BUSINESSWEEK

							BUSINESSWEEK

Newsmaker Q&A March 30, 2007


Wal-Mart: 'On the Side of the Angels'
CEO Lee Scott talks about going green, aiming for the
affluent, battling opponents, and what it's like to be a major
issue in the 2008 Presidential campaign
You would think from reading the headlines that being chief executive of Wal-Mart Stores (WMT)
would be a pretty tough job these days. Workers grumble about pay and benefits. Union groups
wage ongoing campaigns against your company. Cities and towns try to stop you from putting up
new stores. And the Democratic candidates for the 2008 presidential nomination have decided that
hammering your company for the next year and a half could be a pretty good way to get votes (see
BusinessWeek.com, 11/16/06, "Can Barack Wake Up Wal-Mart?").

But Lee Scott, Wal-Mart's CEO, isn't distracted by headlines. During a lunch with BusinessWeek
editors and reporters, he made it clear that he's too focused on the retailing business to be bothered
much by bad press. He's outspoken about the criticism of Wal-Mart, attributing it mostly to union
groups that are worried about their own futures. But he said the evidence is clear that Wal-Mart has
a huge number of supporters: the country's largest retailer pulled in $345 billion in revenues last
year.

In a wide-ranging interview, he covered many of the company's challenges and successes. He
acknowledged that the company's pursuit of more affluent shoppers, particularly in apparel, was
"too far, too fast." And he said opposition in some cities was preventing the company from opening
up certain stores. Yet he sees plenty of promise ahead for the company in international markets and
green products.

What follows are edited excerpts of the conversation.

Scott: I've been directed to be not quite as provocative as I was yesterday [at the New York Times
(NYT), which ran a story titled "Wal-Mart Chief Writes Off New York."]

Since we all read about it this morning, what is your view about New York?

Well, what I was thinking was, we were sitting in New York City, in Manhattan, talking about
stores. It's not something I brought up, [but] I said, I don't care if we ever have a store here. From
that then came the story that we don't want a story in New York City, which then implies that we
don't want stores in the boroughs. Obviously, we do want stores at some point in the boroughs.
Whether we even get them, we'd like them. That's how that occurred.

Mona Williams (spokeswoman for Wal-Mart): You were expressing your opinion but you're just
one vote in the process to determine where we put our stores.
Scott: Once a month on Mondays, the first Monday of the month, we go to a real estate meeting
and these young people stand in front and they post on the board. It's done electronically, but a city,
the trade area, the number of stores in the area, the income level of the people, and all of those
things. It takes about five minutes, and then we vote on the stores. I don't pick the store sites, I don't
pick the towns we go to, I have a part in that process. But anyway, I think people in New York are
sensitive when you say you don't want to be here.

What is you next big push in the area of sustainability and the environment?

We were in Secaucus in the morning, walking through the store, and the department manager in
hardware had to show that his compact fluorescents are outselling his incandescent bulbs 4 or 5 to
1—it might even be more than that. That is a very small part of our business, but on the other hand
at a big company you need something that manifests the effort so that people can get their minds
around it.

We have a lot we're doing in packaging—it's one of the big efforts; it's both the quantity of
packaging and the type of packaging. We have a lot at the store level about energy usage that our
people are very encouraged about and feel very confident that the stores this year and next year can
be at least 25% more energy-efficient than the stores we have opened previously. And that they can
get their goal of a 50% energy savings over, I think, the next 3 to 5 years. I'm not as confident but
they made a presentation the other day that was very compelling.

So you have all those things that are happening in a very serious way. And there is also this step of
trying to figure out the carbon footprint of what we sell. And then working with our suppliers to
help them reduce that carbon footprint.

I heard about your molecules memo—the chemical concern of the week or month.

Well, there are things like pacifiers or chew toys for children that in other countries they don't have
those chemicals in them. And they've been banned in other countries; they're not banned here. Why
wait until something is done about that? It's cost-neutral, so why not just do the right thing and get it
done?

Those are the kind of things we're working on. We're not squeezing suppliers. We are asking
suppliers.

How does that work?

We bring them in and we very nicely talk to them about what it is we're trying to accomplish, what
they are doing in their company. P&G [Procter & Gamble (PG)] is already doing a lot of work with
cold-water Tide, and they're doing a lot of work in concentrating the soap to a third of the size it
was. It will take a third of the transportation costs, a third of the packaging.

It doesn't mean that you resolve all the environmental issues. What it does mean is that the things
you're buying every day can be better for the environment. I've not had a supplier yet that's said,
we're not going to do this; we think it's wrong. People are pushing us too hard. The truth is if the
customer wants Tide and Tide comes in a 50-gallon barrel, that's what we're going to sell. But
between us and P&G we can figure out how to make that a smaller package with the same
effectiveness, same number of uses. We can promote it and help convince the customer that it has
the same value that the bigger bottle did, then together we can have an impact.

