Thank you, Jonathan. Cole Peterson, thank you. I understand you’re the reason that I’m here. Cole and I live in the same area. In fact, I live about a 7 iron from Cole, 4 iron for Cole, and haven’t seen you at home in six months. It’s nice to see you here. It’s nice for me to come to Chicago.
Quite honestly, my first job out of college was in Joliet, Illinois--the garden spot of Illinois--and I’ll never forget when I came to Chicago the first time to interview for my job. I was married and we had a small child. I flew into O’Hare. First, let me tell you I come from a town that has three stoplights. I flew into O’Hare and I was met by a man named Gary Denning with Yellow Freight System. Gary said, “I’ve got a problem in Elgin. You’ll have to rent a car and drive to Joliet.” The problem was that I didn’t have enough money to rent a car, so I had to tell Mr. Denning that he needed to rent a car for me, which he did. I then had to tell him I needed to borrow the money for the tolls, which I understood from him that I would have, because he said go to the first toll. I said that’s going to be a problem. I got to the first toll and put the money in--this is February of 1972--I gave the money to him. The window, which rolled down well, did not roll up and did not roll up again the two days in February that I spent in Chicago.
So, it’s interesting to come to Chicago this morning as the CEO of Wal-Mart and ride up on an airplane and land at Midway. I will tell you though that, good thing being Wal-Mart, the plane was 20 years old and there’s no bathroom on it.
Jonathan, I do want to thank you for hosting Wal-Mart. I want to thank this organization for the forum that it provides for people such as myself. The job you do in educating and keeping the business community of Chicago abreast. Congratulations to all of you who are just named to the Board. Sounds to me like the people who run this organization will keep you well in line, so being a large board won’t be a problem.
You know, these kinds of forums are very important for companies and for companies like Wal-Mart, because, as you might know, once in a while Wal-Mart is in the news. As the world’s largest company we’ve found that you can’t hide in Bentonville, Arkansas, and that what we do is going to be newsworthy even if we think it is or not. While we’re open to constructive criticism I will tell you that we are not open to inaccurate or unfair criticism. We have taken a strong stand in the last few months to make sure that we’re getting our story out there and that we are defining our company and others are not doing that. We are taking the criticism that we receive though and we’re making sure that if it’s correct, we respond to it, because one of the things that can happen when you get under attack is that you actually can close up. We call it at home, being very sophisticated, that you pull out the sandbags and the machine guns. Then everybody who criticizes you all of a sudden is somehow evil or wrong or has bad intentions about Wal-Mart. That’s one of the first things we had to overcome was to understand that there are good-hearted people who want Wal-Mart to be a better company who are going to criticize us and we had better listen to them.
As a large company we found that leaders drive news. It was interesting as I was going through the press clippings in the Chicago area how connected our company, Wal-Mart Stores, is to two of the key issues that are faced by the City of Chicago. The first being the desire for economic growth and stimulation particularly in the areas of the city that most need economic development. Secondly, it’s the responsibility of the city and industry to provide jobs for young people and others who are looking for an entry point into this great economy that all of us participate in.
I see Wal-Mart as one of the solutions to both of those problems. In that light let me share with you just some of the reasons that I believe this. This year, Wal-Mart stores will open 350 new stores in the United States alone. That represents 100,000 jobs in 2005. More importantly, though, it represents 100,000 career opportunities. The last couple of decades, as we all know, good jobs have moved out of many inner cities and the results have been devastating in some areas. Neighborhoods need services if they’re going to thrive. People don’t want to travel far from their home to buy the basics of life. In fact, I think retail in general and Wal-Mart in particular can play a significant leadership role in the redevelopment of neighborhoods and communities, especially those in transition.
