Restoring Wal-Mart

Eduardo Castro-Wright could see the problem instantly. One of his first exercises as the newly appointed president of Division No. 1, the highfalutin internal designation for Wal-Mart's 3,500-unit domestic discount chain, was to map every underperforming store in the country. Most of the worst were clustered around big coastal cities like Boston and Los Angeles. As he toured those stores, Castro-Wright could sense they weren't connecting with their neighborhoods. And neither were the managers--they weren't in Arkansas anymore. "You'd talk to managers and they'd ask, 'If I do a good job, can I come home in two years?'" he says. Who other than Yankees fans would consider two years in Boston to be hard time? "It was an indication that something in the structure of how we were organized and how we went to market was not working," he says.

It's a remarkable statement: the best retail company ever created, the largest company in the world, with annual sales of $345 billion, is struggling. So it requires a big, bold fix. The company that Sam Walton created for the rural South is being massively overhauled to compete in the more urban, more competitive universe where it now lives. You might not notice it yet if you shop there, but Wal-Mart is in the midst of a revolution, an audacious three-year plan that will change practically everything the company does: the way it builds and operates stores, the way it buys and stocks merchandise, the way it hires, trains and compensates employees.

In truth, Wal-Mart is a little desperate--it launched a price war for Christmas toys in early October and then slashed 15,000 prices storewide. It increasingly seems the company's 45-year-old business model--based on a continuously improving supply-chain loop--is better suited to developing economies like Mexico, Brazil and China, where it is doing well, than to mature markets like the U.S. and Japan, where it isn't. In the U.S., same-store sales increases are bumping along at 1% to 2% a month, while rival Target, the fashion-forward, design-centric glamour girl of discounting, runs up 2% to 4% monthly increases. Wall Street complains that Wal-Mart spends too much money opening the same old big boxes, so much so that Wal-Mart announced it will cut store growth and even trim store size. "You do more and more of the same thing and put more and more energy against the same activity, and the rate of improvement diminishes," CEO Lee Scott acknowledges. "So then do you put more resources against doing the same thing, or do you finally back up and say, 'You know what? The world's changed.'"

And you know what? So has Wal-Mart. Under Castro-Wright's prodding, Wal-Mart is trying to become a local merchant again. It is moving managers away from the all-powerful Bentonville, Ark., headquarters and closer to the customers. It is developing snazzier and highly efficient store designs to entice existing customers to shop more broadly across the store rather than just for groceries and health- and beauty-care products. "We have enough customers," insists Scott, 57, who can boast that nearly 20 million Americans shop at a Wal-Mart every day. But while they're happily buying toys, toothpaste and tomatoes, they're walking right by the more expensive, more profitable nonfood lines--apparel and home décor. Wal-Mart's grand strategy of becoming more fashionable has fizzled and is being retooled. "It's us," says Scott. "It's not anything beyond us."

The pressure is providing impetus to attempt new things. Back at headquarters, Wal-Mart is also trying to improve its standing as a corporate citizen. The company has overhauled its wage-and-benefits package and rolled out an ambitious sustainability program that even cynics are praising. Using its negotiating muscle against rising health-care costs, the company expanded the number of drugs available in its $4 generic-prescription program to 361 drug products.

What Wal-Mart does matters--certainly to its 1.35 million U.S. employees but also to its competitors, since Wal-Mart ends up effectively setting wage rates in retailing. And to organic farmers, whose industry has been turbocharged by the company's decision to promote organic foods; and to refrigeration manufacturers, who must create greener equipment to meet this giant customer's desire to shrink its carbon footprint. And to the economy itself: the "Wal-Mart effect" of those $4 generics is being cited as one reason drug prices are falling after years of double-digit inflation, just as its entry into the supermarket trade moderated food inflation.

Your new Wal-Mart is being baked on the premises. The company is testing a dozen new store prototypes that have lower sight lines, woodlike fixtures and a more department-store feel in some sections. Let's not get carried away: it's still a big-box store, but that box isn't quite so stuffed anymore. The stores will use tons of recycled material and be vastly more energy-efficient. Wal-Mart has pledged to reduce energy usage at its stores 30% by 2012. It has embraced compact fluorescent lightbulbs (CFLs) and less packaging. For instance, by next May, to save energy and space, the company will stock only concentrated detergents. In a high-efficiency prototype near Kansas City, Mo., the company is testing LED-illuminated refrigerator cases that don't light up until you approach them, so the lights stay off 40% of the time. Elsewhere it is testing solar panels and windmills.

Wal-Mart shoppers like its stores but don't necessarily love them. Low-income shoppers, one of its three core groups, absolutely need the low prices. The two others aren't buying enough: an aspirational middle-income group that likes the brand names, and a third group of regulars that has plenty of spending power but tends to cherry-pick the store without really shopping in it.

In its search for that shop-till-you drop formula, Wal-Mart is testing one prototype in the middle of Middle America--Elyria, Ohio. Castro-Wright strides into a very un-Wal-Mart-like area that features low, wood-veneer (actually recycled plastic) side counters where towels are displayed. You can actually see over the department, and the sight makes you want to linger; you're not hemmed in by the usual 8-ft.-high (2.5 m) discount-store shelving crammed with merchandise. The assortment--the colors and styles--is broad and deep, even attractive. The prices are killer, natch, but it's the look of the department that is designed to stop traffic and perhaps get a shopper to take a glimpse at that $200 Dyson vacuum cleaner nearby.