5 headwinds Wal-Mart’s new CEO will face
FORTUNE — Wal-Mart announced on Monday that company veteran C. Douglas McMillon will replace chief executive officer Mike Duke when he retires early next year.
McMillon has a stellar resume that reflects his veteran status at the nation’s largest employer: The 47-year-old started his career in the company’s merchandising division and went on to lead the company’s logistics, distribution, and administration divisions before overseeing Wal-Mart International in 2005 and becoming chief executive of Sam’s Club in 2006. He currently heads Wal-Mart’s (WMT) operations outside the U.S.
In a report released this morning, The Buckingham Reseach Group called McMillon a “great choice,” citing his overseas experience and his work to integrate systems across the company’s procurement, distribution and merchandising divisions.
But McMillon’s impressive tenure at Wal-Mart will by no means make his new job an easy one. Here are some of the challenges he’ll face:
1. Wage outrage
The most public and populist of all of Wal-Mart’s troubles is the contentious relationship it has with its hourly workers. Retail workers’ protests of Wal-Mart’s low hourly wages started in earnest last October and have continued ever since. There will be no letting up this holiday season; non-union worker group OUR Wal-Mart said 1,500 protests are planned for Black Friday 2013. The most recent burst of outrage came earlier this month when a Wal-Mart store in Canton, Ohio held a food drive in an employee lounge for the store’s own workers. “Please donate food items so associates in need can enjoy Thanksgiving dinner,” said a sign placed above several plastic bins. A company spokesperson said that the food drive was for staffers who had undergone hardships and reflected just how much store employees care about each other. The company has previously characterized worker protests as “publicity stunts” and has stood by its hourly pay.
2. Depressed sales
Wal-Mart may be able to brush off its reputation woes, but it will not be able to dismiss its weak sales quite as easily. When the company reported its third-quarter earnings earlier this month, comparable sales were down 0.3% as shoppers made fewer trips to the stores. Those figures continued a downward trend seen earlier this year when same-store sales dipped 0.3% in the second quarter and 1.4% in the first. The lackluster performance forced the retailer to forecast disappointing profits for the upcoming holiday shopping season — it expects flat comparable sales in the U.S. — which its executives have predicted to be “as competitive” as they’ve ever seen it. The main contributor to stores’ poor performance is reluctance by lower-income shoppers to spend money on discretionary goods because of this year’s higher payroll taxes and slow job growth.
3. Making it in the big city
One of the bright spots for Wal-Mart has come from its Neighborhood Markets stores, which are mini, city-based shops outfitted to accommodate express shopping trips and compete with dollar stores. Comparable sales at these smaller stores grew 3.4% in the third quarter of this year. Wal-Mart has 300 small stores now but plans to have 400 by the end of the year, which means that Neighborhood Market openings will outpace new superstores for the first time ever. But determining how to supply the 38,000 square-foot shops — which are a third of the size of Wal-Mart’s supercenters — is still in the air, as is the success such stores will have in different metropolitan areas. Organized labor has opposed Wal-Mart’s efforts to move into major cities because of the company’s history of anti-union tactics. The store recently won the right to open its second and third stores in Chicago after years of lobbying, but politicians and union leaders have long kept the company from entering New York City.
4. Surviving in the Amazon
Wal-Mart has invested heavily in merging its online, offline, and mobile commerce operations, a strategy that encourages customers to use the Wal-Mart app while they’re in the store. The effort has resulted in some success. In the third quarter of this year, online sales increased 40%, and the company expects its e-commerce to total $10 billion, 2.1% of its total sales, by the end of the year. That’s a huge figure, but it represents just how far Wal-Mart has to go to catch its biggest e-commerce competitor, Amazon (AMZN), which brought in $61 billion in net sales last fiscal year.
5. Growth abroad
McMillon’s appointment as Wal-mart CEO is an answer to at least one of the company’s biggest questions: what role it will have internationally. The company’s U.S. market is near saturation, so it makes sense to ramp up overseas operations, but international markets typically offer lower operating margins and returns. Wal-Mart’s international sales rose 4.1% to $34.4 billion in the third quarter, but comparable sales fell in key markets like Mexico and Canada. Wal-Mart has long put a big emphasis on its global growth, but its overseas operations are still small compared to its domestic business: The international division represented 29% of the company’s 2013 fiscal revenue. But by choosing McMillon, who oversaw Wal-Mart’s acquisitions of Massmart in South Africa, Netto in the U.K., and Yihaodian in China, the company has indicated that it will continue to try to tap the international markets as a counter to anemic growth at home.