Wal-Mart's New CEO Has to Take On Amazon and Unions

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Yesterday, Wal-Mart Stores Inc. surprised everyone when it announced that its current chief executive officer, Mike Duke , would step down. He'll be replaced by Doug McMillon , a career insider who has been touted as a possible future CEO for a while -- but not, until yesterday, the very immediate future.

McMillon is coming into a more challenging environment than the one that faced many of his predecessors. On the one side, he's got Amazon.com Inc. pushing on his margins. I'm in the Florida Panhandle this week, and yesterday, I stopped by the local Wal-Mart to look at prices. The prices were still very good compared with my local stores in Washington (though we're getting our first Wal-Mart on Dec. 4!). But they aren't crazy-good compared with Amazon. They're still at a very good price point for some of the stuff I buy from Target, such as clothes, and their toy prices seemed good. But their electronics and kitchen appliances weren't particularly amazing compared with Amazon or Costco Wholesale Corp. Wal-Mart still has a competitive advantage among cash customers (a surprisingly high percentage of its customer base), but as Amazon builds warehouses closer and closer to the customer, I suspect Wal-Mart is in for a fight.

On the other hand, McMillon faces renewed interest from unions in forcing wages higher. Last Black Friday featured a series of nationwide pickets that you may have read about because they got a lot of coverage. It was a fizzle as far as organizing workers -- there often seemed to be more representatives from local left-wing groups or the United Food and Commercial Workers union than actual Wal-Mart workers. But interestingly, OUR Walmart says it's not trying to organize Wal-Mart. They're getting information out there about Wal-Mart's labor practices and encouraging Wal-Mart to raise wages -- but from the sidelines, not as part of an organizing campaign. This year's protests are promised to be even bigger and involve even more workers than the 500 who allegedly walked out last year. But they still won't be trying to unionize the company.

This puzzled me -- why not try to organize Wal-Mart? So I asked my father, who used to head a trade association that handled collective bargaining for New York's heavy-construction industry. He pointed out that once you're in an organizing campaign, you face legal restrictions: You can't target suppliers (that might be interpreted as inciting a secondary strike, which is illegal), and you can't really target customers. If you're organizing the workers, you have to focus your campaign on the workers.

So far, the UFCW hasn't gotten very far in trying to get the workers to sign on. Retail jobs tend to have a lot of turnover, which makes organizing campaigns tricky: You spend months persuading workers to organize, and 65 percent of them leave before your campaign really matures, and you have to start over with their replacements. And Wal-Mart infamously employs the toughest squad of management-side labor attorneys around.

The informational campaign allows OUR Wal-Mart to pressure the company through its customers, and more broadly through voters rather than its workers. Clearly the union has decided that this is more fertile territory. After all, if Wal-Mart raises wages, the UFCW wins even if those workers aren't dues-collecting members, because it lessens the competitive pressures on the jobs of the workers they have organized.

Is it going to work? I'm skeptical. Wal-Mart's core customer base is in rural areas and the South -- not fertile political territories for organizations like the UFCW. And its core customers are "extreme-value shoppers" who care a whole lot about price, because at their income level, Wal-Mart's lower prices mean a substantial increase in their standard of living. Last year's protests drew a lot of television cameras, but those cameras also showed mobs of customers streaming into the stores, ignoring the pickets. The cameras may have focused on the picketers, but the customers were focused on cheap consumer goods. Until that dynamic fundamentally alters, OUR Walmart is going to have a hard time achieving much more than satisfying political theater.

But that doesn't mean McMillon can ignore it. He is going to have to steer the company through a more competitive retail environment in which Wal-Mart is no longer necessarily the price leader, in a tougher political environment with fierce pressure to raise wages. And the two problems interact: Amazon's business model is inherently higher productivity than a big-box retailer, which means that as wages rise, Wal-Mart's cost advantage shrinks. By all accounts, McMillon is a talented executive. All of those talents will be needed to steer Wal-Mart into the next decade.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net