The Chosen One: McMillon leadership era underway

What’s next for Walmart under the leadership of new CEO Doug McMillon is the focus of the Spring edition of Walmart Supplier News.

Change is in the air at Walmart as the Doug McMillon era begins. No company makes a change at the top out of a desire to maintain the status quo, and McMillon has already indicated there are changes to come.

“Walmart has a long history of embracing change, and this year we’ll make some changes to improve our business,” McMillon said during Walmart’s fourth-quarter call. “These changes will be made with a filter on increasing customer relevance. Customers’ shopping habits are changing more rapidly than ever before. We must be more nimble and flexible as we operate our businesses to adapt to these changes.”

A little more than one month into his tenure as CEO, McMillon has made it clear what won’t change at Walmart are the foundational aspects of the company’s business model. Things like expense control, operational efficiency and every day low prices to help people save money and live better; those things are non-negotiable.

How exactly Walmart alters execution of its value proposition, the eventual composition of the senior leadership team and the strategies they pursue to accelerate growth have yet to be spelled out in great detail, but McMillon has offered some directional guidance. For example, in addition to increasing relevance with shoppers by connecting with them on their terms, McMillon has said he expects same-store sales to improve as Walmart sharpens its EDLP focus and drives increased traffic with merchandise innovation.

“Comp sales improvement is a key priority, and we’ll use a combination of price investment and enhanced service to accomplish this,” McMillon said. “We will also continue to get closer to our customers and provide them with additional shopping options. In the United States, we see a great opportunity to accelerate our small-format store rollout to complement Walmart’s core supercenter fleet.”

Doubling the number of small-format stores that were originally expected to open this year is the biggest news out of Walmart so far during McMillon’s tenure. The company plans to open between 270 and 300 smaller stores, predominantly under the roughly 40,000-sq.-ft. Neighborhood Market banner, versus the forecasted range of 120 to 150 provided last fall. The big increase means Walmart will spend about $600 million more than originally planned on building out a small-store network seen as an important piece of a larger omnichannel strategy. It spent $100 million more than originally planned last year to add 105 Neighborhood Markets stores and ended the year with 346, and it added seven Walmart Express stores to end the year with 20 units.

The small-format expansion feeds into Walmart’s vision of omnichannel retailing in the United States and worldwide. That vision has been gaining momentum ever since Walmart created a Global eCommerce group about two years ago, led by president and CEO Neil Ashe, but McMillon shares the view that Walmart has the potential to transform how it serves consumers globally.

“Our ability to combine online and mobile with the assets of the world’s largest retailer positions us to win at the intersection of physical and digital retail, which is a competitive advantage,” McMillon said. “Over the past year in particular, we have invested more significantly to improve our customer experience and fulfillment capacity.”

Walmart already offers such integrated programs as Site to Store, Ship from Store, Pay with Cash and Scan & Go, and is experimenting with various pickup and delivery options. All the activity costs money, which is why during the past year, Walmart twice increased the guidance it offered to Wall Street regarding its per share investment in e-commerce, which ended up totaling 11 cents a share. The investments in things like a global technology platform called Pangea and three new fulfillment centers have paid off as Walmart global e-commerce sales increased 30% to roughly $10 billion. The company has forecast similar growth this year with sales projected to surpass $13 billion. That’s a big number to be sure, but it represents less than 3% of Walmart 2014 projected sales, leaving ample opportunity for McMillon to pursue the omnichannel opportunity more aggressively.

McMillon shared his views on the disruptive forces reshaping society and the retail industry in late January, as well as his decision-making process when he participated in a panel discussion at the World Economic Forum in Davos, Switzerland.

“Creativity and change is what comes to mind first,” McMillon said when asked for his thoughts on the topic of disruptive innovation by panel moderator and Bloomberg television anchor Stephanie Ruhle. “The customer is changing rapidly. What the Internet and technology make possible today and what it will make possible tomorrow is very different than before. Our responsibility is to connect customers with products. How we do that, the speed with which we do it and the price that we do it at is all going to change a lot in the future. Our job as leaders is to navigate from yesterday to tomorrow using what’s possible today. As I think about my job, that transformation is very much on my mind.”

McMillon was joined on the panel by a diverse collection of executives that included Maurice Levy, chairman and CEO of the Publicis Groupe; Paul Jacobs, chairman and CEO of Qualcomm; and Peer Shatz, CEO of the Qiagen life sciences company. What all the men had in common was the fact that their respective industries are being transformed by technology in ways that were unimaginable not that long ago.

In McMillon’s case, he has clearly identified that the way to win going forward is to capitalize on the blurring distinction between physical and digital, and a willingness to invest in capabilities to serve shoppers with rapidly changing expectations. Positioning the company for future growth while managing the core business is one of the biggest challenges facing McMillon in his new role.