Is there a day when someone chooses just not to participate in packaging, three or four years
down the road?

Oh, I think you'll start by favoring the people who are doing the right them by giving them the aisle
space, the end caps, letting them be in the monthly tabs we run. I think you do it on the front end
with a carrot. But ultimately if something is just wrong, people will have to correct it.

Have you studied whether your customers will pay a premium for green and how much?

We haven't studied it. But we put product out that is green and has a premium and it just doesn't do
well in our stores. I think there are probably stores, Whole Foods (WFMI) for example, where the
greener it is the more people are willing to pay.

Did you say, though, that people were buying the more expensive lightbulbs instead of the
traditional ones?

But, they save money.

But it's a short-term vs. long-term issue?

What we're seeing is like the lady in Nebraska or South Dakota who has a motel. She changed the
lightbulbs one a week until she got all of her lightbulbs changed. So if you have 300 million people,
you start making those decisions. Our goal this is year is to sell 100 million of them.

Are you backing off your pursuit of the selective, more affluent shopper?

Well, it didn't seem to work real well.

Yeah, why didn't that work?

Because we are defined by our customer, not by us. And we can't wake up one morning and say
we're going to be something different and something more to you and not earn it. We just can't.
We're going to have a different marketing campaign, we're going to try to put some different
merchandise in there. You've been buying Crest from us for 25 years and all of a sudden you're
going to walk across the aisle and buy all of your apparel from us? Maybe their experience with
apparel because of the price points we did have and the quality was such that seeing a sweater for
$35 when they are used to the quality they get when they do pick up that sweater for real casual
activity for $9, in their mind are they going to equate the fact that we're going to a $35 sweater that
we've improved the quality the same amount? I think we went too far too fast.

Are you going to abandon it?

No, we're not going to abandon it. You just have to earn your way there. There is no reason we
should not be able to sell apparel and home to those customers who are in our stores, but we've got
to do it based on the product and the price points that we can build to. Maybe we should have taken
a shorter margin. Maybe we should have put more quality into a $19 sweater rather than going to
$35. Just rethink and that's what Eduardo [Castro-Wright, CEO of Wal-Mart's U. S. operations] and
John Fleming [chief merchandising officer] are doing. How do you stay in this area that you are and
just bump the edges out rather than jumping out of the circle entirely and staking out new territory
entirely.

How are you going to reach out to the customers you targeted through your marketing?

You know what? I'm not a big fan of marketing. I mean, I think the guy Wal-Mart has running
marketing is brilliant and a great find. I think at Wal-Mart Stores with 137 million customers that
you put the right sweater in the right colors at the right price out there, you will sell that sweater.
Marketing doesn't need to do anything other than to help understand who the customer is, customer
insights, understand the individual stores so that you put those sweaters in the right kind of stores,
and to communicate a message of the whole entirety of the store. You couldn't have spent enough
marketing on Wal-Mart apparel last year to have changed the dial.

When Wal-Mart came under attack on a variety of fronts was that a problem of marketing or
the substance of its policies?

In my mind, and I may be absolutely wrong on this, it has nothing to do with marketing. It has to do
with a very specific issue we had when we got into food. The UFCW [United Food & Commercial
Workers Union] felt like there was a long-term danger to them, which created then the offshoot of
Wake Up Wal-Mart and Wal-Mart Watch. The political pressure, the funding behind stopping
stores from growing, big-box bills, the health-care bill in Maryland—if you look at any one of those
things, you'll see that union money is behind those efforts.

That has to do, first of all, with the fact that our opponent has extraordinary political power and a lot
of money. But it also has to do with our lack of sophistication in the area of corporate affairs, not
marketing, in corporate affairs. In the late 1990s, when it started and our board said you all have to
do something about this, we said, well, we really don't. Our sales are still good and earnings are
very good, record sales and record earnings. The board would complain about it. My thoughts were
always, well, that's because the board is going to cocktail parties with people who aren't shopping at
Wal-Mart. In the end, the board was right. They were sensing, I think, getting into their group
earlier than what we were.

It still doesn't resonate at the customer level. All the polling we do shows that less than one-tenth of
1% of the people polled would not shop at Wal-Mart or have stopped shopping Wal-Mart because
of what they've read about Wal-Mart. But it's an important issue in getting future stores. It's a very
important issue for our associate morale, seeing their company bashed day after day after day.

Why don't you think Wal-Mart gets more credit for some of the really great stuff it does?