We expect that the new store we are building here in Chicago--and, yes, in case you’ve been out of town, we did get approval to build one new store in Chicago. We believe that it will, in fact, be an important part of the revitalization of that area. The site was a former Unilever plant. We’re proud that instead of that closed factory we will be bringing good jobs and we’ll be bringing good products to the residents in that area. We went by that site this morning and noticed that the building is almost all gone. We’ll be starting construction--I think we hope to open that building--we have our contractor here, which I’ll mention in a moment, Margaret--I think we hope to have that building open by winter of 2006? Yes. Now in Arkansas, winter starts in late November. When does winter start here? [Laughter] I want to get that defined. But that store alone, I think, Margaret, has already created over 200 jobs for the demolition, and you’ll also be doing the construction. Margaret Garner is a local Chicagoan. The people that we’re employing to do this are local. It’s another contribution to this community. Alderman Mitts, it would be inappropriate for me not to say thank you to you for your leadership. There’s just nothing like a great Arkansas woman who’s transplanted to Chicago. [Laughter and applause]
Our Chicago area associates work in our stores in the suburbs at an average rate of pay of about $10.69 an hour. I just want to make sure that you understand. If I need to remind you that minimum wage is $5.15, I can do that also. They not only work at that average wage but they also have opportunities to receive health insurance, profit sharing, 401k, stock savings plans, dental plans, life insurance plans, and discounts on already inexpensive merchandise. These associates also find jobs though that provide unlimited opportunity in careers. We believe in promoting people from within. Seventy-six percent of the managers at store level at Wal-Mart started as hourly associates. We have a bunch of our district managers over here. I would assume that some of you started as hourly associates? Hold your hand up--don’t just nod. So there’s three of them. Do you guys dress that well all the time? [Laughter]
It’s one of the great stories about Wal-Mart. Because if you have grown up in an area that’s in transition and all you can get is a job, that’s one thing. But if you can get a job that has a future and has a career, I think that’s a whole different subject and it’s something that we are extraordinarily proud of. Our corporate offices are, in fact, full of people who started pushing carts at Wal-Mart or ringing up cash registers. Today, they’re running entire divisions in our company.
When this Wal-Mart store gets located here in Chicago, it will be a local store. It will contribute sales tax to the local community; it will contribute back to the community in charitable causes. In fact, last year in the Chicago area suburbs Wal-Mart contributed $2 million to local charities and community groups including Chicago Boys & Girls Clubs, the Minority Business Development Council, the Wiley White Foundation, After School Matters and others. Many of you know today that the suburbs are in fact getting the tax revenue that belongs within the city itself. To give you an example, I understand the Chicago Transit Authority is struggling financially and that much of the money they receive comes from the sales tax revenue within the city. In fact, it says that the tax revenue generated in Cook County accounts for 48% of the CTA’s operating fund for about $441 million this past year. This new Wal-Mart store will help that enterprise, because those sales tax dollars will stay in Chicago.
We have pretty good systems, information systems, and we can track--based upon people’s credit cards and those kinds of things, not by individual but by location--that this past year $526.3 million was spent by people from Chicago shopping in the suburbs in the Wal-Mart stores. Of course the most important beneficiary of this store is our customer. It’s the customer who lives in that neighborhood who most needs to save money on the daily necessities of life, not the glamour products maybe, but on paper towels, on a set of sheets. We were in Bedford Park this morning touring the store. The number one selling item in Bedford Park in the domestic department is a towel that is $1.57. It’s not a glamorous item but I want to tell you for the people who shop in that store, having the ability to buy a towel that their family can use that they can afford for $1.57 is important. That is what we, in fact, are going to be able to bring, thanks to Alderman Mitts and others.
