The Bully of Bentonville

by Anthony Bianco

  Despite Russell’s determined agitating, the Wal-Mart issue never really took hold among Belmont’s Catholics. For one thing, Abbott Solari was an intimidating figure who would not be drawn into public discussions of the morality of allying with Wal-Mart. Then, too, Russell’s proselytizing drew as many blank looks as angry glares. “A lot of people have not studied the social justice movement and don’t know the teachings of the Church on unions or child labor,” Russell said. “It’s not something you hear in Church every Sunday, so I think there are a lot of Catholics who just wouldn’t connect the issue of what Wal-Mart does with their faith in any way.”

  Even so, it looked as if the Wal-Mart project was going down to defeat when the planning and zoning board denied the abbey the needed variance. There would be no Supercenter in Belmont now unless four of the five city council members voted to override the zoning board. Mayor Billy Joye, a native Belmonter and ardent Wal-Mart supporter, could count on only three votes, so he took the politically audacious but legally permitted step of dissolving the zoning board. The mayor insisted that he took this action not to salvage the Wal-Mart deal, but because several members were guilty of “inappropriate behavior”—mainly in disrespecting pro–Wal-Mart witnesses. It was implausible to say the least, but now all Joye needed to prevail was a simple majority of three votes on the council.

  It was all over but the shouting, of which there was plenty when the Belmont City Council convened in January 2004 for a final vote. A hearing that was supposed to last a few hours was extended into the wee hours three nights running to give everyone a chance to vent. The vote, as expected, was three-to-two in favor.

  Like most site fights, the battle of Belmont left bruised feelings all around. Mayor Joye settled a defamation suit brought against him by a member of the planning board by offering a halfhearted apology. Still pending is a lawsuit charging the mayor and pro–Wal-Mart council members with “impermissible bias and partiality.” Joye shrugs off the suit as the last gasp of sore losers. “You got a very vocal minority in this town,” he said. “And if they don’t get their way, they sue you.” 11 As it turned out, Joye had badly misread political sentiment in Belmont. In November 2005, he lost in a landslide in a mayoral election that was for all intents and purposes a belated referendum on the mayor’s handling of the Wal-Mart issue. Joye mustered only 43 percent of the vote to the 57 percent rung up by Richard Boyce, a former Presbyterian minister who had never before run for political office and had lived in Belmont for less than a decade.

  Although Russell failed to keep Wal-Mart out of Belmont, she is as determined as ever to keep Russells out of Wal-Mart. From time to time, one of her daughters still will offer a mild protest to the family’s Nike boycott. But none of them ever asks why they can’t go to Wal-Mart, even as the press of daily events occasionally leads their mother into temptation. “If anything, they are the ones who understand and have no qualms about not shopping there. I am the one who checks e-mail at eight at night only to find out they need to take something to school the next day,” Russell said. “Wal-Mart is often the most convenient choice, but for this family it is just not an option.”

  CHAPTER TEN

  THE EDUCATION OF LEE SCOTT

  Like the saying goes, you’re not paranoid if “they” really are out to get you. The rumor started one Friday in May 2005, when a few bookshelves and some boxes of books were removed from Lee Scott’s office in Bentonville. By Monday, “two sources close to Wal-Mart” had informed the Arkansas Democrat-Gazette that the CEO’s office had been “emptied out.” Over the next few days, word of Scott’s impending resignation circulated madly by telephone and Web site, seemingly gaining credence with each repetition. By the following Friday, Scott felt that he had to address the rampant speculation about his future at the weekly management meeting in Bentonville. “I am not going anywhere,” he told a few hundred of his most senior colleagues. 1

  Scott had every reason to be upset, but jauntily played his predicament for laughs at Wal-Mart’s annual meeting a few weeks later. Departing from his script, Scott began his speech by confessing that as recently as the day before he had expected to miss the 2005 shareholder gathering. “Oh, not for the reason you might think,” he said, explaining that he had spilled a drink on his wife’s white dress at a social event the night before. “I thought I might be in [the hospital] today,” Scott said. 2

  For Scott, the annual meeting offered sorely needed respite from what had been a truly awful year for him and for Wal-Mart. The typically raucous audience of 20,000—dominated as ever by small stockholders and carefully selected employees—gave three standing ovations within the first half hour: for the American flag, for the troops in Iraq, and then for their own embattled warrior, Lee Scott. The endorsement that counted most came when Chairman Rob Walton got up before the crowd and offered the CEO his emphatic and unqualified support. To paraphrase Mark Twain, the rumors of Scott’s demise had indeed been greatly exaggerated.

