Walmart Data May Have Been Stolen…Again

2013 Report Found that Company Shares Data with More than 50 Third-Parties

Walmart customers may have had their credit card data stolen by hackers, according to recent news reports. The data was stolen from a third-party, PNI Digital Media, which reportedly operates some of Walmart’s online photo processing store.  Although Walmart has not disclosed the number of customers impacted by the breach, the company did take the step of temporarily closing some of Walmart Canada’s online photo site.

Data breaches are familiar territory for Walmart, which is working hard to catch up with competitor Amazon. The company experienced breaches of data multiple times over the years.

In Walmart’s case, this news of a new breach is particularly unsurprising, given that a 2013 study by the Center for Media Justice, ColorOfChange.org and SumOfUs found that Walmart shares consumer data with more than 50 different third parties.

The report, “Consumers, Big Data, and Online Tracking in the Retail Industry,” found that Walmart invades the online privacy of its consumers easily, secretly, and without accountability. In fact, the report found that Walmart could have the personal data of more than 145 million Americans and that the fact that company shares data with so many third parties is largely obscured by the company’s 4,500-word privacy policy.

In their story on the recent breach, the New York Times interviewed a security expert who emphasized that these third-party vendors can often put consumer data at risk:

Adam Levin, founder of the security firm IDT911, said the breaches highlighted the importance of more rigorously vetting I.T. vendors at a time when companies outsource more and more of their technology operations. Vendors have often proved to be the weakest link, he said.

The 2013 report also found that Walmart’s massive data collection held the potential for systematic data-driven discrimination by the company.    The groups called on Walmart to:

  • Be transparent. –
    • Explain, in a clear and accessible fashion, how Walmart and their many third party partners are using the consumer information they collect.
    • Implement common sense limits to the company’s ability to profile users, similar to many of those recently adopted by the European Union Parliament.
  • Give us choices.
    • Give users the right to have their data deleted and allow consumers to comprehensively “opt-out” of future online tracking. This includes honoring Do Not Track signals.
  • Be fair.
    • Explain how the company’s use of predictive intelligence shapes marketing and other business practices, and what safeguards are in place to ensure that it does not result in digital redlining or other forms of discrimination.

The newest data breach suggests Walmart has a long way to go protecting consumer privacy.

Doug McMillon’s Dilemma: Clay Christensen or Peter Drucker?

Already, Doug McMillon has had moments of decisive leadership, including the speedy elimination of the Rube Goldberg-esque “tethering” concept, and allowing the Express and Supermercado concepts to go gentle into that retail format night. But as McMillon continues to define the course of WMT’s future, a looming question is whether he can revive this maturing company’s prospects by placing all of his emphasis on channel-shifting the big-box business model toward e-commerce, smaller formats and other “innovative” strategies.

At the October 15 analysts’ meeting, McMillon referred to Clayton Christensen, author of the Innovator’s Dilemma, as he talked about the need to protect WMT’s new initiatives from the legacy business. While there is a lively debate about the merit of Christensen’s work (see here and here), we suggest that a more pressing concern for WMT is the need to repair the company’s badly broken store operations and internal culture. It would be a stretch to suggest that worker advocates admired Sam Walton’s labor practices, but most would acknowledge the simple fact that Mr. Sam created a cohesive and effective organizational culture appealing to the Christian values of WMT associates, through servant leadership, as well as to their material interests, through profit sharing. But the draconian staffing cuts have undermined associates’ ability to be effective servant leaders, and the elimination of profit sharing in 2010 marked a decisive end to the era of organizational alignment at WMT. This explains why some of the company’s worst critics today are long-time employees.

As the noted management consultant Peter Drucker reportedly remarked, “Culture eats strategy for breakfast.” The ill-will in WMT’s internal culture will likely “disrupt” any strategy—innovative or otherwise—Doug McMillon might seek to implement, and he would do well to put down his copy of Innovator’s Dilemma and listen to what his employees are saying.

