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The Man Who’s Reinventing Walmart

June 4, 2015, 12:21 PM UTC

In his more than two-decade career at Walmart (WMT), Doug McMillon has unloaded trucks in a warehouse and helped lead a $2.4 billion acquisition in South Africa. He has been at various times one of the world’s biggest buyers of teen sportswear, Halloween candy, and potpourri. He has discovered and sold off excess apparel inventory stored in an underground bunker. And he’s been a champion for private-label baby formula. Through it all he has rarely, if ever, appeared flummoxed. And never at any point can anyone recall him struggling.

Until, that is, his first day in the office after officially taking charge as CEO of the world’s largest retailer on Feb. 1, 2014. The problem: He wasn’t sure where to sit.

McMillon arrived early on that Tuesday and reported to his new workspace—the same modest, 15-by-17-foot room with cheap wood paneling that has belonged to each chief executive of the company going back to Mr. Sam himself. That’s when McMillon froze up a little. “I couldn’t sit behind the desk,” he says.

So he didn’t. He plopped down on the visitors’ side and began working from there. After a while Mike Duke, his predecessor as CEO and until days earlier his boss, stopped in to check on him. Gesturing across the desk, McMillon said, “I can’t really go over there. I’m expecting you to be there.” He added reverentially, “This is Sam Walton’s office.”

Duke laughed sympathetically and then nodded to the empty chair. “You’ve been appointed by the board of directors to be CEO,” he said. “You’ve got to get on with it.”

Walmart CEO Doug McMillon
Walmart CEO Doug McMillon, photographed in Bentonville, Ark., in AprilPhotograph by Mackenzie Stroh for Fortune
Photograph by Mackenzie Stroh for Fortune

One could forgive McMillon, 48, for being momentarily daunted by the magnitude of the job. He is, after all, just the fourth CEO to lead the company in the years since Walton left the post in 1988. Walmart’s founder is still revered as something close to a deity in Bentonville, Ark., where the company was founded and where its headquarters remain today. A distilled version of one of Walton’s famous quotes—“Save money. Live better.”—is today both Walmart’s slogan and the core of its corporate mission. Other homespun bits of Walton’s wisdom are preserved on signs on the walls of Walmart facilities. His influence lingers in other ways too. The Walton family, one of the wealthiest in the world, owns roughly 50% of Walmart’s stock. Rob Walton, Sam’s eldest son, remains chairman. The three previous chief executives who came after Walton—David Glass, Lee Scott, and Duke—were executive all-stars in their own right, growing Walmart from merely one of America’s biggest retail chains to the colossus it is today. Sitting at Sam’s desk isn’t just any old job.

“Having been here a long time, I think I had the feeling that I knew what responsibility felt like,” says McMillon. “And then you move into the role and you find out there’s a whole ’nother level of it.”

Indeed, running Walmart, the No. 1 company on the Fortune 500 list for the third straight year and for the 11th time overall, is not like managing a regular company. With $485.7 billion in revenue in 2014, Walmart outpaced No. 2 Exxon Mobil (XOM) by a whopping $103 billion. If it were a country, Walmart’s sales would rank it 28th in the world in GDP, just behind Norway and ahead of Austria. The company today has around 11,000 stores in 27 countries and 2.2 million employees—or “associates” as it calls them—making it the world’s largest employer after the U.S. Department of Defense and the Chinese army. The scrutiny is of a comparable scale. Walmart is mentioned 60,000 times per day on social media. If that seems bananas, well, consider bananas, Walmart’s No. 1–selling item: It sells 1 billion pounds of them a year. Everything about Walmart is supersize.

That includes its challenges. With sales approaching half-a-trillion dollars, Walmart is in uncharted growth territory. For the company to grow sales by a pedestrian 3% this year it would need to add $14.5 billion in revenue—more, for example, than either Whole Foods (WFM) or Marriott (MAR) had in total in 2014. The Wall Street consensus, however, is that the retailer will grow sales by less than 1% in 2015. Walmart has slowed the pace of expansion in China, a key growth market. And the company recently suffered through six straight quarters of negative or flat U.S. same-store sales growth—an almost unheard of sign of weakness in Bentonville.