  Make no mistake, though, Wal-Mart today is a company in crisis. Wal-Mart had run into serious trouble once before. It performed so poorly through the early 1990s that many outsiders expected David Glass to retire early and work full-time for the Kansas City Royals major league baseball team, which had named him chairman in 1993. 3 However, the predicament that now confronts Scott is far worse and more confounding than anything Glass or Sam Walton, for that matter, ever had to face. For the first time since Wal-Mart’s founding in 1962, it can be argued that the vaunted business model that Walton created and that first Glass and then Scott applied on a gargantuan scale has broken down and is in need not of repair but of replacement.

  “As it stands right now and for the last few years, Wal-Mart simply isn’t performing as a great company,” Jeff Macke, an East Coast money manager who is one of the most acerbic of Wal-Mart’s many critics on Wall Street, declared in early 2005. “They are the Mike Tyson of retail”—a once great heavyweight champion now prone to embarrassing itself in the ring. 4 Although Macke has stopped short of calling for Scott to step down, he questioned whether the CEO was capable of fixing Wal-Mart. “In terms of the job Lee Scott is doing, ultimately he is going to have to answer,” Macke said. “I don’t know what he could do to get [Wall Street] back in love with them.” 5

  On Wall Street, the nuanced complexities of a company’s past, present, and especially its future are reduced to a single number—share price—for all to see. Judged by return to shareholders—today’s ultimate measure of CEO performance—Scott has been a D+ student at best. From the day he moved up to CEO in January 2000 to the morning of the 2005 annual meeting, the price of a share of Wal-Mart common stock fell from $64.50 to $47.35. This decline of 27 percent lumped Wal-Mart in with the worst-performing U.S. retail chains over this period and reduced the company’s total stock market value (its market capitalization) by $99 billion. For much of Scott’s tenure, Wal-Mart had held its own; it was only in the last few years that it began lagging badly behind its closest rivals. While Wal-Mart’s stock fell by almost 25 percent over the two-year period ending October 31, 2005, Costco’s rose by 35 percent and Target’s by 40 percent.

  Much as Wall Street’s judgment must sting, Scott reached his nadir with the Tom Coughlin embezzlement scandal, which dumped a bucket of toxic sleaze over a company still so straitlaced at heart that it bans the consumption of alcohol at all corporate events and even prohibits its buyers from sampling the wares of its liquor vendors. “For me personally and for this company, the Tom Coughlin issue has been an embarrassment,” Scott admitted some months after Coughlin, Wal-Mart’s second-highest-ranking executive, resigned as vice chairman and was removed from the board of directors in March 2005. “He has been—was—a friend for years.” 6

  Although Scott and Coughlin were indeed longtime colleagues, they were more rivals than friends. Coughlin was so upset when the Wal-Mart board chose Scott over him in 1999 to succeed Glass as CEO that he might well have quit the company had not several members of
the Walton family intervened. “They asked me to hang in there, and said that I was an important part and necessary,” Coughlin later recalled. 7 It’s entirely possible, even likely, that the motivational roots of Coughlin’s alleged thievery were sunk in his resentment over not getting the top job he wanted and believed he deserved. After all, he wasn’t exactly hurting for money, having received a total of $15 million in salary, bonuses, and other benefits in 2003 and 2004.

