Wal-Mart CEO Sees New Consumer Mind-set

Ceo H. Lee Scott predicts the first half of '09 will be "extraordinarily challenging."

NEW YORK — The economy will turn around some day — but don’t expect conspicuous consumption to make a comeback.

This story first appeared in the January 13, 2009 issue of WWD.  Subscribe Today.

So believes H. Lee Scott, chief executive officer of Wal-Mart Stores Inc., noting the dismal economy has caused a permanent and fundamental change in consumer behavior.

The ceo of the world’s largest retailer spoke at the opening session of the National Retail Federation’s 98th annual convention and expo here Monday morning. In what he called his last public speech as Wal-Mart’s ceo — he’ll be succeeded by Mike Duke on Feb. 1 — Scott predicted the first half of 2009 will be “extraordinarily challenging. In the second half you’ll have a rough spot against the stimulus package. It will be moderately better next year. I don’t see anything that says it will turn around swiftly.”

In talking with consumers and employees, Scott said he found that everyone has been forced to give up something in this economy, be it eating out or buying a new pair of earrings. “They feel good about it,” he said. “The appetite is toward living a little differently. I wonder whether shopping habits haven’t changed. I’m not convinced that [consumers] are going to have this same immediate desire to go right back to consumption and debt.”

Wal-Mart has largely managed to swim against the tide of negative comps that have plagued the industry. “We saw this [recession coming] early on when fuel prices started going up several years ago,” Scott said. “As we got to the $4 per gallon mark, it really created problems.”

Wal-Mart, which was one of the few bright spots in the industry as shoppers traded down to less expensive retailers, reported a smaller same-store sales gain in December than Wall Street expected and slashed its earnings forecast.

Scott shared one nugget of sales information in his presentation. “The weekend before last we had a 25 percent increase in sales of flat-panel TVs,” he said. “People still have money. It’s very targeted to the thing they want. If you don’t have what they want, if you’re off by 1/30th of an inch, forget it. You’d better understand your customer and inventory and open-to-buy. How much depth of assortment you have will determine your profitability.”

But rather than discuss Wal-Mart’s Christmas sales in detail — “we have all had a tough Christmas, we’ve all just lived through that” — Scott wanted to focus on “some of the big issues facing our country during one of the most challenging times in our nation’s history.”

The health care crisis that’s left 47 million Americans uninsured, U.S. addiction to foreign oil, the decline of the education system and immigration were the topics on Scott’s mind. “If we as a country want to get through this time and position ourselves to prosper and lead in the years ahead, then we need to tackle the hard issues,” he said. “We cannot afford to postpone solving these problems.”

Scott, who is as familiar with the inner workings of the Washington Beltway as he is with the back roads of Wal-Mart’s hometown of Bentonville, Ark., can sometimes sound like a politician. Asked by NRF president and ceo Tracy Mullin whether he’s interested in being Secretary of Commerce in the Obama administration, Scott demurred, explaining that he’s signed on to remain at Wal-Mart for two years as a director.

Despite having great influence as the ceo of the world’s largest retailer, Scott downplayed his role.

“One of the most important lessons I learned at Wal-Mart is that you have to hire people who are better than you and give them credit,” said Scott, a long-time disciple of founder Sam Walton.

“I’ve always considered myself to be like Chauncey Gardiner [the hapless gardener who is thrust into the limelight] in ‘Being There.’”

And in a hard-won lesson for the Wal-Mart ceo, who faced scorching criticism during his tenure over the retailer’s behavior, Scott said social responsibility and sales need not be mutually exclusive. “We put together the ‘Save Money’ and ‘Live Better’ parts of our mission and applied them to big challenges like the cost of prescription drugs,” he added. “There is no conflict between delivering value to shareholders and helping solve bigger societal problems.”

Wal-Mart began a campaign in 2005 to be a more sustainable company and last year joined with other businesses, think tanks and labor unions to form the Better Health Care Together Coalition, which has the goal of fixing America’s health care system by 2012. The company has been criticized by watchdog groups for skimping on health benefits for employees.

The prospect of a new consumer order was echoed by Carl Steidtmann, chief economist at Deloitte, who addressed global trends and forecasting at a subsequent NRF session. “The recession will create a very different economy when we come out of it than the one we had when we went into it,” he said. “Real wages are up 6 percent since July. Consumers have the means to spend, they just don’t have the will.”

Stacy Janiak, Deloitte’s vice chairman, national retail leader, suggested using technology to reach consumers on cell phones or handheld devices. “Stores can now send coupons to consumers’ mobile phones. By 2014, mobile commerce is expected to reach $9 billion. It’s getting easier for consumers to shop online with their cell phones,” Janiak said. “By 2012, 40 percent of sales will be online or cross-channel. Every $1 in online sales influences $3 of in-store sales.”

But, Janiak cautioned, “Consumer spending in the U.S. will not return to former levels.”

When the economy finally recovers, the comeback won’t be driven by consumer spending, Steidtmann said. Rather, it will be driven by an increase in governmental spending. “Demographic changes will make business more challenging,” he said, “with the growth of the 60- to 70-year-old population and more people moving to urban and exurban areas.”

Many experts have predicted a spate of retail bankruptcies, but Steidtmann said these will be different. “The problem with many companies is the operating model itself,” he said. “The mix of real estate doesn’t make sense or the brands have lost cachet. A lot of these companies won’t come out of bankruptcy.”

With much higher rates of inflation “we’ll rethink inventories — efficiency and productivity will be raised. We won’t see expansive expansions. A lot of malls will go dark and a lot less retail space is being built.”

Retailers have benefitted from free trade, but Steidtmann predicted there will be more efforts to roll back free trade since the end of World War II. Steidtmann said many companies producing overseas will come back. “One of the strongest areas of construction will be new factories,” he said. “Obama will make [building factories] more lucrative.”