stores lower prices by 5% when a Wal-Mart store comes to town.

Wal-Mart is the largest corporate contributor in the U.S., donating about $170 million annually to support communities and local organizations. In addition, Wal-Mart accomplished a large-scale and rapid response to Hurricane Katrina. The company made an immediate donation of 100 truckloads of merchandise, 100,000 meals, and $20 million in cash. The company put the government to shame in its ability to deliver these goods. Even Wal-Mart's bitterest critics praise this impressive effort.

If we stop our examination of Wal-Mart here, one might think, "What a successful and socially-minded company!"

The Dark Side
However, Wal-Mart has a dark side that seriously detracts from its accomplishments. Listed by its critics as alleged sins include: the company is aggressively anti-union; fails to pay a living wage to its full-time workers, who start out at about $10.11 an hour or $21,000 in annual salary; fails to provide adequate and affordable health benefits to its workers and their families; pollutes the environment; violates child labor laws; and drives mom and pop retailers out of business.

Additional alleged or proven sins include supporting foreign sweatshops and constantly squeezing suppliers to reduce their product pricing so that these companies struggle financially or go out of business.

The company also has been accused of or has lost lawsuits or paid fines for exhibiting discrimination against women and Hispanics, forcing employees to work off the clock, denying workers their lunch breaks, using cleaning contractors that make heavy use of illegal aliens, and locking workers in stores at night.

Here are a few specific facts regarding Wal-Mart's dark side. Wal-Mart faces the largest gender discrimination lawsuit in U.S. history. It is the subject of a class action lawsuit involving about 1.6 million current and former female employees.

In addition, Wal-Mart's annual turnover of hourly workers is 50%. Some 46% of Wal-Mart's employees' children are uninsured for health care or rely on state-subsidized health care programs. Finally, a 2004 Congressional report found that a typical Wal-Mart store with 200 workers cost federal taxpayers an estimated $420,000 per year in hidden costs, such as Medicaid, children's health insurance, free school lunches, and housing assistance.

If one were to just read this "dark side" section of the article, one might think, "What a socially and environmentally irresponsible company!"

Backlash
While Wal-Mart's sales have continued to grow, the company has experienced a number of negative consequences from its bad press and brand poisoning.

In the early 1990s, when an NBC expose revealed that Wal-Mart was placing signs reading "Made in America" over merchandize in its stores that was manufactured by foreign sweatshops, its stock price immediately fell 3%.

Beginning in 2003 and continuing to 2006, Democrats have attacked Wal-Mart for its low wages and poor health benefits. Senators Joe Biden, John Edwards, and John Kerry have attacked Wal-Mart recently for crushing the middle class.

Senator Kerry said, "It's unconscionable and it's unacceptable that five of the ten richest people in America are Wal-Mart stockholders from the same family-worth double-digit billions, but they can't find the money to secure health coverage for their own workers and their families." Senator Hillary Clinton, a former Wal-Mart board member, returned a recent Wal-Mart campaign contribution. Some political observers predict that this Democratic attack on Wal-Mart may continue and reach a climax during the 2008 Presidential election campaigns.

According to several accounts, Wal-Mart is struggling to establish stores in the West and Northeast and in urban areas like Chicago because these areas are more unionized and particularly concerned about the company's social policies. Wal-Mart has flourished in the Republican red states, but the company is virtually blocked out of expanding into Democratic blue states.

One reason Wal-Mart is so blocked in the blue states is that it faces fierce opposition from coalitions consisting of unions, smaller retailers, churches, environmentalists, and neighborhood activists. In a recent SEC filing, Wal-Mart executives identified continued growth in the U.S. as a critical success factor (or a serious risk if it fails to happen).

By contrast, Target has an image of political correctness that plays well in the blue states, according to Crain's Chicago Business. Target opened six stores in Chicago while Wal-Mart fought a three-year battle for permission to open a single store there.

What about Wal-Mart's customers? After all, they're the source of the company's revenue. In a 2004 McKinsey study for Wal-Mart, the consulting firm determined that up to 8% of Wal-Mart's customers had stopped shopping there because of "negative press they have heard."

In a February 2006 New York Times article, Wal-Mart CEO Lee Scott acknowledged that bad press "probably" has slowed Wal-Mart's expansion.