  In December 2004, Wal-Mart abruptly dismissed four senior executives and three other home-office employees with no explanation, other than that they all had failed “to follow internal company rules.” Jim Haworth, the highest-ranking member of the group, was operations chief of the Wal-Mart stores division and a longtime protégé of Coughlin’s. Apparently, the impetus for the collective firing was a bacchanalian drinking party complete with strippers, to which executives of vendor companies were invited (yet another violation of company policy). Coughlin, who hosted the party, also lost his job. However, in deference to his status as cheerleader-in-chief and preeminent Walton protégé, the company allowed Coughlin to serve out his board term and spun his ouster as a voluntary departure. Wal-Mart larded the press release announcing Coughlin’s retirement on January 24 with flattering quotes from Rob Walton (“I particularly respect the special relationship that he has built with our associates in the field”) and Scott (“He is a great example of what a person can accomplish in the retail field”). 8

  Just days before Coughlin’s retirement became official, he tried to use a $100 Wal-Mart gift card to buy contact lenses in a store. The home-office employee who processed the transaction thought it odd that the vice chairman was redeeming a card he was supposed to have given to “All-Star” store employees. The ensuing investigation ended with Wal-Mart accusing Coughlin of misappropriating at least $262,000 over a ten-year period in order to buy items ranging from an $8,500 all-terrain vehicle, a $6,250 hunting lease in Texas, and a $1,360 pair of custom-made alligator cowboy boots to a $13.09 gun case, a $3.54 Polish sausage, and a $2.57 packet of cold medicine. 9 Coughlin admitted to submitting phony invoices, but insisted that the scheme was part of a covert “union project” he was running for the company. He claimed that he’d used his own money to bribe union officials into fingering pro-union Wal-Mart workers—a potential crime in its own right—and that the company had reimbursed him by covering some of his personal expenses. 10 The company insisted that Coughlin was lying, and the UFCW said it found no evidence that any of its organizers had taken bribes, but given the depth of Wal-Mart’s union animus, who could say for sure?

  To investigate Coughlin and his alleged accomplices on the home-office staff, Wal-Mart hired two former high-level FBI officials, two former U.S. Attorneys, and the retired director of the Arkansas State Police. Based on their work, Wal-Mart booted Coughlin from its board, fired four headquarters employees whom it accused of helping him (bringing the total number of subordinates the vice-chairman had taken down with him to eleven), and turned over the voluminous evidence it had amassed to the U.S. Attorney’s office in Fort Smith. (In November 2005, one of the vice presidents whom Wal-Mart dismissed pleaded guilty in Federal court in Arkansas to three counts of wire fraud.) In a letter to Wal-Mart employees, Scott tried to spin this whole scorched-earth exercise in damage control as a triumph of corporate character: “[T]his demonstrates once again the strength of the Wal-Mart culture. Our standards of integrity apply to everyone, with no exceptions.” 11

  But as Scott conceded some months later, the whole sordid episode had taken a heavy toll on morale. “It created a real issue in the company…” he said. “It’s just a tough thing. There isn’t a good explanation for any of it.” 12 As for Wal-Mart’s public reputation and credibility, it was a toss-up in the end as to which had done more damage: Coughlin’s claim that he’d masterminded a covert union-busting bribery campaign within the company or Wal-Mart’s own allegations that a top officer, lionized as the embodiment of the Wal-Mart Way, had ripped it off with impunity for a decade. For a company that had always prided itself on squeaky-clean integrity, the Coughlin affair was perhaps the most telling evidence yet of Wal-Mart’s newfound fallibility.

  Wall Street worries that the accelerating pace of Wal-Mart’s expansion is straining management’s ability to keep a lid on costs. This is all the more troublesome to investors because cost control long has been a Wal-Mart forte. Take the particularly disappointing results of 2005’s second quarter, in which operating expenses rose by $230 million over the preceding year. The rampaging cost of energy was largely to blame, adding $100 million to the company’s utilities bill for its stores and inflating the cost of fueling its 7,100 delivery trucks by $30 million. Although surging labor costs presumably accounted for the remaining $100 million, Bentonville declined to disclose the actual number. “There’s a lot of concern, focus and frustration…as to what exactly is going on here,” complained Deutsche Bank analyst Bill Dreher in the fall of 2005. 13

  Wall Street is even more alarmed by another trend: Wal-Mart’s loss of sales momentum in the United States. Sales have continued to climb by 11 percent to 12 percent annually only because the company is opening 250 to 300 new stores each year. Strip out the impact of expansion, and the annual growth rate at Wal-Mart and Sam’s Club stores now is a meager 3.2 percent, down sharply from 8 percent in 2000, Scott’s first year. Meanwhile, Target’s “same store” sales rate has jumped to 5 percent from 3 percent. (These are small numbers, but keep in mind that each percentage point translates into many billions of dollars.)

