Wal-Mart: A snap inspection

By Pallavi Gogoi

updated 4:04 p.m. ET Oct. 2, 2007

At the Wal-Mart store in Uniondale, on New York's Long Island, when a customer swipes a credit card two questions pop up in the card reader: "Did the cashier greet you?" and "Was the store clean?" It's all part of an effort by Wal-Mart Stores and Chief Executive Officer H. Lee Scott to improve customer service at the retailer's 3,500 locations across the U.S.

Scott may need a new strategy. During a recent visit to the store, one cashier didn't greet two customers, and, when asked about the survey, she replied with outright scorn. "I don't care," she said. "If Wal-Mart doesn't care for me, why should I care?" She took up the issue of cleanliness unprompted. "There was this horrible smell in the store the last two days from some overnight spill," she said. "They did nothing about it. It got so bad that on the second day the fire department came by and we all had to wear masks."

It's clear that Wal-Mart is struggling these days. The once-vaunted retailer is facing slowing sales and a stagnant stock price at the same time its reputation has been battered for its workplace practices. But what exactly is going wrong at Wal-Mart? What has gummed up the gears at the previously unstoppable growth machine out of Bentonville, Ark?

To get some answers, BusinessWeek decided to take a detailed look through several of its stores, to see from the inside how the retailer is handling everything from merchandising to morale. Retail consultant Patricia Pao joined us for three store visits to add an expert's insight to the experience. There were certainly many positive surprises, among them Wal-Mart's cleanliness, but there were also flaws in store layouts and product presentations.

The most significant finding is what appears to be an enormous problem with customer service. As the experience with the cashier in Uniondale illustrates, many of Wal-Mart's workers feel outright hostility toward the company, and, by extension, they often treat customers with indifference or worse. That puts Wal-Mart in a box. Without reasonable service, the company is forced to compete almost solely on price. That in turn squeezes margins and makes it difficult to pay employees the better wages and benefits that could boost morale. It's a vicious cycle that now appears to be working against Wal-Mart. "When you're trying to change your customer service, it's very difficult to do that unless you win the hearts and minds of your employees. After all, they are your ambassadors on the front line with customers," says Pao, founder of a consulting firm, the Pao Principle.

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Wal-Mart declined to comment for this story. The company's top executives have said that bolstering customer service is an important priority. In May, during a conference call with analysts, CEO Scott noted that customer service is being targeted as a key element of Wal-Mart's three-year strategic plan to improve its business. "The core of that plan, improving our customer service and improving returns, is critical to continued success for our company," he said.

Wal-Mart's service has been sliding for many years, according to an annual survey conducted by the University of Michigan. The most recent information from Michigan's American Customer Satisfaction Index shows Wal-Mart dropped to a score of 72 last year, down from 81 in 1995. It's behind Kohl's, J.C. Penney, Target, Dillard's, and Sears, although it does rank ahead of Macy's and Kmart. The average score for the retail industry is 74. Wal-Mart's score puts it on par with the health insurance industry, which has an overall customer satisfaction score of 72, pulled down by the poor performance of UnitedHealthGroup and Aetna.

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