By  on December 21, 2006

Wal-Mart president and chief executive officer H. Lee Scott appeared on the Rev. Al Sharpton's radio show in July to discuss ways the world's largest retailer is changing corporate practices.

In 45 minutes, Scott answered tough questions from Sharpton, the activist minister and former presidential candidate, and his audience, about the company's stance on unions, its record employing minorities and attempts to build more stores in urban areas.

It was an image-molding move by Scott to go along with Wal-Mart's environmental initiatives, a program offering $4 generic drugs and the retailer's quick response to help in the aftermath of Hurricane Katrina.

Welcome to the new Wal-Mart, which has spent hundreds of millions of dollars in the past three years on a campaign to improve its reputation that experts believe is one of the most ambitious and aggressive in U.S. corporate history. The company has not significantly improved its reputation, but experts and data suggest it hasn't lost ground either, despite well-organized opponents.

December, a make-or-break month because of holiday sales, will test Wal-Mart's effort in the battle for consumers' perceptions. There are indications that, along with merchandise miscues and disruptions because of store remodeling, the ethics issues raised by critics of the world's largest retailer are giving some shoppers pause just when Wal-Mart is trying to kick-start U.S. sales that fell 0.5 in November, the first same-store decline in almost a decade.

"They've been humbled," said Paul Argenti, professor of communications at Dartmouth's Tuck School of Business. "The market has humbled them, and I think they are starting to realize that public relations and reputation is not just window dressing. I think they've seen how deeply it can affect you."

Wal-Mart's image problems have been linked to the company's flat share price, difficulty expanding into potentially lucrative urban markets and, according to the retailer's own data, loss of 2 percent to 8 percent of shoppers turned off by negative press.

"I debated coming here," said Leanne, 47, a homemaker from Beverly, Mass., who did not want to give her last name, as she shopped at the Wal-Mart in Danvers, Mass., outside Boston. A tight family budget keeps her coming back. "My concern is I hear more and more stuff about employees not being treated well with benefits and cutting their hours. I think this may be my last time here." She has begun shopping more often at rival Target.In northwest Arkansas, near company headquarters in Bentonville, where Wal-Mart employs about 20,000 people, articles in a local newspaper, The Morning News, on the retailer's stricter employment policies and struggles with bad press generated more than 100 postings to the paper's Web site from readers. Most complain about cultural changes at Wal-Mart, and many mention the mistrust engendered by an internal memo leaked to the press in October 2005 in which the retailer proposed cutting health care costs by reducing the number of fulltime and long-tenured workers.

"Our sales are down, and all my friends in Arkansas and Missouri say their sales are down," wrote one reader. "Wal-Mart go back to what you do best — sell merchandise everyday consumers need for the lowest price and quit hiring overpriced p.r. people to tell everyday Americans how great a company you are. It is not working."

Opponents of Wal-Mart are focused and well organized. Union-funded Wake-Up Wal-Mart launched its first television ad campaign Nov. 30, featuring three sales associates complaining about new employment policies that Wake-Up Wal-Mart said penalize working parents, long-term workers and older workers.

"[Company founder] Sam Walton would never have done this," one associate says during the spot. Wake-Up Wal-Mart also started passing out leaflets at Wal-Mart stores in 100 cities labeled "This holiday season, what if Wal-Mart treated your family this way?"

Wal-Mart sees its recent track record differently.

The retailer "is a company in transformation," said spokeswoman Sarah Clark, who manages a 14-member corporate communications staff. "Our reputation work has taught us we can do good, while still doing well for our business."

Once known for an insular culture that viewed public relations as the ultimate corporate frill, Wal-Mart has been re-aligned to play media offense. Members of the corporate communications unit call themselves "reputation warriors." Their mandate runs from Scott, who has plunged into the role of corporate global statesman, down to staffers on a new 800-number media hotline.

Public affairs and government relations staff has tripled to more than 60 people. Store managers use talking points, and senior executives read their speeches off TelePrompTers. Wal-Mart even has consultants dedicated to reading blogs and relaying updates several times a day to headquarters.Is the strategy working? A consensus appeared to emerge from interviews with financial analysts and retail consultants, as well as experts in public relations, reputation management and crisis management: Wal-Mart's reputation has not gotten substantially better, but by pushing the issue to the top of its agenda, the company may count a small victory in keeping matters from getting worse.

Data seem to bear this out.

Wal-Mart's Reputation Quotient dipped slightly, from 70.6 in 2004 to 69.9 in 2005, a measure derived by Rochester, N.Y.-based Harris Interactive, a $216 million market research firm that analyzes factors ranging from social responsibility to financial performance for Fortune 500 companies. Harris considers scores of 75 and above a benchmark for positive reputation.

Wal-Mart is targeted almost daily by Wake-Up Wal-Mart, funded by the Union of Food and Commercial Workers and its counterpart, Wal-Mart Watch, backed by the Service Employees International Union. Both seek to force major change in wages and benefits at the retailer.

"The biggest plus for [Wal-Mart] so far is, they are engaging the enemy rather than rolling over," said Eric Dezenhall, ceo of Washington-based crisis management firm Dezenhall Resources.

Norwalk, Conn.-based media research firm Delahaye, which reviews a half-million articles annually to track Fortune 500 companies' reputations as portrayed by the media, said Wal-Mart's media rating is 3.5 out of 5, or "marginally positive," asserted Mark Weiner, Delahaye president. Target's rating is 3.7; Sears' is 3.9.

Wal-Mart's financial performance, management team and products are generally covered in positive terms, which accounts for the slight positive slant, said Delahaye senior analyst Matt Merlin.

