Doug McMillon, CEO of Walmart, one of the world’s largest retail chains, is far from one of those superstar CEOs who move from one huge corporation to another every few years. In fact, since beginning his career on the Walmart loading dock, he’s never worked anywhere else.
McMillon, currently on a visit to Israel, is known as a devotee of innovative technologies. Along with several collaborations with Israeli startups, Walmart has already made two local acquisitions. In 2019, it acquired startup Aspectiva, which developed a product insight and analysis system, for price estimated to have been in the tens of millions of dollars. Last year, Walmart acquired Israeli startup Zeekit, founded by Yael Wiesel, which has developed a virtual fitting room that enables shoppers to see themselves in any item of clothing from the online catalogue. The purchase price was estimated at $200 million.
The stated purpose of his current visit is to meet entrepreneurs with technologies relevant to Walmart, but McMillon knows that his quick visit to the country has set the local retail sector abuzz with speculation about the chain's possible entry into Israel. After all, Walmart, an entity on par with a small nation, with 2.3 million employees, already has locations in 24 countries around the world. What's more, another international chain, Carrefour, is on the way to entering Israeli retailing.
In an exclusive interview with Globes, McMillon explains why Walmart is not entering Israel or any other new market at present, why he is willing to cut profit margins sometimes even down to zero, outlines why he prepared to fight tooth and nail for low prices and online sales, and why he loves the fact that Walmart, although a public company, is also a family business.
Ahead of your visit, there was speculation about Walmart’s imminent entry into Israel, and about scheduled meetings with local retailers. In this context, Victory CEO Eyal Ravid’s name came up.
"We’re not here to enter the Israeli retail market. The reason for visiting is our interest in technology companies that will help us continue to improve our operations, and provide the best service to our customers around the world. We’ve discovered that technology in areas like information security, health, agriculture - simple operations like checkout payments, for example - are being developed in Israel. There’s great talent here. We’ve visited Israel several times already, and with each visit, we find more and more companies that can help us in these areas. We’ve made a number of investments in companies we believe will help us improve, and that’s the reason I continue to come back here."
What sort of technologies are you looking for in Israel ?
"We have found that Israel can help us in the development of our business in a large number of dimensions. We acquired Aspectiva, which helps improve the data and information security user experience, and Zeekit, which helps lower the incidence of product returns, which are problematic not just because of the costs, but also because of the importance we attribute to customer satisfaction.
"We want to continue to look for opportunities to improve our customer experience, with the help of Israeli companies, in health, agriculture, supply, and transportation. We met with a number of companies this week and it’s really great to understand how they can help us achieve our goals."
Which technologies are relevant to you?
"Because this is Walmart, it's a very long list. I think artificial intelligence technologies may be useful to us in the future. One thing we've been focusing on since the start is improving inventory management, and we haven’t finished that process yet. We're also interested in technologies related to deliveries, employing cameras during shopping and at checkout - technologies that will improve the customer's shopping experience, save them time and money. We’ve even started making deliveries using drones, and Walmart is cooperating with an Israeli company [Flytrex] in this area.
Will you open a technological development center in Israel ?
"I think that’s already happened. The acquisitions we’ve made are aggregating talent, and I expect our teams will expand and our partnerships will continue to develop."
How do you determine which new territories Walmart should penetrate?
"We are in a period of transition for the business, both in terms of the balance between the offline and online businesses, and in terms of adapting the company to the next generation. This sort of transition period requires focus and investment, and doesn’t allow for too many areas of activity. This is not a good time for us to expand geographically."
So is this actually a process of de-globalization for Walmart?
"We still operate in 24 countries, so I wouldn’t put it that way. I think Walmart will be an international retailer operating in many markets in the future, but if that means operating in 24, 28 or 22 countries - that’s not the most relevant point. The point is to provide service and products of value to customers, contribute to the company, run a good business, and invest in the future. That's the way we think about that subject."
The challenge of inflation: "It’s hard to keep prices low "
We in Israel are experiencing a sharp rise in the prices of food and basic products. It’s claimed that the reasons are raw materials shortages, supply chain difficulties, and shipping costs affecting the whole world. Nevertheless, you recently stated that you would continue being low-priced. How do you do that?
"Walmart was founded in 1962 with a low-price concept, knowing that if we sell at the lowest possible profit margin, we’ll grow and be able to successfully provide customers with product value, which became the company's goal. It’s harder to keep prices low at this time, when inflation is high, but we’ve had lots of experience with periods like these in countries like Argentina and Mexico that have gone through these kinds of crises."
