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December 4, 2013

On the move: the challenge of revitalising Wal-Mart

Doug McMillon may have followed Mike Duke's path at Wal-Mart with the move from head of international to the CEO's office and, in some ways, he has some foundations on which to build the next stage of the retailer's growth. But he faces some significant challenges ahead.

By Dean Best

One Wal-Mart executive replaces another to become CEO. It would be easy to conclude the world’s largest retailer has opted for continuity in naming Doug McMillon as the successor to Mike Duke. 

McMillon, like Duke, will move from leading Wal-Mart’s international business outside the US to taking the top job at the company. The fact the US retail giant has opted for the head of its overseas operations as its new CEO again indicates the importance of its business outside the US for the company’s growth.

However, when McMillon, who joined Wal-Mart in 1984 as a “summer associate” at one of its distribution centres, assumes control in February, will be tasked with adapting the retail behemoth to a fast-evolving marketplace.

“Mike Duke’s role was to bring stability to the organisation, which he did. He did not create dynamic change, however, which will be Doug’s charge,” Neil Stern, senior partner at US retail consultants McMillanDoolittle, says.

Looking at Wal-Mart’s basic financial performance during Duke’s tenure, the retailer did enjoy successive years of higher sales and earnings. Its share price, at the time of writing, has risen by over 70%.

There have, however, been challenges. Duke has presided over Wal-Mart in what have been – certainly in markets like the US and the UK – the most challenging economic conditions for a generation. One could assume such a backdrop would be perfect for a retailer forensically focused on price but, on both sides of the Atlantic, Wal-Mart has seen its sales come under pressure from dollar stores and discounters and from more mainstream rivals sharpening their value proposition.

Internationally, Wal-Mart has expanded further, notably adding Africa to its operations, with a deal to buy a majority stake in South Africa’s Massmart Holdings. The retailer, which has been looking to adapt to consumers’ moves to shop online, has been investing in developing a multichannel business, notably in markets like the UK, but also in emerging markets, its acquisition of 51% of Chinese e-commerce firm Yihaodian a case in point. 

However, Wal-Mart’s work internationally in recent years has been somewhat overshadowed by accusations of bribery in Mexico, albeit before Duke became CEO, that sparked an internal investigation into the company’s other foreign subsidiaries. Employees at Wal-Mart’s former Indian venture, Bharti Walmart, were suspended amid claims of violations of anti-corruption rules. In China, Wal-Mart has faced issues of food safety and been fined for breaking rules on pricing. Issues, perhaps, that can arise at a business operating in developing markets, particularly at a company the size of Wal-Mart, but indicative of the challenge the company – and McMillon faces outside the more mundane battles on price or value.

McMillon will take at the helm at Wal-Mart on 1 February, the date of the retailer’s new financial year. The current year has seen Wal-Mart twice cut its profit forecasts, citing tricky conditions at home and abroad. Wal-Mart has spent much of the year issuing cautious statements on conditions in the US, pointing to factors ranging from “challenging” weather, higher payroll taxes and lower-than-expected inflation.

Wal-Mart’s domestic performance has been under scrutiny under Duke. Comparable-store sales came under pressure in the early part of Duke’s rein – they fell for nine consecutive quarters until the end of June 2011 – and, though the retailer worked hard to try to revitalise sales and there was some success at times in areas like grocery, industry watchers believe it remains vulnerable.

“The reintroduction of Action Alley and more SKUs temporarily improved sales performance in 2011 and 2012, but the group remains highly vulnerable to internet retailers and dollar store chains, which became even more apparent in 2013,” Euromonitor retailing analyst Raphael Moreau says.

Wal-Mart also worked to meet consumer demand for convenience, opening smaller stores, and, as in international markets, sought to build its online presence in the US, moves praised by retail analysts, although there are questions about the impact those initiatives have had so far.

“Mike Duke has made some excellent moves to adjust to the changing retail landscape; e.g. reinvigorating Neighborhood Markets, deploying market coverage strategies with their smaller convenience stores, and improving the shopping experience in Supercenters. There’s also been a major focus on walmart.com,” Bill Bishop, chairman of retail consultants Willard Bishop and “chief architect of retail technology advisors Brick Meets Click, says.

“That said, over the last several years, Wal-Mart has faced a slow growth environment in North America with increasing competition coming from hard discounter Aldi, Dollar General, and Family Dollar Stores. All these stores tend to beat Wal-Mart prices and have been growing rapidly in store count. It appears that he did the right things, the problem was that they didn’t have enough impact on the market to create the necessary performance improvements.”

Domestically, McMillon faces the challenge of winning business back from the likes of Aldi and the dollar outlets but, just as crucially for its future growth, turning Wal-Mart’s work online into increased sales.

“This will require strong leadership to change some of the well-engrained organisational behaviour that’s kept Wal-Mart from realising its full potential in the last several years,” Bishop says. “Bringing Wal-Mart’s stores and Wal-Mart’s digital capabilities together into a unified go-to-market effort will create significant value for the corporation and the good news is all the key building blocks appear to be in place.”

Wal-Mart needs to be “more aggressive” in winning back business from the discounters and dollar stores, Bishop argues. “This will not be easy either, but it’s hard to imagine what the Wal-Mart brand will stand for if they can’t do it.”

Asda, Wal-Mart’s UK arm, has recently made aggressive announcements about its multichannel plans, as it seeks to eat into Tesco’s dominance of sales in what is the most prominent online grocery market worldwide. More of the same will be needed, especially with Morrisons, the major UK grocer that competes most closely with Asda on price, moving online in January.

However, just as in the US, Asda needs to fend off the advances of the discounters, which continue to enjoy double-digit sales growth and are eating into the market share of its largest rivals. It seems Asda has recognised that threat, last month announcing plans for a major round of investment in price, although McMillon will need to keep a close eye on how Wal-Mart is performing in one of its largest overseas markets.

And if that is not enough, some of Wal-Mart’s other overseas businesses will need some of McMillon’s focus. Last month, Wal-Mart indicated where it was prioritising its capital spending in the next financial year, with an increase in its capex forecast for the US, while scaling back plans for international investment – including making moves to close under-performing stores in Brazil and China, as well as slowing its store opening programme in Mexico.

Wal-Mart’s profit warnings this year have come not just on the back of slower spending in the US but more caution among consumers in the retailer’s key emerging markets, Brazil and China.

The reduction in capex indicates an acknowledgement from Wal-Mart that returns will be tougher to generate from such markets, although the retailer, rightly, believes in the potential over the businesses in the longer term. That said, McMillon, head of Wal-Mart’s international arm for almost five years, will need to look at Wal-Mart operates in markets like China to drive its performance, industry watchers argue.

“In China, the group may need to boost the opening of smaller stores, as hypermarkets are also reaching saturation, as the announcement of the planned closure of 25 unprofitable stores testifies,” Moreau says. “Wal-Mart’s hypermarkets in China are met with intensifying competition from aggressive local retailers with efficient operations and offering an increasingly competitive mix of local and foreign products. In Brazil, replicating the discounter store formats in several store sizes to follow the approach used in Mexico could help improve performance and offset the planned store closures for hypermarkets.”

McMillon may have followed Duke’s path at Wal-Mart with the move from head of international to the CEO’s office and, in some ways, he has some foundations on which to build the next stage of the retailer’s growth. But he faces some significant challenges ahead.

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