In order to fix WMT’s culture McMillon should move quickly to change the bonus structure for WMT store managers, which inevitably results in the excessive cutting of labor costs. Bonuses can make up a significant portion of total pay for store managers, and are currently awarded based on the following formula: 40% based on store operating profit, 40% based on store sales and 20% based on market operating profit. Why does this formula lead managers to cut labor costs? Store sales are extremely difficult for store managers to influence, particularly in the short term. In contrast, store operating profit can be directly boosted by cutting costs, and the largest controllable cost in retail is labor. This dynamic is compounded by the fact that, as MIT professor Zeynep Ton has shown, “the financial benefits of cutting employees are direct, immediate, and easy to measure, whereas the less-desirable effects [lost sales] are indirect, long term, and difficult to measure.”

And while we are talking about culture it should be emphasized that there has been a double standard at work over the past several years when it comes to executive and manager bonuses on the one hand, and associate bonuses on the other: store associates are judged on same store sales at their store (40%), profit at their store (40%), inventory turnover at their store (10%) and customer experience scores at their store (10%). In 2010, the same store sales metric was removed from the bonus structure of WMT executives, but not from associate bonus structure, just as same store sales was turning negative (see here); in 2013 as inventory levels became an obstacle to improving inventory turnover that metric was eliminated from store manager bonuses, but not from associate bonuses; and also in 2013 sales and profits were “adjusted up” for the calculation of executives’ bonuses due to the negative impact of cuts to food stamps, yet associates bonuses received no such upward adjustment. The challenge, to paraphrase Susan Chambers, WMT’s infamous EVP for People, is to craft compensation and performance measures that create a culture of “one for all and all for one.”

NYT: Leaked Memo Indicates Continued Understaffing

Even if CEO Doug McMillon is sincere in his stated goal of adding staffing hours and investing in wages, changing the actual hiring, scheduling and operating practices throughout a chain as large as Wal-Mart will be a significant challenge. That’s why the recent report in the New York Times indicating that the company is still cutting labor costs is so concerning as it appears to show that WMT US managers are still being instructed to find ways to reduce labor hours in the stores, not increase them. If the Times’ report is accurate, the internal WMT memo includes supervisorial directives telling managers to verify that labor intensive tasks (such as rotating milk and eggs as they approach expiration dates) are being done frequently, alongside references to reductions in labor—all without any apparent mention of the need to ensure that wages or labor hours are sufficient to improve customer service. Also a concern, we note that some of the language today suggested company officials may be backing away from last month’s comments on adding hours and labor budgets, and have returned to discussing “wage leverage” as a goal, while seeking to avoid “overextending” it.

As an aside, given the apparently significant problems identified in the internal WMT memo with the apparently large scale spoilage and waste of perishables it is ironic that WMT officials continue to spend a significant amount of time congratulating themselves on the supposed sustainability in the area of food supply chain efficiency, including the touting of the goal to “create zero waste.” If WMT officials including Doug McMillon are sincere about these sustainability goals then embracing a different labor model will help bring the company closer to achieving them.

As investors seek to parse these mixed signals on the labor front, it is important to remember how we got here. For over four years, WMT associates have been pointing to significant reductions in staffing and based on extensive interviews with scores of current and former managers and associates, as well as analysis of company financial data, we published two investor white papers (here and here) directly connecting labor reductions to operational problems including out-of-stocks, inventory lapses, declining customer service scores and weak same store sales.

A core element of this critique is our analysis of the staffing cuts at Wal-Mart over the past several years. This chart updates the headcount reduction data in the white papers through Jan. 31, 2014, the most recent period for which data is available, and indicates just how understaffed the company is:

graph 2 for wmts

(Graph Source: company data)

 

The First Step to Recovery?

For at least four years WMT workers have pointed to reduced staffing levels and connected those reductions to operational problems including out-of-stocks, long lines at checkout and deteriorating customer service. In response, WMT officials repeatedly denied that problems existed: company spokespeople said having store greeters “wasn’t necessary”; that in-stock levels were “up significantly”; and that the stores were “fully staffed.” But a recent shift in tone by the company has marked an apparent break from the denial of the past, and executives have now come clean: understaffing has had a significant impact on customer service and store operations.

