2. H. LEE SCOTT JR.

Michael Garry

Key development: Defending Wal-Mart amid continued growth.

What's next: More supercenters, RFID and upscale products.

The Wal-Mart Stores juggernaut has not been rolling as smoothly as in years past, but that is not much solace for the supermarket industry.

Despite continuous attacks on its reputation, uneven sales and a stagnant stock price, Wal-Mart has no plans to let up on its relentless expansion -- especially in supercenters, the format that hurts supermarkets the most.

To its current total of more than 1,800 supercenters, Wal-Mart, still based in tiny Bentonville, Ark., will add 250 this year. It has the opportunity to add 4,000 more supercenters in the U.S. and already has 900 approved building projects in the pipeline, said H. Lee Scott Jr., Wal-Mart's 56-year-old president and chief executive officer, and Tom Schoewe, chief financial officer.

"We have not seen the entire story" with regard to the impact of supercenters, said George Whalin, president, Retail Management Consultants, San Marcos, Calif. "I think it will continue to play out over the next 25 years."

Scott, at Wal-Mart's annual shareholders meeting last month, made it clear that Wal-Mart intends to make no change in its core strategy -- to be the No. 1 grocer in the U.S., observed Whalin. While it has achieved that goal in sales volume, it may take another three to four years before its physical presence is as ubiquitous as Kroger's, Whalin added. Meanwhile, the $285 billion company reported record profits of more than $10 billion last year.

Still, this has hardly been a stellar year for Wal-Mart. Its U.S. Wal-Mart Stores division missed its first-quarter earnings; Vice Chairman Thomas Coughlin, No. 3 on SN's 2003 Power 50 list, resigned from the board in March after allegations of misusing company funds; and its stock price and same-store sales have been topped by Target, its archrival.

Perhaps most troubling, the company continues to be subjected to a drumbeat of negative PR, especially for its wages and benefits. Scott, at the annual meeting, called the PR attacks "one of the most sophisticated, most expensive corporate campaigns ever launched against a single company."

To shore up Wal-Mart's reputation, Scott has become an evangelist for Wal-Mart, speaking to the media, civic and business groups around the country about the company's culture, employment practices and corporate citizenship. Scott's outspokenness is "the biggest difference in his behavior this year," said Art Turock, president of Art Turock & Associates, a sales-growth strategist based in Kirkland, Wash. Scott was not available for comment.

The approach taken by Scott and Wal-Mart, Turock said, is to "correct misperceptions with facts" and "use internal audits and controls so problems don't become media fodder."

In a speech Scott presented at Town Hall Los Angeles in February, he outlined Wal-Mart's contributions to California in terms of jobs created, taxes paid and donations made. As for low prices, he said that "in Southern California, it has been estimated that, if given the chance, we'll save the average family nearly $600 a year at the grocery checkout alone."

Regarding wages and benefits, Scott said in his speech that Wal-Mart's average wage, about $10 per hour, is competitive with comparable retailers with one exception -- "a handful of urban markets with unionized grocery workers." He also defended Wal-Mart's health benefits. "Wal-Mart is nothing like the horror story out of Dickens that critics are peddling," Scott said.

Scott, Turock noted, makes the point that as a retailer, Wal-Mart can't afford to pay its employees like companies in other industries like Microsoft or General Motors.

Wal-Mart this year launched its own media campaign, which includes frequent television commercials featuring Wal-Mart employees as well as programs about the company on PBS and CNBC. "Reporters were allowed to see Wal-Mart technology and distribution operation -- they had much more access," Turock said. In April, Scott presided at the company's first organized meeting with journalists.

Scott, who ranks second on SN's Power 50 list for the third consecutive year, became CEO in 2000 after having served as Wal-Mart's chief supply-chain executive. Jack Haedicke, president, Arena Consulting Group, Eden Prairie, Minn., credits him with developing many of the supply-chain efficiencies that have enabled Wal-Mart to compete on such a low-price basis.

Scott helped make that happen by contributing a "hub and spoke" distribution model, among many other innovations, Haedicke said.

According to Haedicke's analysis of Wal-Mart's public financial reports, Wal-Mart's operating expenses as a percentage of revenues come to 16.2%, compared with 25% to 27% reported by traditional food retailers. That, he added, allows Wal-Mart to offer prices that are 12% to 14% less at the shelf.

Wal-Mart has not let up on its focus on supply-chain efficiencies, as evidenced by its ambitious radio frequency identification (RFID) program, which was formally launched in January in the Dallas market. Most of Wal-Mart's top 100 suppliers, along with a number of others, are placing RFID tags on pallets and cases headed for three Wal-Mart distribution centers and 140 stores. Wal-Mart plans to add its next top 200 suppliers to the program -- some are already participating -- by January 2006. The program itself is expected to expand to more DCs and stores this year.

But Scott acknowledged at the annual meeting that Wal-Mart needs to attract more higher-income customers with products like organic food and fashionable household items to compete with the likes of Target. That would represent another shift for Wal-Mart, which has shown the ability to adjust to market conditions under Scott.