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» Wal-Mart's woes » Greenberg: Best, worst CEOs

Wal-Mart's woes

GEOFF COLVIN: What's wrong with Wal-Mart? It's still the world's biggest company -- at this time of year it may take in $1 billion a day, which is more than the entire nation of Sweden produces.

But suddenly the Beast of Bentonville is looking vulnerable. Sales growth last month was pathetic. Goldman Sachs has downgraded the stock. And now across America people are asking whether this is a bump in the road, or is the whole business, social, and cultural phenomenon of Wal-Mart cooling down? Marshall Cohen is retailing's trendmeister, senior analyst at NPD Group. Watts Wacker is a futurist and author of The 500 Year Delta.

Marshall, Wal-Mart's formula, everyday low prices, plain and simple, has worked incredibly well for 42 years. Why isn't it working now?

MARSHALL COHEN: What's happened is a lot of their competitors have finally stepped up to the plate and said we're going to get into the price game also. And the consumer has really sat and stopped to take a good, hard look at where they can get prices. Consumers today for this holiday alone are just very methodical. They're going out with a clear path of who's offering the best prices on those products.

COLVIN: This is interesting on a couple of fronts. One, that means that although Wal-Mart says everyday low prices, it doesn't mean they have the lowest prices on every item every day, right?

COHEN: That's exactly right. They got beat on several key categories this year, and they didn't promote while others did.

COLVIN: And this gets to the other thing, which is it used to be conventional wisdom that in retailing you do not compete with Wal-Mart on price because they will kill you. That is no longer conventional wisdom?

COHEN: No, that's exactly right. What's happening is they are signaling themselves to find a place or a product that they want to introduce almost as a lost leader. We saw Wal-Mart do it to other industries last year, toys in particular. This year, you could go into a Target and buy a toaster or a single-serve coffeemaker for $4.90. The box costs more than that.

COLVIN: Yeah, I was going to say, they can't make money, but they've got you in the store.

COHEN: Exactly right.

COLVIN: Watts, are there social trends, are there big picture trends working against Wal-Mart right now?

WATTS WACKER: Yes, I think there are, Geoff. And besides what Marshall hit on with the fact that there's the perception and reality as it relates to their pricing today, there's also this thing that's now being called the sovereign nation of Wal-Mart that is hitting consumers in the wrong place as far as an emotion. Well, they're coming into municipalities and trying to in effect circumvent the local laws and zoning such that you'd have to have a referendum with two-thirds vote to stop what they're trying to do. And as this becomes more and more known, it's giving more of that evil empire aspect to them, and it's not sitting well with the Zeitgeist.

COLVIN: Well, what do people want instead? I mean if they are trending away from that, what are they trending toward?

WACKER: Well, as far as the future, I think one of the hot things to look for in the future of retailing -- and let's face it, this is a $2.5 trillion piece of the economy -- is I think that consumers are really starting to gravitate towards direct selling. The whole issue that was at one time kind of the Tupperware/Mary Kay is suddenly being looked at by people like Warren Buffett and manufacturers who are trying to circumvent the hamstringing that's happened with retailers today.

COLVIN: The Dell model has been so incredibly successful.

WACKER: Absolutely.

COLVIN: And Buffett's company is what?

WACKER: He's bought a couple of them, and evidently the payouts are awfully quick and expedient for him. So the sage of Omaha seems to be leading a new trend.

COLVIN: Marshall, here's a quote from Michael Silverstein. He's a consultant at Boston Consulting Group. He was a guest on this program previously. Last spring he was quoted in the Economist as saying "Costco does trading up and trading down under one roof. Wal-Mart just does trading down. At some point that will have played out." Are we beginning to see it playing out?

COHEN: Absolutely yes. What's happening is consumers today are looking to reach upward. And if you're shopping, and let's say you go out and you buy your socks, your everyday wardrobe at Wal-Mart. Now holiday time comes along. Do you really want to get more socks from Wal-Mart? What's happening is even if you're buying a gift or getting a gift, you aspire to get the product from someplace other than the everyday low price retailer.

COLVIN: And so we may see people who are the same people buying sort of high-end stuff for some things, and being perfectly happy to buy, you know, low-end stuff of various types for other product categories.