Do you do this at the expense of profitability to some extent?
"We’re willing sometimes to give up some profitability to keep prices low. We compare our prices to those of our competitors, so that we can continue to provide our customers with the best price possible, even at a time of price increases."
What do you consider an appropriate profit margin?
"Our official reports show we operate at a low single-digit profit."
In Israel, profit in the sector is 3-5%. Is that high?
"It depends on the company's business concept. I can’t comment on other companies."
In these times, after the pandemic and with the war going on in Ukraine - what do you forecast for the market and the economy?
"I expect inflation to continue for a while longer. The unique circumstances of the pandemic caused a change in behavior. People stayed at home, traveled less, and ate out less. The money saved on these expenses turned into spending on products. People started investing in home design, cooking, entertainment, and remote education, which increased the demand for consumer goods and retail. This rising demand that went on for a while put stress on the supply chain and on product supply - which ultimately generated the inflation rates we’re seeing. And I think it will take some time for things to balance out."
Do you see consumers behaving differently now that there's inflation?
"Consumers at all income levels become more aware of how they shop during inflation. They’re more focused on the prices they pay for basic products like rice or potatoes. Sometimes, they’ll buy private label or substitutes for products they’re used to buying. Our job as retailers is to manage our expenses so that we can provide the lowest price at times like these."
That is very challenging for retailers.
"It's always challenging. When you run a business that serves the public and operates at a low profit margin, there's always a kind of challenge, and that's one of the things I like most about this business. The challenges change, and keep you on our toes."
Post-Covid: Growth shrinks to 1%
When McMillon took over as CEO in 2014, Walmart was a traditional offline bricks and mortar retail business. Meanwhile, Amazon and others were changing the rules of the game. McMillon invested huge efforts and billions of dollars, sacrificing profitability (especially with the acquisition of Jet.com in 2016).
During the Covid-19 period, Walmart's online sales soared. However, with the return to normal life, people began frequenting stores once more, and Walmart's growth rate shrank. In the last quarter of 2021, it was only 1%. At its peak, annual revenue from Walmart's online operations was $75 billion. Today it stands at about $60 billion, out of $570 billion total annual revenue.
"The growth of online shopping began even before the outbreak of Covid," McMillon explains, "but during the pandemic, the growth rate rose rapidly to a very high level. Now, with the return to normal life, and the fact that you can leave home again, there’s a decline, which is logical. It doesn't matter to us, we’re just interested in serving our customers. If they’re interested in shopping at our stores - we’re there, and if they are interested in shopping online - we’re there, too."
Still, you’re pulling out all the stops to reinforce your online presence. You’re operating a two-hour delivery service, considering an autonomous truck fleet, as well as a pilot for delivering straight to the refrigerator at home. This involves a huge cost outlay and most certainly isn’t profitable at this stage. Is this a survival move?
"In recent years, we’ve made many investments in the area of online shopping. Some of these activities have shown low profitability, even losses for a while, and we’ve had to manage this so that consumer prices wouldn’t rise because of it. But we’re a long-term company. We don’t just focus on what’s going to happen in the next quarter, but on what’s going to happen in the next generation of retailing."
What does the future of retail look like in terms of the balance between online and offline shopping?
" The answer is hybridization. We see that people sometimes prefer to physically come to the store, and sometimes prefer shopping from home or via their mobile phone. Online shopping will continue to grow and stores will become hybrid. Most Americans live close to our stores, which also function as warehouses. This makes our supply chain - offering fresh products, good prices, and a nearby location - fast and economically efficient.
"Our ambitions in e-commerce are not only to invest in our app and website, but also in accessibility and other forms of communication with customers. The virtual world will be part of the company's future, but stores will continue to be there for people who enjoy the real-world shopping experience, who want customer service that you can’t get online, and who need additional services, like the medical services we will be providing in the future."
The future: NFTs and cryptocurrency payments
What are you most proud of during your tenure as CEO?
"I'm starting my ninth year in the job, and I'm excited about what we've been able to do in raising employee salaries. As someone who started as a junior employee getting paid by the hour, I can identify with our employees. In addition, I’m very proud of our technological development and our expansion online. Our goal is to build a company that will be as relevant in the next generation as it is in the present generation, and that takes investment and vision."
And what are the biggest challenges facing you right now?</i?