Illinois is a state that we’ve been in for over 25 years. When I came to the company I think we had just purchased the More Value chain in Southern Illinois. We have over 150 locations in Illinois. We have 43,000 associates employed in the State of Illinois. That’s a big number. But it’s bigger than that, because if you think about it, this past year Wal-Mart spent $12 billion with companies from Illinois--$12 billion. For many of those companies we not only do business with them in the U.S., but we also then introduce them and provide them the opportunity to do business internationally. One example is John Sanfilippo. People at the table are shaking their heads because I struggled with that earlier. In Arkansas, rarely do you have people with over two syllables in the name. [Laughter] Normally, it’s Joe-Bob and something like that. John and his company in Elk Grove Village make peanuts, great value peanuts. It’s a private label brand at the Wal-Mart stores. It is a great product and the price is unbelievable. I recommend it to you. We helped him introduce his products into the Wal-Mart stores in Japan, Korea and Argentina, where we also have stores, creating export jobs for an Illinois company.
If you read the paper though, not necessarily the papers here in this town, you might believe that everything Wal-Mart sells comes from China. Last year, we imported, we think, about $18 billion in goods from China. Now people may say, whoa, that’s a lot of money. Let me remind you, we are a big company. We purchased $150 billion in merchandise and goods from 61,000 U.S. suppliers this past year. Those suppliers range in size and shape. It can be the multi-national or it can be a very small firm that we’re buying from. As a percentage we certainly think that our imports from China are within the bounds of reasonableness.
You know, Jon, this is a big company. There’s a lot I could say about it. What I think is better though is go ahead now and see what questions you would have if you’ve gone through those. If we could start easy and work our way up… [Laughter and applause]
Question #1: There’s been a lot of stories in the past few months about individuals who have left Wal-Mart for violating a variety of company policies. Is this a new phenomenon or are you just taking a tougher stance when it comes to business ethics?
Answer #1: It’s an interesting question. I can tell you--a lot of you probably have a lot of people who work for you. If you have 1.6 million people working for you, nothing will shock you. People are people and it’s true the world over. What’s different about us today is that we will have someone who is not necessarily very senior in the company who has broken a company policy. Not breaking a law, just breaking a policy. We had two or three who did it this past fall. They didn’t do anything illegal, they didn’t commit a crime, but they did things that we don’t like and we don’t want to be associated with. We let them go. The next thing we know it’s in the paper. Mona Williams here is in charge of this area and I keep telling her that it’s not quantity we’re looking for in public relations. We’ve got quantity and so anything we do today is just in the paper--any slip-up or any mistake. It’s just the way our life is going to be. Then, because of privacy reasons, you really can’t go out and say these three people did this thing. You just have to be quiet and then all of a sudden the rumors go.
Our most recent one happened to be someone who’s on the Board of Directors. We had a legal responsibility to deal with that issue. I’ll tell you how it happened. A couple of people came in my office and said we’ve had somebody bring this up. We’ve investigated it and here’s what we’ve found. What do you think? I said, well, it’s looks like we have a hole and we have a shovel. We can either dig the hole deeper or we can fill it in. We decided the best thing for us to do is to call the FBI and U.S. States Attorney and those people and tell them everything we know. It seems to me like one of the lessons all of us should have in what’s gone on in these corporations is that in many cases it wasn’t the initial act that ever created a problem for people. It was this idea that you somehow can cover up or that you can somehow not be truthful and everything still works out. Since we had nothing to lose, it was an easy decision for us. Maybe it would be more difficult if you had something to lose. In our case we just said we’re going to tell the government everything we know. Of course, that’s in the paper. There are only certain things you can say. We defined the size of the problem but the rumor is it could be a lot larger. It isn’t, but you can only say so much because the U.S. Attorney said we will do the talking about it. I understood him when he said it and it didn’t appear he wanted a debate, and I don’t want a problem with it. [Laughter]
Jonathan: Lee, you’re one step ahead. Usually my general counsel has to tell me after the Attorney General tells me, so you’re a better listener than I am.
Well, I watch “Law and Order” so I’m pretty much…[laughter]
Questions #2: Wal-Mart is known for excellence in supply chain where you came from. Can you describe some of the current initiatives the company has implemented?