COHEN: The commodity business, Wal-Mart is going to continue to own. I mean it's all about everyday low pricing, always the lowest price. If you don't need service, that's the place to go. If you want to have it, the future's upon us now, because and we're seeing a change right in front of our eyes right at this time. What's happening is consumers are willing to pay more money for being able to go in stores that can help educate them on what a product will do, and also make them feel comfortable about somebody being there to help them if they don't understand how to use it or need help in using it.

COLVIN: Examples of such stores.

COHEN: Oh, let's look at the electronics business, for example. Do you want to go into a place where you can buy the lowest price computer and have no idea how to work it or if it's going to be able to, you know, if it's going to need some repair, no one there is going to even know what box it came from? But if you go to a store, a specialty store or a Ma and Pa business that's on Main Street, USA, or you go into a retailer that specializes in that product, you can feel much more comfortable. Look at what Best Buy did with the Geek Squad. That's a perfect example of the two different dichotomies of retail today.

COLVIN: They started running some commercials in the last couple of weeks that they hadn't been doing.

COHEN: Absolutely. They've been making some quick decisions, which is not traditionally like them. I also can feel that they're starting to ask some questions, to look around outside of their environment. What's really happening is they've been very insular, they've been very reluctant to go out and seek outside information, to look at the environment and to learn more about it, and I think they're beginning to start to do that. You can feel it, you can see it, and they're going to need to do more of that.

COLVIN: Watts, here's another possible explanation, another hypothesis for what's going on with Wal-Mart. It isn't big picture stuff at all. It's the price of gas being high, it's the price of heating oil being high keeping people out of their stores for now. Everything's going to be okay when things get a little more normal. Do you buy that?

WACKER: I don't buy that, and I think if anything we're seeing Internet shopping increasing at an increasing rate. We're well beyond the early adaptors. We're now getting into the mainstream and the laggards coming into the Internet. I even heard a cell phone go off at church, and it was 75-year-old person who just bought one and hadn't figured out you turn it off before you go to church yet. And so I think Wal-Mart is going to pay a lot of attention to the fact that the environment is changing. And as Marshall said, service is a piece of it, that now you can almost par service and experience. Service is how I feel about you, and experience is the way I feel about myself. And under these new ground rules, I don't know if Wal-Mart's really figured it out yet.

COLVIN: Can they succeed online?

WACKER: I think they could succeed online.

COLVIN: But they're not.

WACKER: I don't think they're necessarily doing it yet. And the great thing to play out in online is that the Mom & Pop can look as big as a big guy online. And so as they become more sophisticated in learning how to use the Internet, they have a much greater advantage than the bigger guys in that area.

COLVIN: Marshall, who is benefiting from Wal-Mart's troubles?

COHEN: Oh, it's definitely the retailers that are looking at Wal-Mart as competition. Target is a very good example. J.C. Penney is another great example. J.C. Penney has figured out how to compete up and down channel for their source of consumer base. They've been able to provide the consumer with everyday value, and they've been able to upgrade with better product, better quality, and even in some cases better prices. So some of the bigger stores have also been able to compete head on with Wal-Mart, where in the past they haven't.

COLVIN: You have said, Watts, also that small is the way things are going, and you've pointed out these little tiny stores that I think Sony is doing on Michigan Avenue in Chicago. Can this, I mean it may be a trend, it may be something that people like, but can it ever be a significant force?

WACKER: Well, one of the other interesting trends in retail is its influence on brand creation, much more than I've ever seen before. And innovative retailers are trying a lot of different kinds of formats, including what's called the anti-concept concept store. But I heard your question of Wal-Mart. What it really made me think about was General Motors. And here was a company that when I was a kid had a 65-68 market share that today is about 28, and Wal-Mart could become that. Not saying they're gonna, but you have a historical precedent of that approach to...

COLVIN: Well, you do. In fact, you have a precedent of it happening almost all the time, right? I mean all of us can remember 20 years ago when everyone knew that Sears would always be America's largest retailer, because it had buying power that no one could match. Case closed, right? But it didn't happen.

WACKER: So it's, you know, too early to tell if the...

