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Pundit’s Mailbag —
The ‘Culture’ Of Wal-Mart

In our piece — Can Whole Foods Survive Prolonged Economic Downturn? — we raised the issue of how Whole Foods could deal with a predictable cash squeeze, and we layed out several options. As it happens, the company decided to bring in an investor, as we explained in a piece entitled, Whole Foods Exercises Pundit ‘Option Two’ And Sells Preferred Stock.

In this piece, however, we raised the possibility of a sale:

Perhaps Whole Foods could sell itself to another retailer better able to carry it through the recession.

Which retailer would this be? Well it would be a logical play for any of the big three:

Tesco has had interest before but found it pricey. The new lower share price would give it an instant footprint across North America and allow it to roll its money-losing Fresh & Easy division into a new consolidated North American Tesco division. This would confuse the numbers and save Tesco from ever really accounting for the losses Fresh & Easy will accumulate.

Carrefour would value a North American division to diversify its revenue and profit sources. With the Whole Foods footprint and infrastructure, Carrefour could try to open many different formats.

Crazy as it sounds, it would also be a perfect fit for Wal-Mart. Very little customer overlap, different positioning in the mind of the consumer. There is a real risk of culture clash, but if Wal-Mart could convince Mackey to stay and run it as a separate division it would be a winner. Wal-Mart’s enemies would be thrown into fits of cognitive dissonance.

We received a number of responses including this one:

Just wanted to let you know how much I enjoy your column and appreciate your insights and provocations.

Your idea about Wal-Mart buying Whole Foods is a good one — at least for making people think.

What you could have also mentioned is how, in produce and other perishables, Wal-Mart operates very differently than in the rest of their operations, with quality and consistency taking a front seat and low prices kept in the back seat.

That said, I’d ultimately expect that the culture clash would make it untenable. It’s not just that the cultures are different, but that each organization’s success comes, in part, from a very deeply embedded and distinctive culture.

Keep dishing out more great food for thought.

Wayne Davis
Executive Vice President and Co-Founder
Backyard Beauties
Madison, Maine

Well, yes, Wayne is right… it was a bit of a thought experiment, in German a Gedankenexperiment. We actually suspect a Wal-Mart buyout of Whole Foods wouldn’t work because the employees would run away. If you read any of the blogs that Whole Foods employees post on for their own discussions, you know that many are very passionate on social issues and work for Whole Foods as a result of their personal belief system.

This would not be comparable to Unilever’s purchase of Ben & Jerry’s, which was a controversial acquisition as it was unclear if Unilever would allow Ben & Jerry’s to maintain its distinctive culture. But other than a generalized hostility to “big business,” there was no specific animosity against Unilever.

In contrast you might say that Whole Foods has defined itself against Wal-Mart and, certainly, many of its employees consider Wal-Mart downright evil. So it would really take quite a tight-wire act for Wal-Mart to buy Whole Foods and keep it as anything resembling the Whole Foods of today.

So we agree with Wayne on this point and, certainly, thank him for his kind words about the Pundit. We do, however, confess that Wayne’s reference to the “rest of their operations” leaves us in a bit of a quandary.

We have written quite extensively on Wal-Mart. When it comes to quality of procured items, we don’t think an insistence on quality and consistency is confined to perishables. Vendors who try to sell mundane items to Wal-Mart — T-shirts, underwear, socks, etc. — tell us that they have to undergo quite rigorous testing to ensure their products don’t fall apart at the seams, shrink excessively, etc.

Of course, demanding high quality doesn’t stop buyers from seeking low prices. Although at one point in time Lee Scott, the retiring CEO of Wal-Mart, believed that the vendor community was more important to Wal-Mart than Wal-Mart was to the vendor community. With time, Mr. Scott seems to have changed his mind.

Wayne may not have experienced this because Backyard Beauties, a million square foot facility in Maine that provides locally grown tomatoes produced to world-class standards, really has very little in the way of direct competition. We suspect that if there were two other million square foot of world class greenhouse facilities in Maine, Wal-Mart’s search for high quality would not preclude it from bargaining aggressively to get the price down.

When it comes to issues of corporate culture, we are not certain we agree that Wal-Mart any longer has a “deeply embedded and distinctive culture.” It did once, but almost everyone hired by Sam Walton is now gone. It was just the other day that Wal-Mart was advertising in Vogue, and principles that built that company such as Every Day Low Price (EDLP) have been replaced by ambiguous terms such as EDLP PLUS.

We don’t necessarily see this as all bad. The focus on sustainability and social goals may well have been necessary parts of adjusting to a new environment and a new scale of operation. The decision to base executives outside of Bentonville may have been inevitable with international growth. Still, this year, with value all the rage, Wal-Mart is running back to its roots, but we see no indication of great conviction. If the trend was away from value and toward organic, our sense is that the executive team would pivot on a dime.

This may be to their credit. Flexibility in meeting the changing needs of consumers may serve a retailer well, but we are not certain flexibility is really a culture. Over 18 months ago, we realized that Wal-Mart was changing. As we wrote at the time:

What is interesting is that now there is no one with any historical connection to Wal-Mart’s heritage in any major responsible position in Merchandising, Marketing or Operations. No one hired by Sam Walton, no one steeped in the Wal-Mart culture.

Now, having bright people approaching problems without historical baggage might not be a bad thing, but it is a very different thing.

Change has always been a part of the evolution of Wal-Mart. You don’t grow to be the biggest retailer in the world, operating different formats on different continents without being willing to change.

But, up till very recently, change was built on the cultural foundation that had established the company and seen it through to achieve such great success. So as new ideas were evolving, there were always individuals in these key areas that acted as a “conscience” and provided an “institutional memory” that connected the future to the past.

Of course, one can always argue that radical change was needed, but Wall Street and the vendor community have both failed to fully absorb how dramatic the change has been in the way Wal-Mart has been transformed on a cultural, core value level.

We entitled the piece, Wal-Mart: The Name On The Door Is The Same; The Thoughts Inside Are Very Different.

Today we would say that Wal-Mart’s executives stand a bit chastened. The Vogue and George era did not produce success, and Wal-Mart’s failure in changing its reputation has actually positioned the company to succeed well now, during tough economic times.

What culture will evolve as a new CEO assumes his place is a very open question.

The good news for Wayne Davis and Backyard Beauties is that under almost any culture, Wal-Mart, Whole Foods and, indeed, virtually every major New England retailer will still want those high quality greenhouse-grown Maine tomatoes that Wayne and Backyard Beauties produce so well.

Many thanks to both Wayne and Backyard Beauties for the kind words about the Pundit and for assisting the industry in our own Gedankenexperiment on this subject.

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