Wal-Mart aisles
Pallavi Gogoi  /  BusinessWeek
Wal-Mart has a lot of items priced at 65¢ or $1.34. But these typically aren't the high-margin goods that will bring the retailer the profits it's looking for.
updated 10/2/2007 4:04:36 PM ET 2007-10-02T20:04:36

At the Wal-Mart store in Uniondale, on New York's Long Island, when a customer swipes a credit card two questions pop up in the card reader: "Did the cashier greet you?" and "Was the store clean?" It's all part of an effort by Wal-Mart Stores and Chief Executive Officer H. Lee Scott to improve customer service at the retailer's 3,500 locations across the U.S.

Scott may need a new strategy. During a recent visit to the store, one cashier didn't greet two customers, and, when asked about the survey, she replied with outright scorn. "I don't care," she said. "If Wal-Mart doesn't care for me, why should I care?" She took up the issue of cleanliness unprompted. "There was this horrible smell in the store the last two days from some overnight spill," she said. "They did nothing about it. It got so bad that on the second day the fire department came by and we all had to wear masks."

It's clear that Wal-Mart is struggling these days. The once-vaunted retailer is facing slowing sales and a stagnant stock price at the same time its reputation has been battered for its workplace practices. But what exactly is going wrong at Wal-Mart? What has gummed up the gears at the previously unstoppable growth machine out of Bentonville, Ark?

To get some answers, BusinessWeek decided to take a detailed look through several of its stores, to see from the inside how the retailer is handling everything from merchandising to morale. Retail consultant Patricia Pao joined us for three store visits to add an expert's insight to the experience. There were certainly many positive surprises, among them Wal-Mart's cleanliness, but there were also flaws in store layouts and product presentations.

The most significant finding is what appears to be an enormous problem with customer service. As the experience with the cashier in Uniondale illustrates, many of Wal-Mart's workers feel outright hostility toward the company, and, by extension, they often treat customers with indifference or worse. That puts Wal-Mart in a box. Without reasonable service, the company is forced to compete almost solely on price. That in turn squeezes margins and makes it difficult to pay employees the better wages and benefits that could boost morale. It's a vicious cycle that now appears to be working against Wal-Mart. "When you're trying to change your customer service, it's very difficult to do that unless you win the hearts and minds of your employees. After all, they are your ambassadors on the front line with customers," says Pao, founder of a consulting firm, the Pao Principle.

Wal-Mart declined to comment for this story. The company's top executives have said that bolstering customer service is an important priority. In May, during a conference call with analysts, CEO Scott noted that customer service is being targeted as a key element of Wal-Mart's three-year strategic plan to improve its business. "The core of that plan, improving our customer service and improving returns, is critical to continued success for our company," he said.

Wal-Mart's service has been sliding for many years, according to an annual survey conducted by the University of Michigan. The most recent information from Michigan's American Customer Satisfaction Index shows Wal-Mart dropped to a score of 72 last year, down from 81 in 1995. It's behind Kohl's, J.C. Penney, Target, Dillard's, and Sears, although it does rank ahead of Macy's and Kmart. The average score for the retail industry is 74. Wal-Mart's score puts it on par with the health insurance industry, which has an overall customer satisfaction score of 72, pulled down by the poor performance of UnitedHealthGroup and Aetna.

The first store we visited was located in Valley Stream, N.Y., about 20 miles east of Manhattan on Long Island. The store is situated on the fringes of the Green Acres Mall, which also houses a Macy's and a J.C. Penney. The discount store National Wholesale Liquidators sits on one side of the Wal-Mart, and Petland Discounts, a pet supply store, is on the other. A Best Buy and a Circuit City are also in plain view.

The average household income in the three-mile radius of the mall is $85,000, and the Wal-Mart store here reflects the retailer's effort to broaden its appeal to upscale customers. Last year, Wal-Mart started an 18-month remodeling program of 1,800 stores to improve the layout and appearance of the apparel departments, adding faux wood floors, widening the aisles, eliminating clutter, and upgrading the bathrooms. Pao was impressed with the cleanliness and neatness of the location, a recurring positive at the company's stores. The once-common complaint that customers would find clothes, toys, and other items strewn about was definitely not an issue. "Wal-Mart really put neatness as a No. 1 priority and we can see it," says Pao.

The Valley Stream store has clearly benefited from the various upgrades. The first thing that strikes Pao is how much the store reminds her of Target. Faux wooden floors in the men's and women's areas glow under muted lighting. Stylish signs featuring models guide customers to sales areas for undergarments, sportswear, or the more upscale George and Metro 7 apparel lines. The aisles are much wider than they are in Wal-Mart's older stores.