COLVIN: The anti-concept concept. What in the world is that?

WACKER: Well, we're seeing a kind of a on the edge today, but of course the edge tends to migrate to the mainstream, where someone comes into a non-commercial area, usually has some historic value, sets up a minimalist kind of store, and there's an awful lot of consumer sentiment to this approach to retailing now. But of course it's not being done by the big guys, and usually not seen by some of the insular management teams within the category.

COLVIN: Marshall, you keep track of retailing trends all the time. It's the time of year when everything happens in retail. What is big? And in particular, I saw a statement you made that this is the year of the shoe, and I wonder what in the world that means.

COHEN: You know, three years ago we talked about jeans, jeans, and more jeans, and last year we talked about the handbag and how that was the signature item that everybody was buying and investing in and spending more money than you would think. This year it's footwear, and it's not just an age segment. It's across all ages, and it's across both male and female consumers. People are starting to dress up a little bit more, and not necessarily wearing suits every day, but they are starting to wear dressier shoes because it's not good enough to go to work looking like you're getting ready to paint your house.

COLVIN: Now, okay, I'll buy it, the year of the shoe. But what I had heard was that it's the year of the gadget, that all kinds of technology stuff, digital cameras, iPods, camera phones are bigger than ever this year.

COHEN: It's interesting you say that, because what was important last year for holiday? The exact same list. What happened this year, it's what I call the carbon copy Christmas. We are seeing the same hot categories, not items, but categories. And if you got a digital camera last year, you don't need another one, but what you need are the peripherals or the accessory items, bigger flash cards, bigger memory cards. And people are buying those for themselves. They're not really gift-worthy items. I speak to hundreds of consumers. I speak to a hundred consumers every week face to face, and I've asked almost all of them, what do you have to have this year for holiday? And there are so few people who can even answer that question, and that's exactly where we were last year.

COLVIN: Some years there are must-have gifts, this year none.

COHEN: Right. There's a lot of I would love to have, but I don't have to have. And the things that most people want are more expensive, so the gadgets or the electronic items tend to be a little bit pricier than most people would normally give as a gift. Therefore, this year you may get one or two gifts. You may not get five like you did last year.

COLVIN: But the bill will be the same.

COHEN: They're going to spend the same money. That's exactly right.

COLVIN: Marshall, is there any big surprise player in retail this year?

COHEN: This year the specialty retailers have done an excellent job. I'll give you two: Victoria's Secret and American Eagle have done an incredible job with connecting with the consumer.

COLVIN: Watts?

WACKER: I think the most interesting concept I've seen this year is the American Girl store, which combines a restaurant with retail in a very successful way where you take your new doll to tea. It's having a tremendous impact, not just on little girls, but on their moms, too.

COLVIN: I've seen these stores, and they are incredible. They're a phenomenon really.

The two companies you mentioned, what are they doing that their competitors are not doing?

COHEN: Victoria's Secret has been able to continue to captivate their audience. They've been able to get the consumer to look at it from a lifestyle. American Eagle has been able to combine music with fashion and make it wearable clothes. A lot of the other, their competitors have wardrobes that no one would wear. So what's happening is the consumer's going in and saying, hey, for a better price than the competition, I can actually buy these clothes and have fun doing it.

COLVIN: The competition is Abercrombie & Fitch.

COHEN: That's exactly right.

COLVIN: Watts Wacker, Marshall Cohen, thank you.

COLVIN: Speaking of where companies make their money, we told you last week that Morningstar, the mutual fund rating service, makes most of its money from sources other than rating mutual funds. Now New York Attorney General Eliot Spitzer has subpoenaed records from the company as he investigates how Morningstar and other firms make money by advising companies on where to invest their retirement plans -- specifically whether mutual funds must pay to be recommended. Morningstar says it's clean and is cooperating with the investigation.

Greenberg: Best and worst CEOs

GIBBS: When a certain popular bakery company opens a new store, voracious fans often camp out overnight just to be first in line to get one of these gooey, hot, glazed treats. The company sells so many donuts in just a week that if you lined them up, the sugary trail would stretch all the way from New York to Los Angeles! And within two years after going public, Krispy Kreme's stock more than tripled. But now? The company's boss is at the top of Herb Greenberg's list for the worst CEO of the year. Herb is a Wall $treet Week with FORTUNE contributor and CBS Marketwatch columnist and he joins us with his picks for the best and worst CEO's.