Rank in Fortune 500: 1
Revenues: $485.7 billion
Profits: $16.4 billion
Employees: 2.2 million
Total Return to Shareholders
(2004-2014 Annual Rate):

Over the past five years Walmart’s stock price is up 47%. That’s only half the gain of the S&P 500 and badly trails the returns of retailers from Costco (COST)to Whole Foods to TJX.

Where once Walmart was the ultimate disruptive force in retail, rolling across the land with its army of supercenters, today it finds itself facing fierce competition on every front. Rivals such as Target and Costco have recently posted better-than-expected results. The major grocery store chains such as Kroger (KR) and Safeway have adapted and learned how to compete better on price while outdoing Walmart on “fresh,” drawing in shoppers in search of better produce and prepared food. (For a company that gets 55% of U.S. revenues from grocery sales, that’s a major concern.)

At the same time Walmart has been losing cash-strapped customers to so-called dollar-store chains such as Family Dollar and Dollar General (DG). The combination of a deep recession after the financial crisis in 2008 and elevated gasoline prices in recent years gave those bargain-priced, small-format rivals an opening with customers who couldn’t afford to drive out of their way to supercenters on the edge of town. Over the past decade in the U.S., the total number of dollar stores has jumped 50%, from under 17,000 to more than 25,000.

Then of course there is the rise of (AMZN), No. 29 on the 500 this year, with $89 billion in sales. Over the past three years, a period during which Walmart’s sales grew by a total of 8.6%, revenue at Amazon has nearly doubled—though it has yet to establish itself as a consistent profit-maker. With a market value of $173 billion, Amazon is well on its way to catching up with Walmart’s $265 billion stock valuation.

But the influence of Amazon goes well beyond the raw numbers. The online retailer that Jeff Bezos built has changed the habits and expectations of consumers in ways to which Walmart must adapt—evolving from a “push” model, where merchandisers have a large degree of control, to a “pull” model, where shoppers are more empowered than ever. Says Brian Yarbrough, a retail analyst at Edward Jones in St. Louis: “Amazon and online retailing is probably the biggest disrupter of retail since Walmart itself.”

For all of these reasons Walmart finds itself at a critical juncture in its history—and the company is counting heavily on McMillon’s ability to meet the extraordinary challenges ahead. He is a homegrown talent who was marked for leadership early. And he’s spent his entire career rotating through different roles at Walmart in preparation for this moment, like a can’t-miss prospect working his way up to the Big Leagues. In that sense the company’s directors didn’t so much select McMillon as CEO as anoint him.

“I told the board that I thought that he would be the best CEO since Sam,” says Lee Scott, who succeeded Glass in 2000 and served nine years as Walmart’s chief executive. “I think he’s prepared so much better than we were. And his view of the world, his understanding of the context of Walmart within that world, his age and youth in an environment that’s changing so quickly—all of that I think is going to give him more energy to embrace change rather than try to simply cope with change.”

McMillon has impressed executives outside Walmart as well. Facebook (FB) COO Sheryl Sandberg got to spend time with McMillon last year when he and his executive team visited Facebook, and the two have stayed in touch. She views him as the rare executive who can focus on day-to-day operations while at the same time driving innovation. “Usually when you meet leaders, you get a sense that they’re focused on one or the other: execution of their current business or innovative ways to grow,” says Sandberg. “What’s interesting about spending time with Doug is that he’s clearly on both. His conversations, his questions—he’s on both.”

Employees stock shelves at a Miami Walmart. A minimum-wage hike announced in February will bring a raise to some 500,000 workers.Photgraph by Joe Raedle — Getty Images
Photgraph by Joe Raedle — Getty Images

With so much to accomplish, McMillon has moved with a sense of urgency in his first 16 months on the job. He has put new executives into key roles, accelerated investments in e-commerce, and made news by raising the minimum wage for hundreds of thousands of Walmart workers—the last of these as part of a concerted effort to improve the store experience by empowering frontline associates. McMillon is trying to reinvent his half-century-old company and infuse it with a new, Silicon Valley–esque metabolism.