I think we do. I mean, I think that's why we did $345 billion last year. I think from a customer
standpoint, we do get that credit. We don't get that credit from government or institutions. But how
else could you have withstood this onslaught? But if you think about it—yes, some of it's self-
induced by doing things wrong—but an ad that shows a nuclear bomb going off because of Wal-
Mart? If the customers didn't like the store and didn't trust us, over the last several years we would
have paid a very dear price for it.
A lot of attention has been focused on higher gasoline prices as a factor in the decline of same-
store sales in the U.S. In your view, what are the other important factors besides gas prices?

I think there are two. Our business is quite healthy in consumables, food, fresh food, pets,
electronics. You go across our store and we're doing very well in almost all the areas. We are not
doing well in apparel and home. And we just missed it.

You mentioned that competitors are narrowing the price gap. Do you see any need to evolve
the Wal-Mart brand?

I guess that I don't know that I agree that you have to evolve it. I've been here since '79 and the
pricing has always been under pressure, whether it was Gibson's or TG&Y or Kmart or Target
(TGT) or the grocery stores. Whoever it was, there's always been an ebb and flow of how do you
separate yourself. I just read something where we're doing some things to separate ourselves from a
competitor. That's just an ongoing process that occurs.

We are going to sell for less. I believe that long after we are gone, the person who sells for less will
do more business than the person who doesn't. If you look at it, the core issue at Wal-Mart is in how
you create a value for the consumer where a brand name doesn't exist. Because we don't need to
evolve this company when it comes to selling Tide or All or selling Advil—things where the
customer knows, here's what the price is, here's the value. We can drive that business and we can
create the separation that we need if we have the wherewithal to do that on pricing. But where we
really have our challenge is to create the price perception on those things that are not branded.

Which is like apparel and home, where you have your private label. Where you've done better
is existing national brands.

We sell 20-some percent of all the denim bottoms sold in the U.S., but we only sell 5% of the shirts
because you have branded bottoms but you don't have branded tops.

It's a pretty straightforward issue that Eduardo and his team are thinking about and John Fleming,
who's got the ability and creativity to do it: How do you make that move, and how do you create
that back through marketing, that consistent message that gives credibility to that in-store brand?
Kohl's (KSS) has done a very good job of it, but Kohl's has the brands that they built the private
label off of. Wal-Mart doesn't have the brands to build the private label off of.

Why do you think Wal-Mart needs a new ad agency and what do you hope that the Martin
Agency does for you?

As a company, Wal-Mart Stores Inc. did not participate in deciding that we needed a new ad agency
in the Wal-Mart Stores division. That is a divisional issue that is overseen by Eduardo and his team.
I think that with the new people coming in, with Eduardo being new and his vision of how you
make all of this thing come together in a different way, so that the whole is greater than the sum of
the parts, that they needed to look at a different ad agency to see what was out there. That started
the process, and I think it's a healthy process.

Advertising at Wal-Mart is not like advertising at most companies. Sam [founder Sam Walton]
didn't care about it. I've seen some of the best and the worst in the world and they don't impact our
business. I think the consumer insight and helping to build our understanding of the customer and
the individual stores and how we assort those stores and how we get consistency across the
company, there is a role that marketing can play in that. And in-store signage, those kinds of things,
that give you leverage over the 137 million people who are there. That's the value. How many pages
they buy in Vogue and all the silly stuff they did, I just don't think has any value.

A lot of company money has been spent on it, though.

I agree. But I think at our size it is more dangerous to not try things than it is dangerous to try them.
I have opinions. That's all they are: They're opinions. If you go and say, O.K., this is the way we've
always done it, you can't do this. How do you know? So they spent money against it. The Vogue ads
were quite well done. But at the end, when you look at the product and how it came together and the
understanding we have today in retrospect, it wasn't worth doing. But I don't know if you would
have had the same insight if you hadn't done it.

Yet Wal-Mart is spending $570 million a year on ads. If there's no difference in impact
between a good and a bad ad and it's all about low prices, why spend that much?

I think it is important. We need to send our message out there to the customers of what we stand for.
We stand for saving people money so they can live better. Reinforcing that message over a long
period of time with ads is important. Whether or not the ad gets an award or whether the ad is just
reasonable I don't think makes a defining difference in how much sales we do. I think that the
reinforcement of the message is important. That's what I was trying to say.

DVDs are an important business for Wal-Mart. How do you respond to more content moving
from discs to online?

I think you look for ways to facilitate it, not to fight it. Ordinarily the customer is going to go where
they are going to go, so how do you participate? Is there room for Wal-Mart to play in that space? Is
there some advantage if we join with Steve [Jobs, CEO of Apple (AAPL] or whoever else and help
them become even more successful and help customers move into that area? I think the worst thing
you can do as a retailer is to fight it and try to hold on to what you have. If there is a more efficient
way of doing business, it can't be Wal-Mart and our size that causes that to slow down and not
move as fast as it should move. If we really stand for the customer, then that's a sacrifice we've got
to make.

