Fair Trade: Beyond Wal-Mart: A New Risk For Retail

Beyond Wal-Mart: A New Risk For Retail
By Bart Mongoven

A small coalition of environmental and health activists has begun to pressure Target Brands Inc. to change the type of plastic it uses in its packaging and certain products. The coalition, known as BE SAFE, is part of a large network that up to now has focused its attention and efforts on changing corporate practices at Wal-Mart. Now, BE SAFE is airing complaints that Target has ignored demands concerning plastic packaging that its competitor, Wal-Mart, has already agreed to follow -- and thus painting Target as the worse of the two offenders on the issue.

BE SAFE is part of a broader coalition that is working to change Wal-Mart's corporate practices, and its emerging focus on Target marks a new phase in this larger coalition's campaigning effort against retailers. The success of the activists' strategy does not rest on their ability to force change at a single retail corporation, but rather in their ability to leverage concessions made by a leading corporation to effect change throughout entire industries. The thrust of BE SAFE's campaign up to now has been to pillory Wal-Mart -- forcing the retail giant to the defensive and into a negotiating stance. But, having achieved some success in that regard, the activists now pose a challenge to other retailers: As Wal-Mart improves its practices, competitors must follow suit or risk being portrayed as "worse than Wal-Mart."

Though Wal-Mart's reputation may continue to take hits, its willingness to make certain concessions to activists puts rival corporations in a precarious strategic position.

The Wal-Mart Campaign

For more than a year, an extensive coalition of labor, environmental, human rights and other groups has been vocally critical of Wal-Mart's practices. Through national media campaigns and local organizing efforts, they have assisted groups that oppose Wal-Mart's siting of new stores and criticized its policies on wages, health benefits, employee performance and other issues. They also have lobbied for municipal ordinances that are designed to affect only the practices of so-called "big-box retailers," targeting Wal-Mart specifically whenever possible.

The effort, which began to show results a year ago, is not intended merely intended to change Wal-Mart's behavior and make it "better," but -- by impacting the company's vast supplier network -- to change manufacturing practices around the globe. This means using Wal-Mart's leverage to change, for example, labor practices in China and environmental performance in Africa -- issues on which no amount of lobbying or pressure at the government level would be likely to yield results.

During the past year, Wal-Mart has made a number of changes to appease various activist groups (and in order to pre-empt others) that address wages, employee health care, sustainability, drug pricing and labor. It has agreed to expand drastically the selection of organic foods it sells, to change its packaging for some products, to reduce the fuel use by its massive trucking fleet, and to step up recycling dramatically. Furthermore, Wal-Mart recently publicized an internal study of the labor practices of its downstream suppliers. The study found a number of deficiencies, which suggests that the company is establishing a baseline for changes in labor practices. Change is happening fast.

Significantly, Wal-Mart appears to have been most open making deals with activists on issues where the burden of change does not rest solely on the corporation, but can be pushed onto suppliers as well. Though this poses a problem for suppliers, it is less a problem for Wal-Mart -- and no problem at all for its critics. This is, after all, what they want.

Wal-Mart has taken advantage of its industry power in other ways also. For example, Wal-Mart executives meet regularly with major consumer-product companies to explain the pressures the retailer is facing and to explore potential solutions involving changes in product formulation or packaging. Recognizing that accession to some activist demands would degrade product quality or raise prices to unacceptable levels, Wal-Mart also has been able to go back and explain these constraints, and what it reasonably can demand from suppliers, to activists -- who in the main have been accommodating.

So long as Wal-Mart was both the most powerful force for change and the only retailer facing intense pressure, activists took what they could get. But over time, the pressure against Wal-Mart appears to have reached a point of diminishing returns. In many areas, including plastics and packaging, Wal-Mart has told critics that it has reached the limits of what it can do. This leaves activists in a quandary as to how to respond. They already have played the "Wal-Mart is bad" card with the public, so emphasizing this further achieves little. Allegations that the company is ignoring demands now have been documented as patently false. The solution they are left with is to consolidate their gains and then begin to raise the stakes for other competitors in the industry. Thus, they have set their sights on Target.

Targeting Target

BE SAFE's Oct. 11 announcement concerning Target appears to mark the introduction of a wider "big box" campaign. The strategy is fairly straightforward, building on many of the other market campaigns currently in operation in the United States.