Well, Herb, what happened to Krispy Kreme? How did it go so stale?

GREENBERG: You know, I just am still scratching my head trying to figure out how do you screw up a donut? But that's basically what this company did. They had a product that many people like, and in effect if you want to look at it, there were several things going on.

One of them was that the business model is just a bad business model, Karen. I mean, basically, they took this donut that people lined up forever to get and they made them so easy to get that basically after a while, it's like anything that's sort of forbidden -- once you get the forbidden fruit, it's not so, you're not so curious about it anymore, and quite frankly, people started buying fewer of the donuts. These stores after they opened, the sales would just fall off a cliff. So basically, number one, you had a terrible business model for a public company.

Number two, you have accounting-related issues that currently as of last week, the company's quarterly report with the SEC hadn't been filed. It's beyond the deadline and an extension to that deadline because the company says they're spending a lot of time going through accounting issues. And that though is just the icing on the cake of this whole story, because in the end it's all about the business. And they seem to run this business in a sense more for the stock, which really went up there for a while, than for the customers and the employees.

GIBBS: Well, where does management fall into play here? Because management blamed the Atkins diet for the fall off in sales of donuts.

GREENBERG: Let me tell you something. When they blamed the Atkins diet, I put something out in a column and I said don't buy it, because they were blaming the low-carb craze six months after everybody else blamed the low-carb craze. And the way I looked at it was if anyone was going to feel this first, it would have been the donut company. And so you started to wonder what was really going on at this company. And then you started seeing management unwind. The chief operating officer left the company, and after he left the company, the chief executive officer - his name is Scott Livengood - started to say, you know, the more I dig into this company, the more I see. And I started thinking, wait a second now, you're the CEO. You're supposed to know what's going on. What's this digging into stuff? So, Karen, that's why my award for the worst CEO of the year, and maybe longer than that, is Scott Livengood of Krispy Kreme.

GIBBS: Well, certainly Scott Livengood is in bad company, if I can say so. He joins Larry Ellison of Oracle, John Ryan of Zix Corporation, Michael Eisner of Disney, and of course Raymond Gilmartin of Merck. Let's talk about Zix for a moment, because we've talked about the e-prescription company before. What happened to Zix?

GREENBERG: Oh, my goodness. I came in here and I told everybody who was watching that this is a great, the company had a great product, and still does have a good product. It's e-prescribing. You know, this is letting your doctor write a prescription, sending it over the Internet to the pharmacy.

But you know, the company had all these great forecasts, Karen, but it turns out the forecasts they were making were based on a very small number of sales. So the company kept coming out and saying we're going to do X; they never even got close to X, and even though one day they may get to X, the fact of the matter is they overpromised and underdelivered, which this company has a history of doing.

And I have to tell you something about ZixCorp. When I was writing a positive story, I always try to find what the negatives are so I don't get hoodwinked. And I was talking to a fund manager I really like who had met the management of this company, met the CEO. And this fund manager said, you know, the minute I met him, I decided after I interviewed him, I didn't like him, and on that basis, he didn't buy the stock. And this is somebody I really trust. I should have listened to this guy. I should have at that point said, you know what? Good product, bad management. In the end, it's always about the management.

GIBBS: Okay, Herb, tell me about some of these other CEOs on the worst list.

GREENBERG: Well, you have everybody's favorite, and I get these from my readers -- this worst list came from my readers -- everybody's favorite is Michael Eisner of Disney. But you know what? It's popular to knock him. He's going to be on his way out. Disney is still a great brand. It's like McDonald's. You know, you can bet against it, and when it gets pounded down, Disney's not going away. So he's obviously one everybody likes to knock.

Larry Ellison of Oracle, you know, let's face it. The fact of the matter is he micromanages. Customers do business with this company they say, according to certain surveys, just because they have to. And now the company's growth has slowed down. They've had to go out and buy PeopleSoft. He did a great job building the business, but they've had their problems throughout, ups and downs.