Do you see a Wal-Mart downloading service?

I think that might be there. In some cases, it might just be links. In some cases, it might be
something at a store that people can do that they can't do at home because you have a bigger pipe or
more capacity at a store. I think there are lots of different things. But in the end, you can't be the
company that says, we're going to lose sales. Therefore we're going to do everything we can to not
allow that technology to exist. You can't do that.

How does Sam's Club fit into the whole and will it ever be dominant?

I don't know if it will be dominant or not. It's not a word we use. We would prefer to never be
dominant. At our size we would like to be competitive.
Sam's Club is doing very well. It has a wonderful president in Doug McMillon, a very young man
who is doing a great job with his team. They're growing sales and profits, and profits much faster
than sales.

They have a wonderful competitor—at least one—who sets a high standard and causes them to
continue to work to be better. It would be foolish for me to say that we would overshadow that
competitor in the near future. They're a great competitor and fun to compete with. Sinegal [James
Sinegal, CEO of Costco Wholesale (COST)] is a first-class human being. I think they make us
better, but on the other hand I think we make them better. The time before last I saw Jim I saw him
in Secaucus in the Sam's Club walking through and looking at it. He's in our clubs and we're in his
clubs. I've got my Costco card in my briefcase.

You mentioned that the political reaction against the company hasn't chased away existing
customers. But does it increase the opposition you face in opening new stores?

Yes, take California. Every store we put in there takes three years. We get the approval and then a
lawsuit is filed. I forget what the name of that lawsuit is, but it's always the same one. It takes three
years, but we get almost all of them. At the end of three years we open the stores and the stores do
well. It just takes longer.

But then you have other communities where you would like to go and people step in and say, Wal-
Mart cannot go there. On the other hand, we opened a record number of stores last year and we will
open 265 Supercenters this year. The total numbers have not been hurt by it, though there are
specific sites. In a lot of cases where we are turned down, we actually will come back and continue
to come back in many of those locations and find a place. Honestly, sometimes we try to put stores
where we shouldn't be putting them.

What is Wal-Mart's U.S. market share?

We think it's about 10% of retail sales, nonautomotive, nonrestaurant.

Mona Williams: Can you speak about the 20-year bonuses?

We put wage caps in at the stores. That is a difficult, difficult thing to do. I did in the distribution
centers in the 1980s. When we put them into the stores, the long-term associates, who are our most
loyal associates, really then feel the brunt of that. It is, clearly, the right thing to do for the company
if what you want to do is be competitive in your starting salaries and all that. We had cashiers that
were making $25, $26 an hour, which is so disproportionate to what the cashier income is in the
industry. It simply means that at the end of the day you can't pay your starting wage where it needs
to be and be competitive overall with your pricing. It was the right thing to do.

What Eduardo did, though, that I thought was brilliant, is as the year unfolded the things he rolled
out worked really well and the profit numbers were coming in. He sat down at the end of the year
and said, the changes we've made, the impact we've had to have on people have come together to
create greater shareholder value. We can afford to take a portion of that and give it back to those
long-term associates, creating a bonus for everybody who's been here 20 years or more of one
week's worth of pay. I thought it was the right thing to do. It cost millions of dollars, but the store
associates supported the company through what is a very difficult program change. They made it
work and they ended up with a record year and now they have a bonus that they will be getting each
year. It's not based on profits or anything. Assuming we have profits, it will be a share they get over
the long term. It's very positive.

Why does Wal-Mart get so much more heat than Target?

I think the issue is that when we started with our Supercenters and the success of those Supercenters
and the impact they had on the grocery stores that it frightened the chains as they sorted through
what they were going to do. I think it frightened them, it frightened the UFCW. Target was not into
food at that time and so we became the focal point. The thing people miss on Target is that over the
long term they are bright enough that their Super Targets will in fact be good stores. Many of them
are today and they will be better. They just get better. They will be a force to be reckoned with.

I find it interesting that all this attention is focused on Wal-Mart but today Walgreen's (WAG) is
selling more food than they've ever sold. The historical grocery industry itself is under attack from
Dollar General (DG), from Aldi's, from any number of things. But they have found that if they
focus on Wal-Mart, they can get themselves heard. It's just the litmus test this year in the residential
election. You've got to go on the bus tour if you're going to get the support. Long-term it's the issue
of what is their space and what happens to their members if Wal-Mart Supercenters are as
successful as they have been. How do you stop that, because they haven't been able to stop us
through putting a store across the street and taking the business. So how do you stop us politically?
It's a battle about politics. It's about power. And thank God we're on the side of the angels.