Answer #2: We have something that we call “remix” where--what we’ve done--our company has been extraordinarily good in doing everything vertically. Sam Walton believed that if everybody did their job really well, you’d be a great company. This idea of always collaborating and doing all of these other things in many ways became excuses to add staff and add expenses and things that really don’t matter to the customer. I think it’s served us extraordinarily well. What happens to you is that at some points in some areas of the company you only get that good and then you have to start rethinking the supply chain. We have a grocery supply chain that’s phenomenally effective. We have a hard line supply chain that’s phenomenonally successful, and we have an apparel supply chain that is pretty darn good. What that group is doing now is remixing all of those products based on the speed of movement and other characteristics, so that they can serve the stores more frequently. We have stores getting to the volume level that instead of worrying about--we would have stores that could get eight or nine trucks a night--full trucks. But do we really want to get eight or nine trucks a night, or should we not be getting diapers and paper towels and toilet paper to that store four times a day? So it’s coming from that distribution center through the back room onto the sales floor rather than being handled and stored in the back. That’s what they’re doing. Where we worked on days, they’re focused on hours.
John: So I get my pork chops and socks together.
Well, I hope you do already!
Question #3: Are you concerned about the various groups that are aligning against Wal-Mart, such as Wal-Mart Watch, or the group of Democratic lawmakers who are asking for a probe on your discrimination against women?
Answer #3: It would be silly to say you don’t worry about it. Very few people in this room would have somebody who would like to see them stop growing and has $25 or $30 million in cash that they’re going to use against you in one year. Very few people in this room would have that issue that you’re faced with. I understand that not everybody is going to like us. I understand that there are good reasons why some people wouldn’t like us. Some people have a vision of the town I grew up in--Baxter Springs, Kansas--where you parked out front of the store and you knew everyone in that town. Some people want that to be the life that exists in the future. The problem with it is in today’s environment only the people in this room can afford to lead that life. I talked about that towel earlier. It’s not just the towel. Ed, what was the number one selling barbeque grill? $9.92 is the number one selling grill in that store we were in this morning. People need to save money. The average income for the area that we’re building that store--I think average household income was $43,000. Those people can’t afford to lead the life that you idealize. They need to buy things for their family.
Somebody told me something the other day--it sounds kind of hokey probably but I think it’s true. Do you realize that because of Wal-Mart and Target and Dollar General and Family Dollar and people like that, that today every kid can go to school dressed fashionably like the other kids in that class regardless of the income level? Because all of us have the right silhouettes, the right colors, the right fabrics. We may not have the brand but, by golly, a kid doesn’t have to be embarrassed when they go to school because everybody has the ability to be the same. In some ways what we do is democratize merchandise. So it bothers you when a group who says that to protect the core of what exists--Safeway, Kroger, whoever it is--to save the UFCW jobs, Wal-Mart as a start shouldn’t exist. Don’t kid yourself, it’s not going to stop at Wal-Mart. Target’s a darn good company. If you’re going to stop Wal-Mart from sharing values with customers, you’d better stop Target. Then you better get to Aldi. You’d better stop Dollar General and Family Dollar, because if we’re going to draw lines in the sand and say in America today we’re no longer going to reward the most efficient who takes the best care of customers and who has the ability to cause 1.6 billion people to work for it--right? I mean, they came to work voluntarily. But we’re not going to reward that because the most important thing in this country is we’re going to protect what exists and we’re going to create a vision for the country that only the most affluent can afford. That’s the issue I have with the groups that oppose us. [Applause]
Question #4: What’s the future for Wal-Mart in China?
Answer #4: I think the future for Wal-Mart in China is very exciting. You think the process of getting stores in Chicago is testy…[laughter]. The one good thing about China though is when the right person makes a decision it does happen. You just better hope it’s the right decision. We have a great relationship with the Chinese government. They have treated us very fairly in what they have done. They actually--much like in the U.S.--they hold us to a higher standard--higher standard of sanitation, higher standard of employment than many other companies, because they want somebody to set modern retailing standards within that country. We have approval for 12 or 14 stores this year we’ll be opening. We’re primarily down in Shenzhen. We go all the way up--we’re not in Shanghai but we go up to Dalian and we just are opening in--I think John Minzer, who runs International, is in Beijing this week. We have an opening this week in Beijing. We have Sam’s Clubs, Wal-Mart stores, and we will continue to grow dramatically.