The difficulty of that task is not lost on the Arkansas-born CEO, a thoughtful type who is as comfortable diving into data as he is chatting with associates. “I think that we are moving faster today than we moved a year ago,” says McMillon. “I can see progress in certain areas. And another way I know is that people are complaining about how fast we’re going. But I think in today’s environment, that pressure needs to be there.” The question is, Can McMillon get Walmart to change fast enough?

On a recent Tuesday evening, I meet McMillon at the site of one of his company’s newest retail experiments: Walmart Pickup-Grocery. Located just a couple of miles from the company’s home office in Bentonville, the “store” opened last September and isn’t really a traditional outlet but rather a mini-warehouse next to a parking lot where shoppers can drive in and collect items they preordered online. First they sign in at a neon-green kiosk with a digital display. They’re assigned one of 33 parking spots, and after a moment a Walmart employee wheels the order out on a dolly and loads it in the back of the customer’s SUV or minivan.

McMillon arrives just before 6 p.m. in his shiny black Jeep Rubicon, a vehicle with macho rims that give it the effect of a mini-Hummer. “I always wanted a Jeep,” he says, professing not to know the exact model. “I just went in last year and told them I wanted an all-black one.” The 6-foot-2 McMillon looks younger than his 48 years, with the slightest hint of gray in his brown hair. He was on his way to his son’s high school soccer game and had changed out of his suit and was wearing a black Bentonville Tigers windbreaker, jeans, and running shoes.

The pickup facility is the only one of its kind in the U.S. for now, but it’s one of many pilot programs Walmart is testing to connect with customers in new ways. The company is also experimenting with pickup of online orders at regular stores in five cities around the country. Another idea is to serve shoppers in busy office complexes by letting them collect preordered groceries at the end of the day from a truck in a nearby parking lot. (Many of these ideas have been imported from Asda, Walmart’s supermarket subsidiary in the U.K.)

The whole point of such experimentation is to challenge the metabolism of the staid retailer and learn to “fail fast” in pursuit of innovation. That’s a new concept in the culture of Walmart, where failure in general had never been an option, much less a desired outcome. “We know there’s a good chance it won’t work, and that’s okay,” McMillon says. “We’ll learn stuff.”

They already have. When Walmart opened the 15,000-square-foot grocery pickup facility, McMillon says his team thought they could staff it with 25 associates and offer 10,000 items, or SKUs. It turns out they’ve had to bump the staff up to 54 people while bringing the SKU number down to 8,000 simply to make sure they can stay in stock. Inside are blue racks stacked with everything from Honey Bunches of Oats cereal to Colgate toothpaste, and there is a large cold room. Still, the selection seems almost Soviet in its scarcity compared with a typical supercenter, which has about 142,000 SKUs.

A Soft Patch for the Super-store

As McMillon tours the warehouse, something catches his eye. He stares at a wall sign with a nugget of Sam Walton’s wisdom: “Focus on something the customer wants, and then deliver it.” McMillon nods his head. “I haven’t seen that one before,” he says. “That’s a good one.” Turning away to walk down the aisle, he volunteers: “Sometimes I wonder if he really said all that stuff.”

When McMillon was 16, his father, a dentist, moved the family from Jonesboro, Ark., in the eastern part of the state, to Bentonville because he saw better growth potential for his new practice in the little town where Sam Walton was building an empire. The McMillons were regular churchgoers. Doug, the eldest of three kids, played sports, especially basketball, and became the point guard on the Bentonville high school team.

He was expected to achieve. “My dad always had very high standards for me, from day one,” he says. Holding his left hand up over his head to demonstrate the high bar, he stretches his right hand to the same height. “And I always had my mom whispering in my ear, ‘You can do this.’ ” His strong sense of competitiveness, McMillon says, comes from her. “Doesn’t matter if it’s Ping-Pong or a board game, she brings it.”

