Walmart Prefers Political Correctness to Profitability

Mike Duke photoLast week it was Walmart CEO Mike Duke’s duty to find an explanation for continuing declines in same store sales, as the company hosted its 20th Annual Meeting for the Investment Community on Tuesday.

Despite the fact that the most recent quarterly report ended in July and brought a surprising (to analysts) .3 percent drop for the second quarter, when a one percent gain was expected, Duke cited the two-week old government shutdown and a “tough and unpredictable global economy” as reasons for the poor performance.

“It should come as no surprise that the government shutdown is on the minds of our U.S. customers,” Duke told his audience. “As you would expect, we’re following the situation very closely.”

Of course the shutdown came long after the second quarter reports, so there had to be other explanations.

“The competition is also tough,” Duke said. “I see it when I am out visiting their stores. And of course, the holidays are right around the corner – raising the stakes even further on serving customers and delivering on performance.”

Unfortunately the shareholders who have hoped for a boffo performance from Walmart have been sorely disappointed about those “stakes.” U.S. operations especially have been the target of frequent criticisms because of poor selection, scant personnel and empty shelves. Besides those retail basics, NLPC has condemned executives’ pursuit of politically correct public policy initiatives such as Obamacare and “green” energy, whose astronomical costs are not in the best interests of the company, their employees, or their customers.

Earlier this year Walmart was rated worst (or tied for it) among department and discount stores in the American Customer Satisfaction Index. According to Bloomberg News the retailer added 455 stores over the last five years, but shed about 20,000 employees over the same time period.

The results are increasing complaints about empty shelves and poor customer service. In February and March Bloomberg reported that Walmart was “getting worse” at stocking shelves, based upon notes from an officers’ meeting.

“When times were good and people were still shopping, the lack of excellence was OK,” said Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management. “Their view has been that they have the lowest prices so customers keep coming anyway. You don’t see that so much anymore.”

Part of the problem is Walmart has boosted profits by cutting operational costs, the majority of which must come from labor-hours. According to Time the company took $740 million out of its cost structure in fiscal year 2013, which clearly cuts into the number of associates available to run registers and stock shelves. And despite the widespread recognition of Walmart’s efficient supply and replenishment chain – while boasting a 90-95 percent in-stock level – that number means little if the inventory is not making it from the stockroom to the showroom.

“How do you maintain service levels with fewer man-hours? Walmart’s front-end managers are supposed to open another register any time there are more than three customers in line,” wrote Time’s Bill Saporito. “The cashiers have to come from some other part of the store—the back room, which is invisible to the customer, is one such place to grab bodies.”

Another Time story from March noted how many more Walmart employees are talking to journalists – not about low pay or benefits, which has been a hobbyhorse the media likes to ride – but about operational shortcomings.

“The merchandise is in the store, it just can’t make the jump from the shelf in the back to the one in the front,” a meat and dairy stocker who works at a Walmart in Erie, Pa., said. “There’s not the people to do it.”

So how did Mike Duke say he would address the same-store sales weaknesses? He seemed to address everything except the actual problem. He promised that Walmart would “see fantastic new merchandise, aggressive investments in price through lots of rollbacks, and better in-stock levels.” He also mentioned the larger goal to “reduce operating expenses as a percentage of sales by at least 100 basis points over five years” and explained that the logistics team is “doing a fantastic job of reducing shipping costs and increasing transportation efficiency.” Duke also addressed savings in the process of building new stores, and the progress and growth in Walmart’s e-commerce (where, of course, zero personal interaction with the customer is required).

As for getting the merchandise out of the back of the store, what did Duke say he would do? Rather than get extra help to move it to the front, instead he wants to use stores as mini-warehouses for smaller stores. According to Associated Press, by 2017 Wal-Mart plans to add 400 more Neighborhood Markets (which average 38,000 square feet), while it plans to add another 300 Supercenters (which average 182,000 square feet) over the same period. That sounds like more back room emphasis and less display focus.

None of the measures announced by Duke last week addressed the practical problems Walmart faces with same store sales. The discount giant, once mighty under founder Sam Walton, ought to be the “go-to” store in difficult economic times. Duke could do worse than to look at another mega-firm that targets the thrifty: McDonald’s. Where Walmart saw declines, the fast food king saw its same-store sales rise during the same period. McDonald’s never stops innovating; constantly analyzes what customers want; and makes sure its menu has something they are looking for and that it’s available.

Duke sort of made that kind of promise in 2011 after same-store sales sank by 1.5 percent, and Walmart experienced a slight uptick to a positive .2 percent in 2012. He said shoppers would find a wider selection of merchandise at the “everyday low prices” Walmart customers have come to expect. Now, though, the decline seems to have resumed.

But in his remarks last week, Duke concluded by emphasizing politically correct Walmart initiatives that the vast majority of his customer base cares nothing about, at least as far as how it affects their spending habits.

“A big part of our success with our people has to do with the difference our company makes around the world,” Duke said. “And we have only accelerated in the past year — with our commitments on renewable energy, on reducing certain chemicals in our products, and on helping to revitalize manufacturing in the U.S. We set the pace for how companies take on big issues facing society. And we will keep leading because it is good for our business.”

Indeed, Walmart regularly receives praise for meaningless accomplishments such as ranking as the top corporate solar energy user. Executives at the Bentonville, Ark. headquarters have become obsessed about their political and media image at the expense of true growth.

There’s a name for a big corporate chain that failed to remain focused on delivering what customers want, squeezed costs to the point of incapacitating its operations, and fell to retail irrelevance. It’s called K-Mart, and Walmart needs to reverse course to avoid a similar collapse.

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes, an aggregator of North Carolina news.