The positive aura faded, however, when Pao looked for help. We walked into the electronics area, where Compaq and Acer computers are displayed under glass cases. Pao wanted to see some of the computers from Dell, the PC maker that just reversed its longstanding strategy and began selling its products through retail stores. No salesperson volunteered to help, so we approached one employee dressed in the company's uniform of polo shirt and khakis. When Pao asked about the Dells, he said, "We're sold out of them, and I have no idea when the next shipment is coming in." Then he turned and walked away, never volunteering to find a computer at another store or suggesting he could find out when the next shipment would arrive.

The risks of selling on price alone
Pao wondered aloud what had happened to Wal-Mart's well-respected point-of-sale system, technology that is supposed to automatically order items when they're close to selling out. The issue may have something to do with working out the kinks in the new Dell relationship, although Wal-Mart declined to discuss the missing computers.

Consumer electronics is clearly a big focus for Wal-Mart. In each of the three stores, the electronics departments displayed several 32-inch, flat-panel TVs on the walls. Trying out the products, however, can be problematic. There was typically no way to experiment with a television and no salespeople around to help. It's a far cry from the experience at Best Buy or Circuit City, where customers can plop down on comfortable sofas in a living room-style setup and play around with the features on huge plasma and LCD TVs. "You have to bet on a hope and a prayer that this is what you want, because there's not much you can demo here," says Pao.

In the second store we visit, in Westbury, N.Y., we see a row of fancy Apple iPod display cases. Pictures are shown for two versions of the music player, the shuffle and the nano. But the display cases are empty. No actual iPods are anywhere within view, and no employees are nearby to help. Pao says she worries that this lack of service means that Wal-Mart's strategy is to sell at the lowest price, rather than compete for higher-end customers who may be willing to pay for a little expertise or hand-holding. "If they don't differentiate themselves [in electronics], the low margins will come back to bite Wal-Mart as they already have in the rest of the store," she says.

The Westbury store is located in an area with a median household income of $82,000, but it wasn't as chic as the Wal-Mart in Valley Stream. Faux wooden floors are used sparingly, seen only in a few sections such as handbags and women's apparel, and the aisles are relatively narrow. Pao felt like it was a half-hearted attempt at looking nice, since the rest of the store still had the unsightly gray linoleum floors.

The store in Uniondale was the last we visited. The town is about 28 miles east of Manhattan with a median annual income of $68,000. It was the most neglected of the three stores, with minimal upgrades. Rows and rows of clothing hung on T-bars with little attempt to make the products appealing. The displays here reminded Pao of Woolworth's, the five-and-dime store that went out of business in the 1990s. "Customers need visual cues to focus on — they need the little boutique-like effect that Target creates by focusing on different items in various parts of the store," says Pao. "The clothes on T-bars as far as the eye can see gives it the feeling of a big mess, even though it's neat enough."

When it came to fashion, Pao found Wal-Mart lagging. It's a subject close to Pao, who in the past has consulted with retailers like Ann Taylor. Even at the store where the displays were nice, Pao felt that Wal-Mart's more upscale George and Metro 7 line lacked excitement. She says these so-called affordable trendy lines are mostly upscale basics, only modestly different from the vast swaths of jeans, T-shirts, tank tops, and other basic clothing lines displayed in the many aisles at Wal-Mart. "It's certainly not trendy, but a collection of upscale basics that their core customers could gravitate to," says Pao.

Yet another disappointment was in store for us. The fitting rooms were locked, and no one was around to open them, the third time in as many stores that we had encountered such a problem. Similar to the situation with electronics, customers looking for clothing largely find themselves on their own. They can furtively try on T-shirts or sweaters between racks of clothing, or they just have to hope that the clothes they're interested in will fit.

Pao tries several doors in the unmanned fitting room area. Finally, one opens. Still, she is unimpressed. "It was the size of a small closet and didn't have any mirrors, so you have to walk out to see how you look," she says. Pao says that nice fitting rooms are one of the basic tenets of good customer service. Requiring customers to track down a sales clerk or wait to try on outfits is off-putting to many shoppers.

Pao's distinct impression was that the floor salespeople did not want to help on any front. At all three stores, Pao asked for an organic beauty line called Noah's Naturals, whose products she had heard were available at Wal-Mart. In the Uniondale store, not far from the cashier who would later say Wal-Mart didn't care about her, Pao approached one female employee who was stocking shelves to make her inquiry. Without pausing in her work, the worker said she had never heard of the line. She then turned back to the shelves to stock more beauty creams, without offering to locate the product at another store or find out if it would be coming in later.

Successful retailing is "10% a great idea and 90% execution," says Pao. However, in the case of Wal-Mart, especially when it comes to customer service, she says it looks like "90% was spent on strategy and thinking, and 10% on execution."

Copyright © 2012 Bloomberg L.P.All rights reserved.


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