"Organizational integrity has always been their Achilles' heel," Merlin said. "They've always scored fairly low for one of the large companies."

Financial analyst Dana Telsey, founder of Telsey Advisory Group, said Wal-Mart's reputation reached a low point about two years ago and has been stable since.

"The key thing is they are addressing it, and that is making the analyst community more comfortable," she said.

Most experts predicted Wal-Mart will spend the next decade trying to untangle its mistakes. From gender discrimination and wage-and-hour lawsuits to development battles with communities, Wal-Mart in the mid-Nineties built a reputation as a bully. The company was routinely portrayed as exacting a pound of flesh from suppliers and low-paid workers in order to stock its shelves with cheap goods."Wal-Mart is the classic example of a company that is transforming and rebuilding its image while there are tremendous challenges going on," said Leslie Gaines Ross, chief reputation strategist at Weber Shandwick public relations. "Every action they take launches a public debate."

Treatment of workers remains the biggest vulnerability, analysts said. As Wal-Mart seeks to rachet down labor costs, its relationship with hourly associates might become a reputation powder keg.

Cost-saving policies instituted by Wal-Mart U.S. ceo Eduardo Castro-Wright, including salary caps, a stricter absenteeism policy and scheduling priority for associates who can be available for second- or third-shift hours over those who need predictable hours, appear to have stirred worker discontent.

Wake-Up Wal-Mart this fall disclosed internal Wal-Mart talking points for managers aimed at handling associate anger over salary caps, something Wal-Mart said in 2004 it wouldn't institute.

"Wal-Mart is a confused entity right now," said Eli Portnoy, chief brand strategist of The Portnoy Group Inc. "Moving to more part-time employees, cutting back health care while throwing millions of dollars on gleaming stores and ads in Vogue magazine is an image change that's inappropriate.''

Opposition groups have exploited benefits as an area of weakness. They've publicized the internal memos that discuss ways to reduce health care costs and touted data that show Wal-Mart associates and their children are often the biggest consumers of state-funded medical aid programs.

Spurred by these figures, several states proposed legislation in the last 12 months that would mandate Wal-Mart spend a certain amount on medical benefits or be forced to contribute to state health care programs. None of the legislation passed, although the topic may be revisited next year in a political climate chillier toward Wal-Mart at the federal level because Democrats will control the House and the Senate.

But history has shown that the giant retailer can be surprisingly adaptable. Wal-Mart's methods have evolved from heavy-handed (running associate "testimonial" television ads, for example) to staging media events, a tactic Target has perfected, to create positive buzz. In October, for instance, the company set up an eco-friendly retail exhibit at the MTV TRL store in Times Square.

Wal-Mart's U.S. stores get 127 million visitors each week, a base it's trying to convince to spend more to maintain earnings growth. The company's same-store sales have lagged those of Target Stores in 39 of the last 40 months.A McKinsey & Co. study commissioned by Wal-Mart in 2004 that found between 2 percent and 8 percent of customers had stopped shopping at the retailer because of negative press also concluded that 54 percent of respondents believed Wal-Mart was "too aggressive" and 23 percent said the company was arrogant.

Wal-Mart vice chairman John Menzer signaled a rare strategy shift during a presentation to financial analysts in October, saying the company would slow the pace of expansion, reduce capital expenditures next year and abandon a saturation strategy that saw supercenters placed as close as one mile apart.

In September, Wal-Mart tapped Leslie Dach, former Edelman public relations firm vice chairman and Democratic Party strategist, to be executive vice president of corporate affairs and government relations. Dach promised the company would "play offense every day, because we have a message and a storyline that's persuasive."

Referencing criticisms by union-funded opposition groups, he added, "We want our opponents to react to us because the more they do, the more shrill and out of touch with working families they seem."

Guided by Edelman, Wal-Mart is trying to connect with journalists, academics, politicians and community activists. This fall, the retailer started routing calls, based on area codes, to managers dedicated to servicing that region's journalists.

The retailer's experiments with blogs, another first for Wal-Mart, are seen as progressive, though initial efforts got mixed results. The blog "Wal-Mart-ing Across America," detailing the adventures of a couple's RV adventure, was criticized when it was revealed the retailer had both bloggers on its payroll.

"Lee Scott has gone through a metamorphosis as a leader," said Weber Shandwick's Gaines Ross, who specializes in working with ceo's after major corporate scandals. "He used to be very anti-visibility, but he's realized that when your company is under the gun, there's an obligation to speak up."

Scott comes across as a "very vigorous, neighborly kind of guy," Dezenhall said. "When Lee Scott talks about the environment, Wal-Mart wins on two fronts. It's of great concern to the public, and they have a portfolio to back them up because it's in their corporate interest to reduce waste."The retailer's credibility was damaged when the October 2005 internal memo recommending cutting costs by discouraging older and unhealthier workers from working at Wal-Mart was leaked to reporters.

"I would not be shouting from rooftops about workforce benefits until they have a better story to tell,'' Dezenhall said.

Gaines-Ross said Wal-Mart needs to remember, in an age of instant communication, "everything that's internal is external….[Wal-Mart] should not put anything into a memo that they wouldn't feel comfortable having printed on the front page of a newspaper."

Wal-Mart is changing much about the way it does business in the U.S., and navigating its associate base through these changes is one of the retailer's most immediate reputation challenges. Long term, what may matter more is the company's ability to convince the U.S. public — and eventually consumers worldwide — that Wal-Mart uses its power responsibly.

"It scares people that one entity has so much power," Dezenhall said.

Wal-Mart's Clark sees it differently: "We never liked to talk about our size before. But we're working on sustainability and other ways we can use our size to benefit the world."

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