  Part of the problem is that existing Wal-Marts are losing business to new Wal-Marts as the company locates its stores closer together than before. At the same time, the company is beginning to pay what promises to be a steep price for having located the great bulk of its stores far beyond the reach of mass transit. The explosion of gas prices above $2 a gallon has made it clear that Wal-Mart’s economics are predicated on low-cost gasoline no less than on low wages. According to a study by Retail Forward, 71 percent of Wal-Mart shoppers have altered their driving habits to economize, compared with 65 percent of Target’s. Not only are customers making fewer trips to the store, but they have less money to spend when they get there. Like most economists, Scott sees no relief in sight. “I worry about the effect of higher oil prices,” he said in the fall of 2005. That is, he fears that “oil prices will erase improvements in employment and real income for a portion of our customer base—an important portion of our customer base.” 14

  In maintaining its traditional fixation on low-income consumers, Wal-Mart also has undercut its sales growth by failing to appeal equally to more affluent shoppers who also are walking its aisles in large numbers. According to the company’s own surveys, the higher a shopper’s income, the more narrowly she shops at Wal-Mart, sticking to basic, low-margin commodities like detergent and socks. Wal-Mart’s attempts in recent years to follow Target’s and J. C. Penney’s lead by adding trendier, more upscale merchandise generally have been half-baked and ineffectual. “Their overall assortment lacks creativity and originality,” said Bob Buchanan, a retail analyst with A. G. Edward & Sons. “They have missed on key products many times.” 15

  Then, too, an increasing number of Wal-Mart customers across all income groups have been put off by indifferent service, unkempt shelves and aisles, long checkout lines, and other consequences of understaffing and of inept store management. “We’ve got a lot of stores that do not meet the minimum customer expectation,” Eduardo Castro-Wright, a former CEO of Wal-Mart Mexico, acknowledged a month after he was put in charge of the U.S. stores division in September 2005. According to Castro-Wright, 25 percent of all the American stores fall into this bottom-scraping category, double the number of stores rated excellent in the company’s monthly consumer-satisfaction surveys. 16

  Finally, the escalating public controversy over Wal-Mart’s socioeconomic impact on America also has significantly dented its sales. Image matters in retailing more tha
n in most industries, and Wal-Mart’s is in tatters. In a national survey taken for Ad Age in mid-2005, Wal-Mart ranked second only to Enron Corp. as the “least trustworthy” company in America. (In the same poll, in response to a second question, it ranked second only to General Electric as the country’s most trustworthy company, affirming that the United States has polarized around Wal-Mart as sharply as any of the other hot-button issues dividing red state and blue.) By Wal-Mart’s own estimate, 40 percent of Americans either are skeptical of the company or hate it outright. 17 For more and more consumers—especially the affluent ones who could benefit the company most—not shopping at Wal-Mart has become a political and moral statement, one made a lot more frequently when a Target or a Costco store is close at hand. “Consumers increasingly have a conscience and are increasingly shifting to competitors,” said consultant Burt Flickinger. 18

  Wal-Mart’s sales engine is sputtering, but the company’s triumphant passage through Hurricane Katrina demonstrated that at least its logistics and distribution prowess is intact. For Scott, Katrina seems to have been the kind of searing, character-testing crisis that the September 11 terrorist attacks were for former New York Mayor Rudy Giuliani. “Katrina was a key personal moment for me,” Scott recalled a few weeks after Katrina had devastated the western Gulf Coast, where Wal-Mart dominates retailing with twenty stores in greater New Orleans alone. “The world saw pictures of great suffering and misery. At Wal-Mart, we didn’t watch it; we experienced it.” 19