" Inflation, supply chain disruptions and resulting inventory shortages, and personnel-related challenges. Our workers have been through a lot over the past two years, some have had Covid and went through hard experiences, some didn’t come to work for a while, or worked from home, and emotionally it was difficult for everyone. We try to support their mental wellbeing and their financial situation."
Is Walmart also moving towards the world of crypto?
"I believe the transition to the digital sphere will continue, with NFTs as a byproduct, and that blockchain will also be part of our future. People are going to buy cryptocurrencies in different ways and we want to be there today when that happens, and be part of the metaverse. It's great fun to discover what Walmart will look like in the virtual world, and it's an area we're focused on right now and learning about."
The connection between retail and healthcare is not obvious. How does this fit into your vision?
"We provide health services in a number of places around the world, of varying scope and type. In the US, we operate one of the largest pharmacies, a large optometry business, and a growing hearing services business. Over the years, our pharmacies have begun giving flu shots, for example, and other vaccines, and with the outbreak of the Covid pandemic we vaccinated millions in stores. We’ve acquired a health insurance company and we’ve opened clinics.
"Being the largest retailer in America, we have data on the public’s dietary habits, which enables us to give guidance for a healthier life. We think about holistic care: giving people access to healthcare, especially preventative, both in-store and online. In the US, too many people go to the emergency room to get treatment."
Personal experience: A varied career at one company
Throughout your career you’ve worked at only one company. Aren’t you itching to try something else?
"When I started out as a teenager, unloading goods, the company's founder, Sam Walton, was still living and leading the company. I was inspired by the vision, the concept, the people. Over the years I moved on to more senior roles but I fell in love with the company from the outset, and today, 30 years later, I still find my work challenging, and still love it. Most people change jobs for change’s sake, and I was lucky to experience variety within the same company, and I’ve never been bored."
Walmart is a family business. Does that affect the corporate culture?
"It’s a huge advantage for us. Walmart is a public company and with that comes with a great deal of pressure. We have an excellent executive committee, most of whom are independent executives, but about half of the business is owned by the family - and it's the founding family that cares about the business culture, about the long term, about values, about the environment, and that's a huge advantage. And sometimes, we want to make an investment, and we have that long-term vision which allows us to make the investment. We also care about the short term but we make long-term investments in an attempt to balance out the two."
The connection with Team8
We met McMillon at the offices of investment group Team8, and to clear time for the interview he interrupted his round of meetings with startup founders seeking to interest him in their technologies. The connection between the companies was made by Ehud Finkelstein several years ago.
McMillon held meetings with a variety of companies, from the immediate suspects, such as those innovating in autonomous checkouts or using AI to make the supply chain more efficient, to a company growing salmon far from the sea but near the supermarket, and a company working on quantum computing.
Some of the companies belong to Team8's portfolio. "This encounter is something we do for the Israeli ecosystem," says Team8 Group managing partner Yuval Shachar.
Team8 was founded in 2014 by Nadav Zafrir (a former commander of IDF signals intelligence unit 8200), Israel Grimberg and Liran Grinberg.. They were joined by Shachar, who led the raising of the first fund. The group sets up and invests in technology companies in cybersecurity, data, and fintech. It operates a unique model for forming companies based upon a community of hundreds of senior managers in leading enterprises around the world (among them McMillon himself), organized by sector, called the Village. The idea is a variation of the saying "It takes a village to raise a child", the child in this case being a startup company.
The link with senior company executives means that a startup is built from the beginning in collaboration with those who are meant to be its potential customers, and is matched to their needs and to the burning problems they want to solve. "Unsurprisingly," says Shachar, "they feel part of the process that shaped the company, and they have a sense of belonging and ownership towards it, resulting in a high chance that they will become customers. When we take a startup to the market and we already have as initial customers Citibank or Walmart, that opens doors for it."
Thus Walmart, as one of Team8's strategic investors making up the Village, helped to form, for example, cybersecurity company Illusive, whose system is installed throughout Walmart, and Harmonya, which identifies new consumer categories such as beverages containing caffeine and protein, a hit among those following a keto diet, and foods with immunizing properties, a category that began to flourish during the coronavirus pandemic. Team8 is currently thinking of creating a new field according to the model it has developed, in digital health, and it hopes that Walmart, which has introduced various health services at its branches, will join that village.
Besides Walmart, among Team8's strategic investors are Cisco, Barclays, Qualcomm, Airbus, and Microsoft.
Published by Globes, Israel business news - en.globes.co.il - on March 27, 2022.
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