McMillon spent two summers in high school working in Walmart warehouses, mostly because the job paid $6.50 an hour vs. less than $4 at McDonald’s (MCD). The idea of a career in retail hadn’t yet crossed his mind. He attended the University of Arkansas down the road in Fayetteville and worked summers at the Bank of Bentonville. McMillon next enrolled in the MBA program at the University of Tulsa. Before his second year he called a Walmart executive named Bill Fields. McMillon had interviewed with Fields before, and he told him he might be interested in enrolling in the retailer’s buyer-training program after finishing school. Fields told him he could start at Store No. 894 in Tulsa right away. He would be an assistant manager. McMillon pointed out that he had a full course load to manage. “He said, ‘Yeah, I don’t care. It’s a 52-hour workweek. You can do it,’ ” says McMillon. He reported for work soon after.

McMillon loved the job from the moment he started, and his first day was almost too good to be true. His new boss told him he would be a buyer trainee in sporting goods, in charge of fishing tackle, and pointed him to a pile of paperwork to sort through. McMillon had been looking through the stack for a few minutes when he found a yellow Post-it with a handwritten note that read “Walmart Trilene Fishing Line” and a price—and then “Kmart” and a lower price. There was an initial on it. McMillon wasn’t sure what to do, so he walked it over to his boss.

“Do you know who that’s from?!” the manager asked. “That’s from Sam Walton. How long have you had this?” McMillon replied: “I just got here!” They immediately lowered the price on the fishing line to beat Kmart, and got word to Walton.

Mr. Sam and His ShepherdsCEO portraits from Getty Images and MacKenzie Stroh
CEO portraits from Getty Images and MacKenzie Stroh

From that first job in 1990, McMillon began a rapid ascent through the merchandising side of the business. He was a buyer for ladies apparel and crafts and fabrics. He worked with diapers, luggage, and office supplies. And he was viewed early on as a future leader. Eventually he was made CEO of Sam’s Club, Walmart’s members-only warehouse chain. In 2009, when Duke succeeded Scott as CEO of Walmart, McMillon replaced Duke running Walmart’s international operations.

One of McMillon’s strengths is his listening ability. Instagram co-founder and CEO Kevin Systrom joined Walmart’s board last fall. His first meeting with McMillon, during the recruitment process, made a big impression on him. “He’s one of the most intensely friendly people I’ve ever met,” says Systrom. “And intensely friendly in the sense that his focus is on you, like there’s no other thing going on in his mind when he’s talking to you. He’s not distracted. He’s not thinking about a meeting he has next. He’s 100% focused on you.” Systrom says it’s a quality he “hasn’t seen in any other executive [he’s] met in the Valley, nor in business period.”

That focus, combined with McMillon’s long history at Walmart, makes it easy for him to relate to associates at all levels of the company. And McMillon knows that getting outside Bentonville is the best way to receive unvarnished input on what’s really going on. That’s part of the reason he decided to spend one of his first days as CEO riding with a Walmart truck driver in Mississippi.

McMillon traveled to Walmart’s distribution center in Brookhaven, Miss., and got paired up with a 52-year-old driver named Rickey Oliver on a delivery run to a store in Magee, Miss.  The 3½-hour roundtrip gave them plenty of time to talk. Oliver got right to the point, though. “What are your plans as CEO here at Walmart?” he asked almost as soon as they got on the road. McMillon asked him if he was familiar with “He said, ‘That’s what I’m going to work on. We’re going to make No. 1,’ ” recalls Oliver. “And so we talked about that quite a bit.”

Oliver had some feedback to share. He told McMillon that was much harder to navigate than Amazon. When Oliver searched Walmart for baseball gear, the top results were videogames and other stuff, not bats and gloves. Amazon gave him the results he wanted right away. McMillon promised he would work on it, and the driver says he’s kept his word. “I can see getting much, much better than it was,” says Oliver.

After the ride was over, McMillon thanked his new adviser and said he was going to send him a book, journalist Brad Stone’s The Everything Store, about the rise of Amazon. A few days later the book arrived. “And I read it,” says Oliver. “And I sent him my thoughts on it.”