With this morning’s earnings release WMT CEO Doug McMillon said the company was committed to investing in wages to improve customer service. This new approach first became clear during the 2Q15 earnings release call on Aug. 14, 2014 when CEO Doug McMillon said, “We’ll keep working during the back half of this year to get the combination of price investments and store associate hours right to deliver improved comp sales and serve our customers in a way that exceeds their expectations.”

On the same 2Q15 pre-recorded call US CEO Greg Foran elaborated further: “During the quarter, we also allocated additional associate hours to specific areas of the store, such as front end, deli, bakery, and overnight stocking to improve overall customer service.”

At the October 15 analyst meeting CEO Doug McMillon, in his prepared remarks, added out-of-stocks and check-out lines to the list of problems associated with lack of labor hours in the store:

“[T]here are places where we need to put more hours in the store and there are places where we need to make price investments… we have room to improve on in-stock on the shelf. We have room to improve on our check-outs.”

During the Q&A period at the same meeting, in response to a question about whether or not analysts should expect further “leverage” from WMT’s brick and mortar stores (a euphemism for cost cutting) McMillon made the break from the past even more explicit: “And Wal-Mart US in particular, my focus is not on leverage. I think we’ve got to make sure that we make investments necessary in wages, in other areas to get it right, that’ll enable us to be successful over time.”

These comments were greeted positively by analysts, some of whom had raised concerns about staffing levels numerous times over the past several years. Citing the low labor levels among other challenges, Wolfe Research’s Scott Mushkin wrotewe believe it is generally a positive that the company realizes it needs to alter its current course.”

WMT 3Q 2015: Lowered Guidance, a Leaked Memo and Doug McMillon’s Dilemma

WMT US reported positive same store sales for the first time in seven quarters, as consumers benefited from lower gas prices, but customer traffic fell -0.7%, the eighth consecutive quarter in a row with fewer customers, as price inflation contributed to positive comp sales

For the second quarter in a row the company lowered its earnings forecast for the full year Inventories at WMT US grew faster than sales for the ninth consecutive quarter

Consolidated net income fell 0.4% but the company reported EPS of $1.15 per share, a penny above last year due to lower share count; EPS was helped by a significantly lower reported tax rate; ROI fell due to the decline in operating income

Mixed signals as executives cite investment in wages, but reintroduce talk of “wage leverage”

graph 1 for wmts

 

This morning WMT reported earnings and sales slightly ahead of investors’ expectations, which had been significantly lowered over the last several months. The stock was up approximately 2% in pre-market trading. Profit fell despite a boost from a significantly lower estimated tax rate, the company said, due to “certain discrete tax matters.” A bright spot for the company was a return to positive same store sales in the WMT US division, after nearly two years during which comp sales had failed to grow. Going forward the real challenge will be to return to positive customer traffic, which has been negative for the past two years. The current quarter, which includes the critical holiday season, will be an important test for the company, particularly given the company’s apparent willingness to allow its price advantage to decline or even disappear in some markets.

WMT 2Q 2015: Lowered Guidance and 3 questions for Greg Foran

Last week, WMT’s full year guidance was ratcheted even lower than analysts’ already bleak expectations. Over the past three months the stock had fallen by nearly 6% (vs. a 3% increase in the overall market during the same period). In prerecorded remarks incoming WMT US CEO Greg Foran said “Walmart U.S. is a great business, with a deep and rich heritage in serving our customers with a smile, in clean, tidy, well-merchandised stores, with terrific low prices and value. A cornerstone of our success has been our wonderful associates, from our stores to our DCs, our Home Office and e-commerce facilities. They still are.”

