3 Challenges New Wal-Mart CEO Doug McMillon Must Face

On Monday, Wal-Mart Stores  (NYSE: WMT  )  announced that company veteran Doug McMillon would replace Mike Duke as president and CEO. McMillon, 47, is a company insider who started his Wal-Mart career at the age of 18 as a summer associate. He has Arkansas roots and is well liked by the Walton Family – two attributes that helped drive his promotion from president of Wal-Mart International.

But does the leadership transition from Duke, 63, who has been CEO since 2009, signal that Wal-Mart is embracing change or staying the course as the all-important holiday season approaches?

While replacing a veteran executive with an up-and-coming high performer has all the makings of a strategic shift, early indications suggest that the retail giant will be staying the course with McMillon at the helm. McMillon's decades of employment, deep institutional knowledge, and company loyalty have been credited as key reasons he beat out Bill Simon, president and CEO of Wal-Mart U.S., an executive seen as more of an outsider, for the top job.

Being a friend of the Waltons, with deep Arkansas roots, and decades of experience doing things the Wal-Mart way is not the hallmark of an incoming CEO who is going to shake things up at the world's largest retailer and America's largest employer. But, given the many challenges the company faces, change might be exactly what is needed.

Wal-Mart's challenges

Wal-Mart is coming off a disappointing third quarter when its largest revenue generator, sales from U.S. stores, dropped 0.3%. The company also has forecasted flat earnings during the critically important holiday season. While lowering its full-year forecast, Wal-Mart still expects to see modest sales growth in FY2015 through the opening of smaller, more targeted stores, and its longtime strategy of lowering prices.

However, there is some doubt whether these measures will be enough to stave off Wal-Mart's competitors. Costco (NASDAQ: COST  ) is coming off a big year with more than $100 billion in revenue, 5% growth in U.S. store sales, and 7% growth in international sales.

As Costco continues to challenge Wal-Mart domestically and internationally, some are beginning to wonder whether the Seattle-based company could replace Wal-Mart as the largest retailer in the world.

Target (NYSE: TGT  ) continues to battle with Wal-Mart for discount shoppers and even after missing its third quarter sales targets with 0.9% of new growth, the company remains a major threat. In addition to the established competition, Wal-Mart also must deal with threats such as Best Buy (NYSE: BBY) competing for Wal-Mart's low-price market share in electronics sales.

Wal-Mart must also handle a continued investigation into allegations of bribery for expedited building permits in Mexico and potentially other international markets such as Brazil, China, and India. In the U.S., the company faces continued criticism for its low wages and its opposition to organized labor within stores. While a debate on raising the minimum wage is about to begin in Congress, Wal-Mart employees and those sympathetic to their cause are planning protests at 1,500 Wal-Mart stores during Black Friday.

Time to embrace change?

Wal-Mart's challenges are real but so are the opportunities for new growth. There are ample opportunities for the company to improve on its mediocre  performance in e-commerce, refresh its online presence, and truly compete for an increased digital market share. Wal-Mart has also yet to fully implement the vision of turning its massive footprint of storefronts into nationwide distribution centers for e-commerce or other growth opportunities.

The company could ease some of its criticisms in the U.S., and eliminate some of its barriers to enter new domestic markets by raising the wage and benefit levels of its employees, and coming to a reasonable agreement with labor organizations. Wal-Mart's image on this issue continues to be tarnished with reports of stores hosting food drives for its own employees who are not earning enough money at work to put food on the table at home. As Costco continues to be the model retail company for high wages, good benefits, low turnover, and exceptional productivity, Wal-Mart's position on this issue becomes more unsustainable.

In the end, things are not all bad for Wal-Mart and it continues its supremacy both domestically and internationally. But its diverse set of current challenges does pose the question of whether the retail giant should embrace some changes to its well-established business model in the years ahead.

The bigger question however, will be if McMillon, given his insider status with the company, will be willing or able to bring about change. The answer to this question may hold the forecast to Wal-Mart's profitability in the decades to come as McMillon takes the helm.

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