Did McMillon write back? “Oh, yeah,” says Oliver. “When I send him an email he always responds within just a few minutes.”

Mcmillon is in pitch mode. On this sunny afternoon in late February he’s sitting onstage in an auditorium at Stanford’s Graduate School of Business—ground zero for Silicon Valley brainpower. And he’s not going to miss the opportunity to do a little recruiting. When the graduate student interviewing him asks why he has stayed at Walmart for his entire career, McMillon responds that the complexity of running a giant retailer always keeps him engaged.

“The startup thing sounds cool,” he says. “But I haven’t heard of one yet that is more challenging than what we’re trying to do. If you want hard, try to take a 52-year-old business that’s this size and change it. That’s hard.” Providing jobs to more than 2 million people, he adds, makes it important work too. He pauses. “So if you want to work at Walmart, give me a call.”

Walmart, San Bruno, CA
The network operations center, located inside Walmart’s global e-commerce headquarters in San Bruno, Calif., tracks order volume, site traffic, and social media activity in real time around the world.Courtesy of Walmart
Courtesy of Walmart

In recent years the company has worked hard to make that a compelling prospect, investing heavily in both technology and talent. The e-commerce business, which has its headquarters in San Bruno, just south of San Francisco, now employs about 2,500, up from 500 four years ago—what Walmart’s e-commerce CEO Neil Ashe calls building “talent density.” It has constructed one of the world’s largest private clouds—from scratch. Ashe and his team have increased the number of items available for sale on from 1 million three years ago to 7 million today, and the number should exceed 10 million by year’s end. This spring the company is opening four new fulfillment centers around the country, each of which is more than 1 million square feet. And in the most obvious face-off with Amazon, Walmart is preparing to introduce its own version of Prime, Amazon’s free delivery service for premium customers.

McMillon would be the first to tell you that he doesn’t have a digital strategy: He has an “everything” strategy. He wants—make that needs—to combine online speed with Walmart’s billion square feet of store space (a land area twice the size of Manhattan) to let customers shop however they want, whether it’s ordering on their mobile phones for home delivery, through in-store pickup, or by good old-fashioned aisle wandering. The industry buzzword for this is “omnichannel.” And Walmart, not surprisingly, has its sights set on being the megapower of omni-retailers.

To accomplish this goal McMillon knows full well his biggest challenge is as much analog as digital. When he was named CEO, it had been more than a decade since the onetime assistant manager had worked in U.S. stores. He’d spent years first at Sam’s Club and then running Walmart’s international business. When he got the top job, his first task was store immersion. It wasn’t pretty. Items were often out of stock. Produce in the grocery aisles looked decidedly less fresh than at rival chains. McMillon—who keeps a list on his phone of the top 10 retailers for each of the past five decades as a reminder that even the mighty can fall—felt the urgency of the moment.

the Sam's Clob CEO Doug McMillon 2008
McMillon during his time running Sam’s Club, photographed for Fortune in 2008.Brian Smale
Brian Smale

His first big move was to put a New Zealander named Greg Foran in charge of U.S. stores. The intense if soft-spoken Kiwi, who spent three decades with Woolworths in Australia and turns 54 in July, has leaped into the fix-’er-up job with gusto. Foran put into place a crash three-month program he calls “unvarnished appraisal,” in which he solicited no-holds-barred feedback from store managers—he got responses from thousands of them—and drilled down into the metrics of the retailer’s 4,500 U.S. stores. How do customers rate them in key metrics such as clean, fast, friendly, and in stock? (Walmart polls them daily.) What is the cost of labor?

It was clear from the data that Walmart would have to seriously up its game. To get the accountability they wanted, McMillon and Foran reasoned they would have to pay their employees more. In February the CEO said he would raise the minimum wage for associates to $9 an hour this year, and to $10 next year. That was the announcement that made headlines—and pushed rivals Target (TGT) and TJX (TJX) to raise their wages as well. But it was just part of a much broader overhaul. The company is increasing the amount of training for its associates and eliminating so-called zone managers to give more responsibility back to frontline workers.

