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SEPTEMBER 22, 2005
By Robert Berner

Can Wal-Mart Wear a White Hat?

After years of ignoring its critics, the retailer is embarking on a charm offensive, showing compassion and thinking green

In August, seven media-savvy professionals from Edelman, a Chicago public relations firm, flew to Bentonville, Ark., for an unusual assignment. Although they remain on Edelman's payroll, the PR experts, some of them seasoned veterans of political campaigns, now run a new office deep in the headquarters of Wal-Mart Stores (WMT ).

Dubbed "Action Alley," the office -- as well as a similar one in Washington, D.C. -- acts as the nerve center of the world's largest retailer's campaign to soften its public face. Backed by Wal-Mart's own publicity staff, the team responds within hours to any new blast of criticism.

SWEET CHARITY.  The troops also try to spin positive stories about the corporate giant. As they sat facing one another around three tables arranged in a U shape one day in mid-September, Hurricane Katrina was still high on the agenda. Action Alley had scored a bull's-eye after just weeks on the job when it garnered widespread national publicity about Wal-Mart's efficient relief efforts following New Orleans' devastation.

Now the team was deep in follow-up, making press calls guided by talking points scrawled on the felt-marker boards lining the perimeter of the room: "EOC," for emergency operations center, which earned so much praise for coordinating the company's disaster response. Plus, "associate stories," referring to the experiences of individual employees during the storm, and "donation-partnership," meaning stories about Wal-Mart's charity.

Already, "we have had some great successes," exults Wal-Mart Corporate Affairs Vice-President Robert McAdam, who heads the new office.

SHARE-PRICE DROP.  H. Lee Scott Jr., Wal-Mart's tough CEO, is on a charm offensive -- and how it plays out could change perceptions of the retailing leviathan at home and abroad. For several years, Scott shrugged off relentless criticism, but he now admits the broadsides on everything from labor practices to suburban sprawl were starting to inflict real damage.

In fact, U.S. sales growth at stores open at least a year has fallen by half over the past four years, to 3% in 2004. So this year, Scott decided to speak out.

"When growth was easier, this idea of critics simply being ignored was O.K. [But] as the share price slows, you have to get to this point," Scott told BusinessWeek at his Bentonville (Ark.) headquarters, where for the first time he discussed details of the company's outreach effort.

REACHING OUT.  The outcome, he says, is the most comprehensive publicity blitz Wal-Mart has ever mounted. Early this year, sensing that bad press was undercutting the lure of low prices, the retailer launched a national ad campaign about its corporate citizenship.

Now, in addition to Action Alley, Wal-Mart has opened eight community-relations offices nationwide to answer local criticism. It also has approached two environmental groups and will soon announce a major initiative to curb waste by reducing packaging.

And Wal-Mart hired a nonprofit group to reach out to anti-sweatshop groups and improve monitoring of overseas factories. "We have to continue to evolve in how we operate and how we interface with society," says Scott.

DISCOUNTS THREATENED?  What's not yet clear is how far-reaching the changes will be. The company lost a lawsuit alleging that supervisors forced employees to work off the clock, and settled another about its contractors using illegal immigrants.

But responding to other complaints could require costly changes to Wal-Mart's core low-cost, low-price business model. For instance, the company is still battling a massive class action alleging that it discriminates against female employees in pay and promotions. At this stage, Scott is adamant that Wal-Mart continue to focus on low costs to remain competitive with other discounters.

"You can't be throwing away things that are the key to your success," he says. But Scott is all for image-enhancing efforts to broaden its appeal to affluent customers. And observers say that environmental and anti-sweatshop plans could help deflect criticism of other areas that are harder to alter, such as low wages and benefits.

CONSERVATION.  The danger, of course, is that detractors will be inflamed all the more if they perceive Wal-Mart to be better at talk than action. "Their reputation in the area of trust has been slipping, and trust was probably their greatest asset," says Chris Ohlinger, president of Service Industry Research Systems, a market research company. He says consumer surveys show that the accumulation of negative publicity has contributed to sluggish sales growth.

Yet already, Wal-Mart is being prompted to change more than Scott expected when he started down the kinder, gentler path. When the company reached out to the Natural Resources Defense Council and Conservation International, talks centered on generally reducing its impact on the environment.

But they quickly led to a concrete goal: Cut paper and plastics and save fuel by shipping more items on one truck. By reducing the packaging of 16 toys, Wal-Mart eliminated 230 cargo-ship containers.

MASSIVE POWER.  This follows the July opening of an eco-friendly store in McKinney, Tex., soon to be followed by another in Aurora, Col. The experimental supercenter receives electricity from solar panels and wind turbines. It gets heat from burning the motor oil left after lube changes and the fat used to fry chickens.

The environment, Scott says, is where Wal-Mart, with its massive market size, can make a real difference. A greener Wal-Mart could also be helpful when facing opponents in places like California, notes Patrick McKeever, a retail analyst at SunTrust Robinson Humphrey.

Wal-Mart may find it a lot tougher to make progress on the sweatshop front. Last year it began working with Business for Social Responsibility (BSR), a San Francisco nonprofit, to reach out to groups active in monitoring overseas plants.

SWEAT-SHOP CHALLENGE.  The move came a year after Wal-Mart brought in a labor expert to expand its in-house global factory-inspection program. The expert, Rajan Kamalanathuan, won respect from anti-sweatshop groups by setting up such a system at Asda Group -- a British grocery chain with suppliers in low-wage countries -- which Wal-Mart bought in 1999.

Kamalanathuan says the company hasn't yet decided how far it will go. For years, critics have asked Wal-Mart to follow Nike (NKE ), Gap (GPS ), and others by opening suppliers' factories to independent inspectors. Wal-Mart currently uses in-house monitoring, which, critics say, leaves outsiders unable to verify reforms.

Wal-Mart's campaign bears striking similarities to those undertaken by companies such as Nike. A decade ago, when the sneaker maker was first hit by sweatshop allegations, for example, it tried to quickly burnish its image and reach out to moderate critics. But the dialogue soon forced Nike to take steps management had long resisted, such as submitting suppliers' factories to random inspections by independent labor monitors.

Wal-Mart may well follow a similar course. The difference is that it has so many more issues to deal with, from sweatshops to big-box criticism to labor unions. Still, "Wal-Mart is at an early stage," says BSR President Aron Cramer, "and it's likely that they, like most companies that engage in these processes, will adapt their approach over time."

Berner is a correspondent for BusinessWeek in Chicago

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