Interestingly enough, in China the average sale for a customer with a basket ranges between $4.00 and $5.00. If you do a $100,000 on a Saturday, you will have had 20,000 to 25,000 customers in your store to do $100,000. Of course, primarily you’re selling food. You sell a little bit of apparel, not much. You don’t sell a lot of electronics. They’re still working on some of those issues with counterfeiting and some of those things, because a lot of the software that is not bought in traditional stores. But it is very, very exciting and we think it will be good. They’ve been very fair to us.
Question #5: A corollary question there is also what have you found with civil rights and human rights in doing business in China?
Answer #5: I’ve found that China is very much like everywhere else. The last two factory issues that we’ve had in our company that have been highly publicized: one was in New York and the other was in Los Angeles, using undocumented workers in almost slave conditions. It was found by the Department of Labor. It’s been a few years. I find that it’s not just China; it’s here in the U.S., it’s in Bangladesh, it’s in India. There are people who are willing to cheat. Don’t give me this crud that says the reason they have to cheat is because you get too good a price. That’s not true. The reason people cheat is because some people cheat. It’s just the way it is. Look at P&G’s profits. They’re making ten cents on the dollar and we’re making three. This isn’t about the fact that you get too good a price. It’s about the fact that some people are just greedy.
I did a factory inspection in Bangladesh--four-story factory. I saw them marking the fire extinguisher with the date and the signature when we were on the first floor. I said, “Why are they doing that?” They said because it’s four floors. He said they put the fire extinguisher on the first floor and one on the second. When you tour the first floor and go to the second, they take the first floor fire extinguisher and put it on the third floor. When you go to the third floor they take the second floor and put it on the fourth floor. So you have to watch those kinds of things. Not just in China. I think actually the conditions in China are improving somewhat. Because of the position we have I was able to have a short conversation but a direct conversation, a pleasant conversation with the Premier about the fact that all U.S. companies are going to very interested and are interested today in sustainability and in making sure that there’s not a competitive advantage in China because their people are allowed to dispose of hazardous chemicals in ways that you wouldn’t be able to in the U.S. I think because of our position we actually can have a positive impact on global competitiveness on a fair basis.
Question #6: Wal-Mart’s business seems to be vulnerable for the first time. Your stock price is declining, comps are low, and your first quarter of earnings was below expectations. Do you see this getting better anytime soon and, if so, what’s going to happen? And don’t run out and buy stock.
Answer #6: I don’t know. We did not do particularly well in the first quarter. We ended up, because of tax benefits and others, we added $8 billion in sales and added 14% in earnings. I think it would have probably been only 9% without the tax benefit, if I’m not mistaken--10%, something like that. Disappointing for our standards. If you look, I don’t know that it’s overwhelmingly bad if you compare it to what other large companies do in a quarter. Second quarter looks to be very difficult.
I have a friend that’s in the boat business and his entry level boat business is just terrible. His upper level boat business is extraordinarily good. He sells one boat for $2.5 million and they’re a year out on production, but the $6,000 boat they can’t sell. That’s similar to what we’re dealing with. With our customer, if you go back to the tax changes that were made that certainly benefited upper, middle and higher as it should--I understand, that’s who’s paying taxes. The Wal-Mart customer didn’t get much of that benefit. If you think about the savings rate in the U.S.--it’s about, what, 1½%? In our customers, 20% don’t have a bank. Twenty percent of our customers we estimate don’t have a checking account, so they’re spending their money every week. When fuel prices go up the way that they have, that customer has to stop buying something. They either stop going to a restaurant or going to a movie. I know movie ticket sales are down. It really impacts us. We don’t see it in deodorant, paper towels, diapers and those things. Where you see it is in those things the customer has choice on. Unfortunately, those are also the things that we make the most money on.