Foran is impatient to see the results. He has set Oct. 1 as a deadline for every store to show major improvement before the Christmas shopping season heats up—even coming up with a corny catchphrase to drive it home: “10-4 for 10/1.” Signs with the slogan recently appeared around Walmart’s headquarters, with digital clocks counting down to midnight on Sept. 30.

As massive and tech-oriented as the company’s challenges are today, there is something about the current efforts to tear through bureaucracy that feels very much like classic Walmart. A question that has caught on of late with McMillon’s senior managers is, “Who owns the D?” Who is taking ownership of a decision? It’s the 2015 equivalent of a yellow Post-it from Mr. Sam, a reminder that someone needs to take responsibility for making things better for customers.

For the guy who now owns the D at the biggest company in history, McMillon seems awfully relaxed as he watches his younger son, a senior in high school, play left wing for the Bentonville Tigers soccer team. He barely reacts when the young man gets a yellow card for an aggressive challenge. (Indeed, McMillon predicts it: “You’re going to get a card on that one,” he says quietly to no one in particular before the referee reacts.) The CEO even seems at ease when he broaches a touchy topic.

How much of a headwind, he asks me, is Walmart’s fraught reputation?—but then begins to answer it on his own. “For us, the company we know is different from the way some perceive it, and it’s frustrating,” he says. “Some shoppers read that we don’t treat our people well or whatever. And I wonder sometimes just how much time we should be spending on that. It’s clearly important. What people think about the company is important.”

Walmart CEO Doug McMillon 1993
McMillon is featured in Walmart World, an internal magazine for associates, in May 1993.Courtesy of Walmart
Courtesy of Walmart

But if Walmart’s gargantuan size makes it hard to move the needle on growth, its established place in the public’s mind makes it equally difficult to rewrite its reputation. Walmart won kudos for its wage announcement, but soon critics were suggesting that it would cut hours to make up the difference and pointing out McMillon’s substantial pay package. (He made $19.4 million last year, according to a 2015 proxy filing.)

Two months later Walmart closed five stores for what it said were plumbing problems, furloughing more than 2,000 workers. Many media outlets, however, seized on a different story line: highlighting claims that the Bentonville retailer had shuttered the venues as retribution because one of the stores had been the site of a worker strike against the famously anti-union company. Says McMillon: “Temporarily closed. Five stores. All with more than 100 plumbing incidents in a relatively short period of time. And it’s this big of a story? Really?”

McMillon acknowledges that he “probably can’t” reverse the narrative with everyone. “But I think we can do things—not say things—that can make the narrative less believable,” he adds. That includes the company’s campaign, announced in late May, to press its meat and dairy suppliers to curtail the use of antibiotics in farm animals.

Scott, who spent nine years as CEO dealing with the same reputational challenge, agrees that actions matter more than words. “If you have a dirty store, a store that’s out of stock, an associate encounter with a customer that is not friendly and not helpful, then all of the things said about you become very believable,” he says. “But if your store is friendly, well stocked, the associates greet you, and the cashier thanks you, then the criticisms do not really resonate with the customer.”

For McMillon that wisdom boils down to three little words: “Run great stores.” That’s what he was chosen to do. 

Four Steps to a Reinvention

CEO Doug McMillon’s plan to remake a retail pioneer

  1. Go “Walmart-size” on e-commerce: Build one of the world’s biggest private clouds. (Check.) Now, compete with Amazon on its own turf. (In progress.)
  2. Think “omnichannel:” Make it easy for customers to buy anywhere, anyhow—and get their purchases anywhere, anyhow.
  3. Rev your metabolism to startup mode: Experiment, experiment, experiment; invade Silicon Valley for fresh talent.
  4. Bring back Mr. Sam: Well, his spirit, anyway. Give local managers more autonomy to make stores sparkle—and hold them accountable.

A version of this article appears in the June 15, 2015 issue of Fortune magazine with the headline ‘The Chosen One.’