Next Wal-Mart CEO Faces Challenges Sam Walton Never Saw

May 8 (Bloomberg) -- David Strasser, an analyst at Janney Montgomery Scott LLC, talks about chief executive succession plans at Wal-Mart Stores Inc. and outlook for the world's largest retailer. Strasser speaks with Scarlet Fu, Sara Eisen and Josh Barro on Bloomberg Television's "Surveillance." Porter Bibb, managing partner at Mediatech Capital Partners LLC, also speaks.(Source: Bloomberg)

As Wal-Mart Stores Inc. (WMT) prepares to anoint the fifth chief executive in its history, the world’s largest retailer is grappling with challenges founder Sam Walton never faced.

Wal-Mart’s board has identified international chief Doug McMillon, 46, and Bill Simon, 53, who runs the U.S. operations, as leading candidates to succeed Chief Executive Officer Mike Duke, according to a person familiar with the situation. While Duke, 63, isn’t expected to step down immediately, Wal-Mart may name his successor in the coming months, said the person, who asked not to be identified because the matter is private.

Wal-Mart is trying to goose slowing sales gains in the U.S. as such rivals as Amazon.com Inc. and the dollar stores lure its customers. Overseas, the company is struggling to ignite growth in China and other emerging markets even as it probes allegations of bribery in Mexico and possible violations of the Foreign Corrupt Practices Act.

The next CEO will face “tough decisions globally,” said David Strasser, a New York-based analyst for Janney Montgomery Scott LLC. “They have to pick and choose. China has been a big struggle. What do you do? Double down? Back out?”

In the U.S. “they’re dealing with a more competitive landscape and a consumer who is struggling,” he said.

Photographer: Joshua Roberts/Bloomberg

While Chief Executive Officer Mike Duke, seen here, isn’t expected to step down immediately, Wal-Mart may name his successor in the coming months, said the person, who asked not to be identified because the matter is private. Close

While Chief Executive Officer Mike Duke, seen here, isn’t expected to step down... Read More

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Photographer: Joshua Roberts/Bloomberg

While Chief Executive Officer Mike Duke, seen here, isn’t expected to step down immediately, Wal-Mart may name his successor in the coming months, said the person, who asked not to be identified because the matter is private.

Since Sam Walton stepped down in 1988, the company has looked inside for its CEO. Duke and his predecessors -- Lee Scott and David Glass -- all were insiders with years of experience at the company before taking over the top job. Duke was named CEO of the world’s largest retailer in November 2008 and didn’t formally take the reins until Feb. 1, 2009.

Succession Timing

“There are rumors and speculation about our company all the time and we just don’t comment on them,” David Tovar, a Wal-Mart spokesman, said in a telephone interview. He declined to comment on succession timing.

McMillon, who has been at Wal-Mart since starting as a summer worker in 1984, is close to the Walton family, three other people said. Simon joined Wal-Mart in 2006, after working in the food and beverages industry.

“Bill Simon has proven he’s done a really good job running the U.S. business; he righted the ship,” Strasser said. “It’s been tough with the low-end consumer. He could’ve been better driving sales but it’s on a good trajectory.”

Still, Simon lacks international experience, and Wal-Mart considers that a “growth area,” he said.

McMillon’s standing with the Waltons combined with his international experience could give him an edge with the board, said Jay Lorsch, a professor at Harvard Business School, which is based in Boston.

Photographer: Beth Hall/Bloomberg

Wal-Mart Stores Inc. international chief Doug McMillon, left, who has been at Wal-Mart since starting as a summer worker in 1984, is close to the Walton family, three other people said. Close

Wal-Mart Stores Inc. international chief Doug McMillon, left, who has been at Wal-Mart... Read More

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Photographer: Beth Hall/Bloomberg

Wal-Mart Stores Inc. international chief Doug McMillon, left, who has been at Wal-Mart since starting as a summer worker in 1984, is close to the Walton family, three other people said.

Favorite Candidate

“It’s my understanding that the Walton family continues to have a lot of input, so if they have a favorite candidate, that would affect who’s chosen,” Lorsch said. “Wal-Mart has pressures, especially the allegations of bribery in Mexico --and the next CEO is likely going to have to deal with this.”