The first step in the strategy is to approach the industry leader. This is the company that has the greatest resources to implement changes quickly and to force suppliers to change as well. It also is the company with the most to lose from an activist campaign: its perceived market leadership. Market leadership affects all aspects of a company -- from recruiting to stock valuation -- and loss of market position is painful for shareholder value, as well as company morale.

The next step comes when a market leader has gone as far as it is willing to go. At that point, market campaigning groups are forced to find a new target, usually another major company in the industry. The secondary target usually faces two sets of demands: First, to meet the promises the initial target already has agreed to, and second, to improve upon or exceed those standards. Instead of "activist vs. company," the game becomes a contest of "company vs. company" -- a shift that raises the stakes for all involved and accelerates the rate of change.

A New Twist on Competition

The course of the campaign against retail corporations will be shaped to some extent by inherent differences between Wal-Mart and Target. The two companies are and will continue to be fierce rivals, but they serve different segments of the market, and their brands have been built around different principles.

Wal-Mart, for example, has built its brand around low pricing, and activist campaigns targeting Wal-Mart markedly have not been directed at its customers. For many of Wal-Mart's traditional customers, caring about what kinds of plastics are used in the products they buy -- or making purchasing decisions on such a basis -- is a luxury they cannot afford. For this reason, activists working to shape Wal-Mart's behavior have relied upon the effect their criticisms may have with key decision-makers in areas where Wal-Mart wants to expand and with policymakers. In Chicago and Maryland, for example, activists have worked with mixed success to get implicitly anti-Wal-Mart ordinances passed.

For Target, whose customers tend to be more affluent and more sensitive to social issues than is Wal-Mart's traditional base, the risk from activists is shaped rather differently. Criticism of Target's policies on isolated issues, such as packaging materials, might have an impact, but only a slight one. The real risk to Target would be if a series of such complaints begin to accumulate, affecting perceptions of its overall brand. This fear could influence Target to act quickly on issues, seeking to prevent activists from reaching a point of critical mass.

Another key factor to consider is each company's relative power in the marketplace. Because Wal-Mart is unquestionably the 800-pound gorilla of the industry, Target does have some advantage: Wal-Mart's size and reach guarantee that a number of organizations will remain critical of the company and its operations. So long as these organizations remain committed to portraying Wal-Mart as the "bad guy" in the industry, Target and other retailers know that any concessions they make to activists immediately will be turned into demands for Wal-Mart.

But this is where Target's advantages end. The overarching risk of being portrayed as "worse than Wal-Mart" in a corporate campaign generates self-sustaining pressure for Target and others to negotiate with, and surrender to, activists on numerous issues. Once driven to the bargaining table, Wal-Mart's competitors can do little more than match what Wal-Mart already has done. The concessions made by the industry leader already have affected the products being sold by Target and other retailers. For instance, Wal-Mart's work with cosmetics suppliers to address the formulation of nail polish generally means that nail polish companies change formulations through entire product lines -- not just the products sold through Wal-Mart, but through all the retail chains they supply.

Here lies the trap that Wal-Mart, through shrewd negotiating strategies and management practices, has established. While other retailers watched -- pleased not to be in the hot seat -- the retail giant worked with its major suppliers on issues affecting merchandise. As it did so, Wal-Mart also built infrastructure for dealing with activists' concerns -- coalitions with suppliers, outreach offices, public relations and marketing teams -- and appropriate decision-making structures for management. This effort took more than a year, but it is likely now a permanent fixture inside the company. And competitors devoid of such tools and infrastructure find themselves at a disadvantage.

The BE SAFE campaign is not an outlier; the new focus on Target marks the beginning of a "race to the top" in which retailers will be forced to exceed Wal-Mart's efforts in dealings with activists. The problem for the corporations is that, to accomplish this, there will be severe pressure to force suppliers to do things they already have told Wal-Mart are not possible, or at least things that are non-starters from an economic standpoint.

There is another option, of course: Retailers can begin to express a "preference" for products that meet certain environmental or health criteria. This tactic, long a staple demand of groups active in timber issues, essentially elicits a promise that the company will change its policies or purchasing practices as soon as there are economically viable alternatives available. This leads to the larger -- and as yet unresolved -- question: How will manufacturing and consumer product companies be the "first to market" in bridging the gap between activist demands and what they themselves believe is currently possible?

Send questions or comments on this article to analysis@stratfor.com.