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OCTOBER 31, 2006

Top News
By Pallavi Gogoi

Wal-Mart: A 'Reputation Crisis'
The giant retailer has been trying hard to improve its image and reignite sales

The political advertisements include a number of actors talking sarcastically about Harold Ford Jr., the Democratic candidate from Tennessee. The one who has stirred up all the controversy, though, is a bare-shouldered blonde who says she met Ford at a Playboy party and closes the clip by winking and whispering, "Harold, call me."

The ad is taking aim at an African American bidding to become the first black senator from Tennessee since Reconstruction, and it has set off a firestorm of debate, particularly among those who says it's a racist attempt to stoke fears of black men pursuing white women. Those who have taken heat for the ads include Ford's opponent, Bob Corker; the Republican National Committee, which paid for the ads; and Terry Nelson, the Republican strategist who created the ads.

One of the most surprising targets of criticism, however, has been Wal-Mart (WMT). The retailer didn't have any hand in the ads attacking Ford. However, Wal-Mart did have Nelson on its payroll as a consultant, as part of the company's growing effort to burnish its own image. Shortly after the Ford ads aired, Reverend Jesse Jackson came out attacking Wal-Mart and demanded that the company sever its relations with Nelson. Two days later, Nelson bowed to the pressure and submitted a letter ending his relationship to the company.

"A Real Threat" It's been that kind of year for Wal-Mart. The Bentonville (Ark.)-based company has been pushing hard to improve its public image, at a time when its financial fortunes increasingly depend on it. It's come under heavy fire from workers and politicians, for everything from the low wages it pays workers to the small retailers it pushes out of business. That dark reputation has resulted in communities around the country taking on Wal-Mart, by trying to halt construction of new stores or forcing it to pay higher wages and benefits.

At the same time, the company is scraping for every dollar of sales it can get. On Oct. 30, Wal-Mart reported that estimated same-store sales for October rose a slim 0.5%, the smallest such increase in nearly six years (see BusinessWeek.com, 10/30/06, "Wal-Mart's 'Comps' Creep Lower"). Slow sales have resulted in Wal-Mart's stock going sideways for five years, a harsh situation for investors long accustomed to outsized returns.

Wal-Mart has a "reputation crisis," says Gerald Baron, founder and president of AudienceCentral, a public information emergency response group and author of Now Is Too Late 2: Survival in an Era of Instant News. "Wal-Mart understands that the situation they are in is a real threat to their future."

Image Incongruity But Wal-Mart's efforts to improve its public image have been floundering. Besides the company ending its relationship with Nelson, it's had to backtrack on several fronts. In August, Andrew Young, the first African American U.S. ambassador to the U.N., resigned his position as head of the company-backed group Working Families for Wal-Mart, after making anti-Semitic and anti-Korean comments. Then, in October, a folksy blog called "Wal-Marting Across America" drew fire. The blog focused on happy Wal-Mart workers, but the couple writing it hadn't disclosed that the expenses and the writing were paid for with Wal-Mart money. That same month, independent filmmaker Ron Galloway, who had made movies in support of the company, reversed course and resigned from the board of Working Families for Wal-Mart.

The contrast between how critics see Wal-Mart and how the company sees itself couldn't be more stark. While opponents say the retailer hurts workers by paying them low wages and benefits, Wal-Mart execs see themselves as champions of the middle class, making products affordable by pushing suppliers to offer goods at lower prices. In a presentation to Wall Street analysts on Oct. 24, Leslie Dach, the company's newly appointed executive vice-president of corporate affairs and government relations, said that the media, local governments, and lawmakers in the capital "see us in a better way than they did a year ago." He added: "Our favorables are at 70%—numbers that any politician would covet in an election cycle."

Countless Consultants Still, the world's largest retailer recognizes that it has something of an image problem. In the last year, it has hired some of the best-known political and public relations consultants to improve its public face. It also just cut the ties to its ad agency of 32 years, in an effort to remake its image into a hip retailer that is also kind and considerate to employees.