He added “We will deliver against these key customer requirements: being in stock, clean stores, the right price, the right items, improved service, better productivity. I will be out in stores hearing directly from our customers and our associates and tracking our performance.”
Foran was right to focus on associates in his first public role as US CEO, and he clearly perceives that the company’s US workers are at the center of a major strategic challenge that involves operations, culture and reputation. We believe many US associates would welcome the opportunity to describe the problems they are facing in the stores, and we hope this well-timed overture goes beyond the one-on-one “open door” policy which has come to represent an empty promise for associates across the US.
Mr. Foran, in an effort to begin this dialogue we respectfully offer you three questions:
1. It’s clear you and Doug McMillon want to accelerate the small format and ecommerce strategies, but are you also ready to make the investments in labor required to give those strategies a chance to succeed?
2. We welcome your fresh perspective, not just on strategy, but on company culture as well. There is widespread concern about fairness and respect at WMT. For example, when executives’ bonuses are insulated from the effects of SNAP reductions while hourly associates’ bonuses are not, the message is clear: we are not all in this together. Will you commit to fixing this culture?
3. WMT’s reputation has been damaged by its labor practices and this in turn has made it harder for the company to expand into profitable urban markets in the US. Are you ready to adopt a more collaborative approach?

Thinking Small

Over the past several months, WMT officials have clearly articulated a desire to ramp up investments in ecommerce and small format stores, but critics have pointed out that these initiatives represent a different business model than that of the supercenter, as well as significant new capital expenditures, and even defenders of the strategy acknowledge it is primarily a defensive one. In response, WMT officials have sought to emphasize the ways the new investments will leverage the company’s existing big box base—initiatives such as “site to store” (allowing customers to pick up website purchases at brick and mortar stores) and “tethering” (using supercenter backrooms as secondary distribution centers to supply new small format stores nearby).

But recent downgrades by Goldman Sachs and Jefferies raised doubts about these initiatives, citing the company’s focus “on growth and investment rather than returns” (Goldman) and arguing the “lower initial ROI from [small] formats during the early years of maturity are likely to be a headwind” (Jefferies).

Goldman suggested bluntly that “the jury is still out” on the company’s tethering concept. And rightly so: as many WMT associates can attest, supercenter backrooms are sometimes so chaotic they are hardly able to supply the supercenters they are connected to, much less an “ecosystem” of nearby smaller stores. (Apologies if we have this wrong, but we thought that Sam Walton built the largest retailer in the world by eliminating intermediate distribution points, not adding them.)

WMT ROI Continues to Decline

Meanwhile the market share impacts of Neighborhood Market are unclear at best. While WMT officials continue to tout strong same store sales gains at the smaller format, last month BMO Capital released a report suggesting that the Neighborhood Market format may not be as effective as WMT officials have suggested. BMO found that WMT lost market share in roughly one-third of markets where it operates the format, including four of the top ten markets. The four markets called out by BMO were Dallas-Ft. Worth, Phoenix, Las Vegas and Houston. Our own examination of Metro Market Studies data confirms these trends. The case of Dallas-Ft. Worth should be particularly troubling for WMT. Between 2010 and 2014 WMT’s market share fell from 27.3% to 27.1%. This 0.2% market share decline might appear relatively small, until one considers that the company increased the number of Neighborhood Markets from 22 to 32, and the number of supercenters from 71 to 73, during this time period.
Note well: this market share analysis pertains to grocery sales only, a segment in which the company claims it is actually gaining market share nationally. (In contrast, WMT’s overall market share, including general merchandise, has been falling since 2010.)
The obvious concern is that the new Neighborhood Markets may be cannibalizing existing WMT supercenters. Thus, the investment in new Neighborhood Markets may appear to be sound on a store level basis however when the cannibalization effect is considered the market-level ROI reduction may offset any gains.

Instead of expanding in markets where WMT already has significant market share, a much more compelling case can be made for growth in a number of urban markets where the company has little to no presence. As one analyst recently noted, in four large population states (New York, New Jersey, Massachusetts and California) the number of WMT stores per person is about half the national average for the company. “Walmart has to go where the people are,” wrote the analyst, “and those states, especially their large metropolitan areas, have not been warm and friendly to Walmart.”