“As leaders, we have to be forward-looking. We have to think about who we talk to and what information we put in our minds so we can develop a vision,” McMillon said. “But we also have to think about the role our teams play. Who is working on today, and who is working on tomorrow? How do you make sure that those teams work together in a way that is seamless because at today’s pace, which is extraordinarily fast and probably only going to get faster, you have to be able to do both at the same time. How we manage through the change and disruption so that [we are] ready for the future is a huge issue and a big part of our challenge.”

Other challenges McMillon touched on in Davos with implications for those who have a business relationship with the company related to the coming wave of Internet-enabled wearable devices, the connectivity opportunity those devices afford and privacy obligations they present to responsible companies. On the subject of privacy and transparency, McMillon shared a common sense point of view about doing what is right.

“We understand that trust is a huge issue. Trust is the ultimate asset, and if you lose it, all of your business is at stake,” McMillon said. “So as we think about opt-in, transparency and clarity. What we’ve got to make sure is that every step along the way we are building customer trust. They do want to save time and they want to have access to information. They want some of these things, and we want to provide it to them, but we have to do it in a way that causes them to be comfortable and trust us as we go.”

Already Walmart is doing things in the United Kingdom and China that require a high level of digital engagement and could dramatically change how U.S. shoppers are served if the oversees initiatives are applied domestically.

“Some people don’t want to spend an hour and a half in a Walmart store wandering around. They want to get in and out,” McMillon said.

In the United Kingdom some people don’t even get in. They order online and pick up at stores with a service called “Click and Collect,” that is “going through the roof,” according to McMillon. A similar service is being tested in Denver.

Ultimately, customers are going to want to be served how they want to be served, and the implications for Walmart are huge if shoppers en masse decide they prefer the pickup option, possibly forcing Walmart to cannibalize its own business while further investing in new ways of serving shoppers.

“That is one of the big challenges, but the alternative of not investing is even more concerning. You have to find a way of making the right capital investment and managing your operating budgets so you can steer the company for the future,” McMillon explained in Davos. “It is very important to keep your current business — your core business — strong so that helps fund the future. As leaders, we get a lot of help from investors and our own finance team in helping make those trade-off decisions.”

Finding the balance between current returns and future investment is not a situation unique to Walmart, but it has become the focus of greater scrutiny in the past decade as the pace of sales and profit growth slowed, and investors were rewarded with share buybacks and dividend growth.

“The obligation that we have is to clearly explain our strategy and what we are investing in so investors and others can evaluate us and hold us accountable appropriately,” McMillon said. “In our case, as we make investments it will be our responsibility to say, ‘Here’s what we are doing, what we expect to get and when we expect to get it.’ The business’ ability to be relevant in the future and to fulfill our purpose — to help people save money and live better — to deliver on what we have always done, we just know we have to change.”

As McMillon works through some of the weighty issues he touched on at Davos, he will be facing a challenge unlike that experienced by his most immediate predecessors, Mike Duke and Lee Scott. They dealt with all of the distractions associated with being the world’s largest company and the relentless vilification that comes from hardened critics. McMillon must cope with those same issues, as well as leading an organization that just keeps getting bigger and more complex. For example, Walmart ended last year with nearly 11,000 stores under 71 banners in 27 countries, and e-commerce sites in 10 countries with more than 2 million employees who each week served roughly 245 million customers and generated sales of $473 billion. The staggering complexity of the retailer’s business creates enormous opportunity, along with the potential for crippling bureaucracy and cross-functional gridlock, even despite McMillon’s best efforts.

Ultimately, he may be forced to address a thorny issue Walmart founder Sam Walton described in a journal article published after his death in April 1992. In a piece called “The Wal-Mart Partnership,” which appeared in International Trends in Retailing published by the former Arthur Anderson & Co., Walton talked about thinking small to grow big and someday surpassing $100 billion in sales.

“Nothing like it has ever been done before, but our folks will do it,” Walton wrote in the posthumously published journal article. Walton then went on to confess what he called a really radical thought he had been having in the fall of 1991 — the same year McMillon began working at Walmart’s home office. “I probably won’t do anything about it, but the folks who come after me are eventually going to have to face up to this question. Even by thinking small, can a $100 billion retailer really function as efficiently and productively as it should? Or would maybe five $20 billion companies work better?”

Walmart’s current structure suggests senior leadership and the board of directors led by Walton’s eldest son Rob Walton long ago answered that question. Still, if the subject was on Walton’s mind in 1991, when Walmart was well shy of the $100 billion mark, it would seem to be even more relevant today as the company approaches $500 billion.

The subject has come up from time to time, most often with regard to Sam’s Club; if anything, Walmart has headed in the opposite direction, acquiring majority control of publicly held international retailers in Chile, Japan and South Africa. In his capacity as CEO of Sam’s Club in June 2007, McMillon deftly answered the question that was seldom discussed publicly.

“From a real estate, logistics and system perspective it is very beneficial for Sam’s to be part of the company,” McMillon said. “I think it makes sense to look at these things from time to time, and I’m sure we will continue to do so because the question is always going to be there. I see a tremendous amount of benefit in what we’re currently doing, and I hope that we just are smart enough to take full advantage of it.”