Wal-Mart won't disclose how much it is spending on these efforts, although they certainly don't come cheap. For instance, the company hired Dach in August by offering $3 million in stock, as well as options on 168,805 shares that vest over the next five years. The company hasn't disclosed the salary or bonus for Dach, who was vice-chairman at PR firm Edelman and a former media advisor to President Bill Clinton. Wal-Mart referred questions about Dach to its public filings and declined to elaborate.

Among the other people that Wal-Mart has hired as either consultants or employees are Michael Deaver, former adviser to President Ronald Reagan; Democratic strategist Charles Baker; Jonathan Adashek, a strategist for John Kerry; Taylor Gross, who has handled President George W. Bush's communications; and the controversial Nelson, who was the political director for President Bush's campaign in 2004. Wal-Mart didn't return several calls seeking comment about its relationship with Nelson.

Good PR Is Hard to Find Many of Wal-Mart's political consultants came on board after Wal-Mart hired PR giant Edelman last year. Edelman has been a controversial force in Wal-Mart's image-boosting efforts. Last December, the firm formed the advocacy group Working Families for Wal-Mart, paid for solely by Wal-Mart, to counter criticism from the union-funded groups Wal-Mart Watch and WakeUpWalMart.com. The Working Families group has been at the center of several notable maelstroms swirling around Wal-Mart.

An early disappointment was the high-profile appointment of Young, as head of Working Families for Wal-Mart. He resigned barely six months into the job, after saying in an interview that Jewish, Korean, and Arab store owners had been ripping off urban communities for years.

The Working Families group also hired the couple who published the "Wal-Marting Across America" blog. They were known only as Jim and Laura, and they drove cross-country in an RV to capture the stories of people they met in Wal-Mart parking lots. BusinessWeek.com first revealed that the Working Families group was paying for the RV, the gas, and the blog writings (see BusinessWeek.com, 10/8/06, "Wal-Mart's Jim and Laura: The Real Story").

The effort became notorious in the blogging community, where writers took Wal-Mart to task for tarnishing the reputation of blogs (see BusinessWeek.com, 10/17/06, "Wal-Mart vs. the Blogosphere"). When the Wal-Marting blog was exposed, a Wal-Mart spokesman said, "It was a Working Families for Wal-Mart initiative, and we didn't have anything to do with it." Edelman's CEO issued a mea culpa and took full responsibility for the mess.

Losing Support How much of Wal-Mart's problem is style and how much substance? The answer is unclear at this point. However, at least some consumers are no longer shopping at the company's stores because of its reputation. According to a study by the consulting firm McKinsey & Co. for Wal-Mart, 2% to 8% of the company's customers have stopped shopping there, "because of negative press they have heard." Reputation is even more important as the company pushes upscale, trying to sell everything from organic food to high-end apparel, through its Metro 7 line. So far these initiatives have failed to ignite sales as much as the retailer hoped.

Expansion plans have been scaled back. In late October, Tom Schoewe, Wal-Mart's chief financial officer, told analysts that the company will see its capital spending grow 2% to 4% in fiscal 2008. That is down from the 15% and 20% growth this year.

Even some former supporters wonder whether Wal-Mart has to change its ways. Filmmaker Galloway appeared on several TV shows praising the retailer after making the movie: "Why Wal-Mart Works: And Why That Makes Some People Crazy." But he had a change of heart this year, after meeting with a Wal-Mart employee who had been featured in his film and is now upset because of the company's recently announced wage caps (see BusinessWeek.com, 8/11/06, "The Flip Side of Wal-Mart's Pay Hikes"). "This lady was distraught because she would never get a raise at Wal-Mart," he says. "I think that profiting on the backs of long-term employees isn't right."



Gogoi is a reporter for BusinessWeek Online in New York

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