Finally, Wal-Mart's stock has fallen about 11% or over the last five years. Wal-Mart claims this slump is the result of its customers having less money and soaring fuel costs, which may be true, but one wonders how significant a role Wal-Mart's brand poisoning has or will affect the company's current or future stock price and financial performance. It seems reasonable to assume that the sheer volume of Wal-Mart's bad press must have had some adverse effect on its stock price, either directly or indirectly. For example, if Wal-Mart loses its ability to expand into the blue states, this undoubtedly would lower its stock price.

Wal-Mart's Efforts at Brand Recovery
In 2005, Wal-Mart announced that it had lowered the cost of health insurance for its workers; however critics pointed out that Wal-Mart lowered monthly premiums by raising deductible amounts to unaffordable levels.

Wal-Mart has pledged that it will reduce energy use, increase fuel efficiency, and minimize solid waste. Environmentalists commend these goals but remain critical of the company in terms of the land-use impact of new stores in rural areas, covering fields or wetlands and prompting customers to use extra gasoline getting to stores.

Wal-Mart introduced a TV advertising campaign in August 2006 with the following messages:
· Saves the average working family $2,300 per year
· Creates tens of thousands of jobs per year
· Offers eligible employees health insurance for only $23 a month
· Moved 150,000 uninsured people onto health insurance
· Is one of largest corporate contributors to local charities in America

The company also has announced a transformation strategy that includes the following steps:
· Broadening customer appeal
· Enhancing the workplace
· Improving operations and efficiency
· Driving international growth
· Making unique contributions to the community

In June 2006, the company also discussed plans to increase diversity among senior executives, offer more robust employee health plans, increase disaster relief, and reduce its impact on the environment.

Finally, Wal-Mart funds lobby groups such as Working Families for Wal-Mart that aggressively attack Wal-Mart's critics. Having these "dirty business" groups at an arm's length from Wal-Mart is one of the company's smartest moves to protect its brand. This is a defensive tactic, though, not a reform.

What Will the Jury Decide?
Will Wal-Mart achieve these admirable goals and recover or build a positive brand image? The jury's way out on that one. In a 2005 article in Business New Hampshire, a PR consulting firm president, Katie Paine, said that Wal-Mart remained too focused on earnings for too long to the detriment of the firm's public image and civic responsibilities. She said Wal-Mart's 2005 publicity push was aggressive but transparent. "The media isn't buying it," she said. "It's way too little too late."

It's entirely plausible that the situation described by Ms. Paine will continue indefinitely. This would mean that Wal-Mart has poisoned its brand to the extent that it loses additional customers, its stock continues to slump, and its ability to expand into blue states essentially remains blocked.

Since customer and public perceptions generally are slow to change, Wal-Mart would have to make major genuine and successful reforms across a wide range of "dark side" issues and publicize them widely over an extended period of time before customers, other consumers, and watchdog groups concede that Wal-Mart is changing for the better and deserves a brand upgrade.

Wal-Mart would be wise to earn the praise of well-respected third-parties that will have far more credibility than Wal-Mart in publicizing reforms. For example, if the Sierra Club pronounces Wal-Mart an environmentally responsible or "green" company, wouldn't that carry much more weight than a press release from Wal-Mart?

Much of the social criticism of Wal-Mart stems from perceptions that it treats its employees poorly regarding wages and benefits. According to business historians, Sam Walton, the founder of Wal-Mart, was famous for pinching pennies, which included keeping a careful eye on payroll expenses. At the same time, however, he continually rallied the employees by reminding them they were important team members and created a profit sharing program that backed up his words.

He promised a truck driver that he'd make at least $100,000 in profit sharing if he stayed with company long-term. The truck driver accumulated over $700,000 in profit sharing during his tenure with the company. Wal-Mart critics say the company has forgotten the "human side" that balanced Walton's "hardball side"-a balance that was critical to the company's success.

Only time will demonstrate whether Wal-Mart can profitably recover this balance.

Allen Long is Managing Director at Outward Insights, a Boston-based competitive intelligence and strategic planning consulting firm. He runs the company's Silicon Valley Office. He also is an adjunct professor at Stanford University and a member of the ZIBS Panel of Experts.