Putting the ‘Heat’ on US Manufacturing

Today WMT officials are hosting a “US Manufacturing Summit,” cast as an effort to jump start domestic sourcing, but this is not the first such effort. WMT’s first “Buy American” campaign was launched in the late 1980s, and also promised to boost US manufacturing jobs. While the overall effect on jobs was unclear (WMT shifted production some items such as shirts to US manufacturers while simultaneously increasing imports from China and other low wage export platforms) the program was widely considered a PR success. But WMT’s “Buy American” campaign had another goal as well. As one then Wal-Mart board member told Wall Street Journal reporter Bob Ortega, one of the main objectives of the campaign “was to put the heat on American manufacturers to lower their prices.”
One consequence of this “heat,” according to one WMT vendor who spoke with Discount Store News, was that companies like his were “no longer manufacturers,” and had merely become sources who “produce only the products that Wal-Mart has decided it wants to sell, which in turn makes R&D and introduction of new products redundant and unprofitable.”
When even those prices weren’t low enough, some suppliers, now completely dependent on WMT for their markets, were told to move offshore. As Professor Gary Gereffi at Duke University observed in 2004: “Wal-Mart is able to transfer whole U.S. industries to overseas economies.”
How many jobs were affected? According to a report by the Economic Policy Institute, Wal-Mart’s imports from China had reached $27 billion by 2006, and Wal-Mart’s imports alone accounted for 11% of the growth of the US trade deficit with China between 2001 and 2006. EPI estimates WMT was responsible for the loss of an estimated 200,000 US manufacturing jobs.
What about Wal-Mart’s 2014 “Made in the USA” campaign? If WMT’s earlier foray into US manufacturing resulted in tragedy for thousands of US workers, the current edition resembles something closer to farce.
To illustrate its “commitment to American renewal” Wal-Mart has identified a handful of suppliers it says are part of an effort to grow US manufacturing jobs. One of the examples most often profiled in recent press accounts is that of Element Electronics Corp., a producer of flat screen TVs in Michigan and South Carolina. One report called Element “the campaign’s biggest surprise to date,” touting the supplier’s “six assembly lines making 32- and 40-inch TVs that are now available in all of Walmart’s more than 4,000 U.S. stores.”
But, as a subsequent Wall Street Journal report noted, the real surprise may be the one that awaits unsuspecting US consumers:
“WINNSBORO, S.C.—Every flat-screen television set that rolls off conveyor belts here goes in to a box marked “Assembled in the USA” before it ships to Wal-Mart customers. What might surprise buyers is how little those TVs change after arriving from China in the same boxes.”
5
The Journal describes how Element’s US workers merely unbox the TVs, insert Chinese-made memory boards, then test them before replacing them in their patriotic cardboard cubes. Element would like to do more assembly in the US, but, as Professor Gereffi noted ten years ago, the necessary supply chains were moved offshore years ago, often at the behest of a large Arkansas based buyer.
It’s not surprising then that WMT’s actual “commitment” amounts to zero: the company’s press releases announce an additional $250 billion in domestic purchases over the next ten years, but that is actually slightly less than what WMT was already on track to purchase, assuming WMT US and Sam’s Club’s sales and cost of goods sold simply continue to grow at the rate they have over the past three years (2.9%).
Meanwhile, as it has in the past, WMT continues to lobby in favor of “free trade” legislation including the secretive Trans-Pacific Partnership and “fast track” authority for trade bills. We eagerly await any indication the company is considering reversing these positions as part of its commitment to US jobs.

Giving Low Wage Consumers a Raise

There is a widespread attribution of WMT’s woes to the state of the low-income consumer—continued high unemployment, nonexistent wage growth, cuts to food stamp benefits. But here we see a tension inherent in WMT’s business model. As the largest employer in the country, with a labor policy based on notoriously low wages and benefits, and the increased use of temporary employees, WMT has driven standards down in the service sector labor market. These effects are felt most acutely in the local labor markets where WMT also has the largest market shares among low income consumers. As economic geographer David Harvey wryly observed, “Impoverished workers do not constitute a vibrant market.”

