New Walmart CEO: Will Retailer Now Rise Or Fall?

Walmart has announced insider Doug McMillon is set to succeed Mike Duke as CEO on February 1. Change was on the cards, but the timing was a surprise.

Aged 47, Doug will be Walmart’s youngest CEO since Sam Walton. After a period of stagnant sales, labor disputes and foreign bribery scandals, can he lift Walmart and bring change, or will its dip in fortunes continue?

Walmart View On World: Walmart In Position Of Strength And Growth

In the press release announcing the move, chairman Rob Walton indicates that the Walmart view on the company is about strength and growth:

“This leadership change comes at a time of strength and growth at Walmart. The company has the right strategy to serve the changing customer around the world, and Doug has been actively involved in this process. The company has a strong management team to execute that strategy.”

The press release implies Walmart is more than ready for internet and mobile world:

“Mike put in place the building blocks for the next generation Walmart and today the company is stronger, more global and more unified across all our stores, mobile and online”

Current CEO Mike Duke is going to stay on for a year as chairman and advisor, in order to oversee a smooth handover.

All of which implies that Walmart feels on track, and that there is no need for change other than to tighten up on the controls of its corporate machine.

My Outsider’s View On Walmart: A World Of Challenges And Uncertainty

My view is that the above rosy outlook discounts the world of challenge and uncertainty in the global retail market. I see a "Big 3" challenge for Walmart and Doug McMillon in his new role:

Challenge 1: Move On From Recent Scandals And Restore Reputation For Integrity

Walmart’s reputation has been tarnished by US government investigations into potential Foreign Corrupt Practices Act violations in Brazil, China, India and Mexico. In 2011, the head of Chinese operations left after Walmart was accused of fraudulent labeling of pork.

Doug rejoined the core Walmart business from warehouse retail subsidiary Sam’s Club back in 2009, as CEO of Walmart International, and after the occurrence of the alleged violations. So he may not be to blame, but he has already been part of the attempt to move on from these scandals.

I don’t believe Walmart is a fundamentally bad company, and I think that it has integrity in general. The challenge is about policing the integrity of the entire company. The typical Walmart way, as continued under Mike Duke, has been to deal with these problems by introducing further layers of management, appointing Chief Compliance Officers and Anti-Corruption Directors in each market and region. I am concerned that such additional roles could create layers of bureaucracy, which, if not properly applied, will actually hamper the company’s ability commercially to adapt in the future.

There's also an argument for Doug to play offense rather than defense, and address customers' concerns directly via social media, not hiding behind the @WalmartNewsroom Twitter account. As Businessweek’s Diane Brady notes:

“Wal-Mart has also been ahead of the curve in areas like sustainability. Yet it’s more vilified than celebrated, in part because of a closed culture that seems reluctant to engage with the outside world. Media relations consists more of fielding calls than making them. Wal-Mart’s senior executives don’t blog and are rarely quoted. The company is faceless in social media, which can turn comical when it gets into a Twitter battle with critics like Ashton Kutcher.”

Challenge 2: Low Margins In Emerging Markets & Stagnating Business Performance In Core Markets

In Walmart’s core US market, there has been falling revenue in the past three quarters. In order to deliver on its mission of “Everyday Low Prices” for customers, Walmart has had to operate on low profit margins (currently 3.1%).

At home and abroad, Walmart is facing wage inflation, as well as a series of planned strikes by activists on Black Friday, one of the busiest shopping days of the year. ‘Our Walmart’ believes that a company which, in 2012, made $17bn on sales of $480bn, can afford to pay full-time employees a minimum of $25,000 a year, and is calling 1,500 Black Friday protests to make its point.

Store worker Tiffany Beroid falls below this wage level, and she said: “Walmart has been heading in the wrong direction, and it's a testament to the pressure the company is feeling that they're changing leadership at this moment. We're happy to see Mr McMillon acknowledge the hard work of associates in his statement this morning, and we hope that this appreciation translates into improving jobs for Walmart workers. We sincerely hope that Mr McMillon will answer the country's calls for Walmart to publicly commit to paying $25,000 a year, providing full-time work and ending its illegal retaliation against its own employees.”

In Doug’s area of international sales, there was growth of just 2.9% in the first six months of 2013. Expenses have been outpacing sales, and this was down on 10.5% in the same period the year before. Similar wage inflation pressure is starting to be felt in many of the BRIC markets.

Patrick McKeever at MKM warned in a recent note to clients that in the last quarter Walmart has started downsizing in India and Mexico, while closing 50 underperforming stores in Brazil and China.

Challenge 3: "Global Commerce" & The New World Of Even Lower Margins

The next phase of retail will be to cater en masse for connected shoppers, who may use their own combination of physical store visit, the internet, and increasingly their mobile device in the overall shopping experience. The convergence of these three areas across the world is becoming known as "global commerce".

As John Donahoe, CEO of eBay, told me in a recent interview for the BBC CEO Guru:

The smartphone is really breaking down the boundaries between online and offline or e-commerce and retail. We talk about it just being commerce. So if you take the effect of those two things, now as a consumer anywhere in the world, from any internet-connected device, you can have access to the world’s inventory whether it’s in a store, half a mile from you or half a kilometre from you, or whether it’s somewhere else around the world. And if you’re a seller – whether you’re a large retailer or a small seller – you can have access to the world’s consumers."

This is the global commerce world in which the CEO of Walmart now has to work out how to build sustainable value. Walmart’s competitors are now not just Costco, Publix, Target and Tesco, but the likes of eBay, Amazon and Alibaba, none of which have the cost burden of a physical storefront. This represents a radical evolution in the current retail environment. Only when it makes sense, these new competitors are free to bring store fronts, and in time distribution channels for small sellers, to go up against Walmart locally and indeed anywhere in the world.

Historically, Walmart is a great company, and through hard work it has become the biggest and most successful international physical retailer by scale. It has even beaten back Tesco, which has recently had to retreat from its global ambitions. It has strong values and ambitions – to lower the cost of living and build a better life for everybody – but it is Walmart’s very success which now makes it difficult to change.

On one level, Walmart share price is on a high, up 18% year-on year. However, this is still below the 26% annual gain in the S&P 500, which Walmart has trailed for the last two and the last five years. So there is significant uncertainty about the future for Walmart.

So How Can Doug McMillon Make Walmart A Success?

1. Draw more on Walmart’s core values in resolving scandals
Ensure they’re embedded not just in processes but in the hearts and minds of management.

2. Increase the intensity of the focus on core retail customers, while enhancing the usability and convenience of their integrated multi-channel shopping experience
Go faster on online grocery deliveries. Don’t jeopardize the long-term cost dynamics for short-term popularity.

3. Recruit someone from the outside to revisit Walmart’s approach to emerging international markets
Find a way to adapt and scale sustainably, while not compromising on business practices and integrity.

4. Get clear on how Walmart can make money and on what is its role in the connected “global commerce” world
Ensure that the Walmart machine radically evolves to make it happen quickly.

5. Be himself
Doug must do all of this while being overseen by a new chairman and advisor Mike Duke, who’s been responsible for the company over the last five years.

I have no position in the company, but if I were a Walmart stockholder, I would currently be a seller or very weak holder. However, if Doug were to implement all of the suggested changes while staying true to Walmart’s values, then I believe that the company could become a strong buy.

I wish Doug good luck in his new CEO role.