Ray Gilmartin of Merck, well, Vioxx. You know, he's the CEO.

GIBBS: Your colleagues at Marketwatch have come up with a list of their four top CEOs, and there are some surprises as well as a couple of household names. Raymond "Chip" Mason of Legg Mason is the CEO of the year. Of course Steve Jobs of Apple Computer shows up, John Wilder of TXU Corporation, and James Mullen of Biogen Idec. Now kind of interesting because Chip Mason is not a household name. In fact, he's not even a Wall Street titan, based right here in Baltimore, Md. What about that?

GREENBERG: I like that, because when you want to think of who the best CEO is, you always see these stories that are always about all of the marquee names, and here is a guy who's been sticking to his knitting, running a business. He's avoided all of the Wall Street shenanigans. He hasn't grown the company for the sake of growth. And as a result, he's highly respected. His employees apparently really love him, and again, employees loving you is very important, and the way you treat your customers and the way you treat your employees. And he's ended up creating what has been a very good business in a very difficult time in what has been a very difficult industry, Karen.

GIBBS: Well, let's talk about Steve Jobs, Mr. Apple, but also Mr. Incredible, because he's also at Pixar. Now he's cocky, but he certainly can deliver the goods.

GREENBERG: Oh, my goodness. You know they're already talking about iPods, a shortage of iPods again for this Christmas. What is so beautiful about Apple, you know, you look at the story just a year or two or three ago, and it just looked like, you know, it was just sort of stuck in the mud. And now, when they opened up their retail stores, I thought what a stupid strategy that is, opening up their own retail stores. What a genius it was. You go in these stores. They are absolutely packed whether you go in them at 9:00 in the morning, and I'm not just talking about during the holiday season, during other times of the year, these stores have done very well.

And what's so great about what Steve Jobs has done is the products work well, but the marketing and the merchandising is fabulous. You walk in these stores and you say, I really think maybe I should get, you know, a Mac. And you start thinking, well, wait a minute, I've tried Macs, and sometimes I have some trouble with them because I'm used to a Windows machine. But he's got me hooked in there and he's got me buying things and he's got me wanting to buy more, and it looks like he's making up for all that lost time. He's going to give it to the Windows guys really big when we get to this other side, you know, the music side of the business. For that, he's right in line to be the very best, absolutely.

GIBBS: Do you think he'll probably go down in history as one of the most innovative CEOs of all time?

GREENBERG: I think he has to, especially with the way he pulled this out. You know, there was that one mistake early on, little mistake of just, you know, keeping Apple all to himself and not opening everything up, but he's making up for it in lost time. And the fact that he's doing this and he's running Pixar, because again he's the chief executive of both companies, the chief executive officer. That means that even though there are plenty of other people running these things and involved, he still is in a sense, it's his instincts and he's sort of calling the shots. Think about that. Two companies, two successful companies, two very innovative companies. I wouldn't be surprised if one day this guy's on my list for, you know, a much longer period than one year.

GIBBS: How about Biogen, James Mullen? Some call him a visionary.

GREENBERG: Well, obviously he's a visionary if he could take sort of what was becoming a flat-lined biotech company and acquire another biotech company to become the world's third largest company. And what's very important here, you know, you make an acquisition of anything with people, where people make the difference, you know, the assets are the people. And when you do an acquisition, if those people, the assets walk out the door, you're done. That didn't happen here, and so you end up again with a company that appears to have done a very good deal. He's had great vision, he's moving the company ahead, and again it looks like everybody is being rewarded.

GIBBS: As you shifted through the debris of corporate America, you actually came across a gem, and of course you've called Howard Schultz of Starbucks the executive of the decade. Why?

GREENBERG: Because Starbucks has done one of the most phenomenal jobs, not just creating a great American success story, but building one of the really great worldwide brands. And you know, you have to compare this with Krispy Kreme. It's just the opposite. And a lot of people thought Krispy Kreme was going to become another Starbucks. Let me tell you something. You need coffee every day. You don't need donuts every day.

GIBBS: Speak for yourself. Herb, thanks very much.

GREENBERG: It's always a pleasure, Karen.