I think the second quarter will continue to be tough and that’s what we told the street, but we also believe the third quarter will improve, particularly if we can keep fuel prices down at some more modest level. We’re encouraged about the second half of the year. We’re up against comps that are a little easier comparison. We did a major wage change last year in the middle of the year. We anniversary that. All of you on the front table understand anniversarying real well. We’re looking at the second half to be better. But I worry about the economy. I worry about making sure that people who are out there that are making this economic engine go, that make up the bulk of the citizens of this country--I worry about them and I worry about their financial health.
Question #7: Lee, when you’re talking to young leaders in Wal-Mart or elsewhere, what are your two or three lessons on leadership?
Answer #7: There are so many. I’ve gotten to where now, as you can obviously tell, it’s hard for me to say good morning in two minutes. One, I think the greatest enemy of business is ego. It just amazes me how in today’s world with all the business books that have been written, how people can still get their ego out in front and not understand that this world does not revolve you, your community doesn’t revolve around you, your company doesn’t revolve around you. You are there to serve that company. There is so much strength in saying that this morning’s visit to Bedford Park and the fact that that store looked great and the associates were happy, is because of what Ed is doing. It is not because of what I’m doing. Just having the courage to give away the praise and the accolades to the people who earn them, and how powerful that is in your own career. That’s the first thing.
Second is just integrity. If you don’t have it, I just don’t want to be around you. There’s no place for you in business today. Our reputation as business people is tough enough. If you can’t tell the truth and you don’t understand that you have an obligation that’s greater than to yourself, that it’s to your corporation, then there’s no place for you.
Thirdly, I don’t care anything about personal loyalties. My paycheck comes from Wal-Mart stores. That’s who my obligations are to. They are to the 1.6 million associates and they are to the shareholders. They are not to some cronies that I’m pulling through the company or that are pulling me through the company. I have seen more problems and more problems recently where people think that if I’m loyal to John or Mary, they’re going to make my career for me. Well, the truth is if you can’t make a career on your own, you ought to go do something else anyway. That’s what I believe. Those would be three. [Applause]
Question #8: How does Wal-Mart choose performance metrics that drive value for shareholders?
Answer #8: We’re pretty simple. In the health of our business we look at comp store sales increases everywhere. This morning when I got up--they come on at 3:30 in the morning--we get comp store sales increases for every country. That’s the first thing we look for. Now, you have to temper it a little bit. In the United States, we’re running about 2% comps, but with all the new stores we’re opening our cannibalization of existing stores has taken about 200 basis points off of that--about 1.8 or 1.7, somewhere in that range. So, that’s the first thing.
Secondly, we as a company look at expenses. You can’t sell for less if you’re spending more. We look at expenses every day and we look at them very, very carefully. We manage those things more than we do things like gross margin, because we think if you start running that store for gross margin, not for your customer, ultimately your sales will dissipate. And we just try to make sure that our earnings are equal to or greater than our sales growth. We spend about $12 billion in capital expenditures, so we’re reinvesting as fast as we can back into these new stores to get them built as fast as we can build them.
Wal-Mart Stores U.S. has about a 10% market share. Tesco in the U.K. in food alone has about a 30% market share. So we’re about a $200 billion U.S. company. If we were a $600 billion Wal-Mart Store U.S. company, we would only be as good as Tesco. We wouldn’t be the best. We would only be as good, so we think there’s an extraordinary amount of growth ahead of us. I don’t mean this the way it’s going to sound, but there are not that many people in business who can say, guys, I can see a clear path to add $400 billion to my sales. True? But we can’t. What we want to do is drive the comp store sales, drive the top line and manage the heck out of expenses and have our profit be equal to our sales growth.