During Duke’s tenure, Wal-Mart shares have lagged behind the Standard & Poor’s 500 Index. Wal-Mart advanced 67 percent from the last trading day before Duke took over through yesterday, compared with a 97 percent increase for the S&P 500.

Wal-Mart’s shares, which had earlier rose as much as 0.4 percent, erased their gains yesterday after the Bloomberg News report on the potential CEO candidates and closed unchanged. The shares fell 0.1 percent to $78.25 at the close in New York.

Early in Duke’s tenure, Wal-Mart moved into Target Corp.’s (TGT) space by trying to make stores more inviting and easier to shop. As part of an effort to de-clutter stores, the company removed thousands of items from shelves.

Photographer: Beth Hall/Bloomberg

Prior to joining Wal-Mart as executive vice president of professional services in 2006, Bill Simon held roles at the U.S. restaurant company Brinker International Inc., Diageo Plc, the U.K. spirits maker, Cadbury Schweppes, PepsiCo Inc. and RJR Nabisco. Close

Prior to joining Wal-Mart as executive vice president of professional services in 2006,... Read More

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Photographer: Beth Hall/Bloomberg

Prior to joining Wal-Mart as executive vice president of professional services in 2006, Bill Simon held roles at the U.S. restaurant company Brinker International Inc., Diageo Plc, the U.K. spirits maker, Cadbury Schweppes, PepsiCo Inc. and RJR Nabisco.

Inauspicious Timing

The timing wasn’t auspicious. When the U.S. tipped into recession, many Wal-Mart customers who’d long done all their shopping in one trip at their local supercenter could no longer find everything they needed. Many defected to the dollar stores, which were busily adding groceries to their assortment.

Wal-Mart was forced to reverse course and return thousands of items to the shelves. With same-store sales sliding, the company began cutting its workforce, even as it opened more supercenters. A new challenge emerged: keeping shelves stocked.

Once a paragon of logistics, Wal-Mart has been trying to improve its restocking efforts since at least 2011, hiring consultants to walk the aisles and track whether hundreds of items are available. It reassigned store greeters to replenish merchandise. At a February meeting of U.S. executives Simon said “self-inflicted wounds” were Wal-Mart’s “biggest risk,” according to minutes obtained by Bloomberg News.

Online Sales

Another challenge facing a new CEO is how to goose Wal-Mart’s online sales, which account for about $5.15 billion, or 2 percent, of total annual sales, according to Kantar Retail, a London-based consulting firm.

More and more Wal-Mart customers are shopping at Amazon (AMZN), according to Kantar. Yet Wal-Mart continues to pour capital into its brick-and-mortar operations. This year it plans to open about 130 supercenters, which Simon called Wal-Mart’s “primary growth vehicle” in an earnings call last month.

Under McMillon, the company has been working to relaunch its “everyday low price” strategy in Brazil and China after struggling to find strong sales growth in both markets. In India, Wal-Mart has faced questions over lobbying.

An Arkansas native, McMillon began his career in a Wal-Mart distribution center, according to the company’s website. He moved through the ranks, working in a variety of merchandising roles in the U.S. division, where he concentrated on food, apparel and general merchandise. Before taking the reins of the international division, McMillon ran Sam’s Clubs from 2006 to 2009.

High Profile

“Doug has been high-profile since his early to mid-30s,” said Brian Yarbrough, an Edward Jones & Co. analyst based in St. Louis. “He’s an up-and-comer. They might be ready to move him into the slot and have him as CEO for the next 15 to 18 years.”

Prior to joining Wal-Mart as executive vice president of professional services in 2006, Simon held roles at the U.S. restaurant company Brinker International Inc. (EAT), Diageo Plc (DGE), the U.K. spirits maker, Cadbury Schweppes, PepsiCo Inc. (PEP) and RJR Nabisco. He was secretary of the Florida Department of Management Services under then-Governor Jeb Bush. He also served 25 years in the U.S. Navy and Naval Reserves.

“He’s done a good job of turning around U.S. operations,” Yarbrough said. “But it’s not like things are just rolling along. The business remains challenging. The consumer remains under pressure. It’s a slow growth environment. And dollar stores have done a good job.”

To contact the reporters on this story: Renee Dudley in New York at rdudley6@bloomberg.net; Carol Hymowitz in New York at chymowitz1@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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