But as the national momentum continues to build for a raise in the minimum wage—due in no small part to the energy and courage of low wage workers, including WMT associates, who have been standing up for themselves—the debate about WMT’s ability to pay higher wages continues to rage. One foolish analyst recently argued higher wages were impossible, writing that “Wal-Mart’s model is not designed to pay higher wages. Thus, shareholders will suffer if wages rise.”
This analyst dismissed the example of Costco’s better paid, higher productivity workforce as an exception that is irrelevant to WMT. As many before have done, this analyst points to WMT’s larger assortment compared to Costco, stating “this will always require more labor than running discount warehouse stores.”

Consistent with the rhetorical traditions of the anti-living-wage genre, the foolish analyst studiously avoided comparing Costco’s performance to that of Sam’s Club, a discount warehouse chain that looks remarkably similar to Costco (and is owned and operated by WMT). Like Costco, Sam’s has a limited assortment of SKUs and caters to a members only, significantly higher income customer base than WMT supercenters. But while Sam’s Club workers receive pay that is comparable to other WMT associates, Costco employees make significantly more. Yet Costco’s investment in its workforce pays for itself, as the superior sales and operating statistics make clear.

Net Sales per Sq. Ft.

(Source: UFCW analysis of company filings. Sam’s Club data for each period represents annual data for the fiscal year ending in the January following the year identified. For example, 2013 data represents the period ending 1/31/14; Costco data for each period represents annual data for the fiscal year ending in August or September of the year identified.)

Why is the Costco comparison important? Because there are essentially two competing explanations for why WMT’s wages are so low: first, as WMT’s critics argue, the company has a deeply ingrained cost-cutting philosophy that blinds executives to the longer term opportunities missed by failing to invest in workers and increase their productivity. The alternative explanation is that high wages are simply incompatible with WMT’s business model—the company would pay workers more, its defenders imply, if it was financially viable to do so. The importance, therefore, of the Costco vs. Sam’s comparison is that it provides a natural experiment: what would WMT executives do if given the chance to operate a business model (discount warehouse clubs) which both critics and defenders of the company acknowledge to be consistent with a high-wage/high-productivity labor model? The answer, unfortunately for Sam’s associates and for WMT shareholders, is hypothesis number one: the company pays the same low wages at both WMT US and Sam’s Club stores.

In fact this conclusion is consistent with empirical research on the retail sector, which shows that a variety of formats, not just low SKU warehouse clubs, can implement high road labor strategies—but it isn’t just academic speculation. Any honest assessment of the operational problems at WMT stores will identify significant losses associated with a chronic underinvestment in labor—out of stock shelves, long lines at checkout, and chaotic backrooms are clearly hurting sales.

Frontline associates—members of OUR Walmart—have been raising these concerns publicly for over 3 years (see our reports here and here), and we are heartened to see mainstream analysts echoing these concerns in recent months. Earlier this year outgoing US CEO Bill Simon gave lip service to the need to add more labor to the store, and this morning his replacement Mr. Foran said the company had in fact added hours, but WMT associates have yet to report any noticeable change in staffing levels. But don’t just take the workers’ word for it. In June analysts at the highly respected Cleveland Research observed that any labor investments were “highly selective to almost non-existent,” and stated that this was the “biggest problem by far” the company faces in keeping its shelves stocked.

Reputation Matters

A recent survey by Lake Research Partners provides some insight into this opposition: a large segment of the public has a negative perception of WMT, and many view the company as treating its workers badly. Among the 27% of consumers who rarely or never shop at WMT, over one-third (36%) cited “poor treatment of workers” as a reason. Even among WMT’s most loyal shoppers, those who shop there weekly, 9% say they have been shopping there less, and among those 25% cite “poor treatment of workers” as a reason.

More broadly, a majority of consumers see WMT’s labor policies as emblematic of what’s wrong with the economy. According to Lake, “By a 56% to 17% margin, consumers agree with the statement ‘Walmart is a real example of what’s wrong with our economy—the CEO is making millions and the workers are making minimum wage with poor benefits.’”

WMT's Bad Reputation

Source: Lake Research Partners