USA (By Daniel McGinn, Newsweek) November 8, 2005 — Andrew Grossman was in his office at Wal-Mart Watch, opening the mail one day in September, when he came across a plain manila envelope with no return address. Inside he found a memo labeled "Memorandum to the Board of Directors From Susan Chambers." Hmmm. Grossman, the former executive director of the Democratic Senatorial Campaign Committee who's now an anti-Wal-Mart activist, Googled the name to learn that Chambers is the retailer's executive vice president for benefits. The draft memo described how 46 percent of the children of Wal-Mart workers are uninsured or on Medicaid. It detailed how Wal-Mart's health plan requires such high out-of-pocket payments that the small number of employees hit by a very costly illness "almost certainly end up declaring personal bankruptcy." It also proposed that Wal-Mart rewrite job descriptions to involve more physical activity, in part to "dissuade unhealthy people from coming to work at Wal-Mart." "I was kind of shocked by it," Grossman says. In late October, after his group leaked the document to The New York Times, he had plenty of company.

Wal-Mart, the world's largest employer, has faced much criticism over the years. But the health-care memo is just one in a series of new challenges to its image; together, they threaten to take the long-running debate over Whether Wal-Mart Is Good for America to a whole new level. Last week filmmaker Robert Greenwald premiered a scathing new documentary titled "Wal-Mart: The High Cost of Low Price." Thanks to heavy promotion by a growing band of anti-Wal-Mart activists, it will be viewed by thousands of Americans in coming weeks. Wal-Mart is also facing dozens of lawsuits, and its stock price has declined sharply in recent years. Lately the company has begun defending itself more aggressively. But its PR problems could become a sort of Nightmare Before Christmas: as the crucial holiday selling season gets underway, the activists hope shoppers will ask themselves hard questions. Is Wal-Mart a force for good because it lets Santa's dollars stretch further? Or is it a corporate Scrooge—and a store to be avoided as a matter of conscience?

The new documentary probably wouldn't be getting so much attention if it weren't for the activists. One group, Wake Up Wal-Mart, was launched by the United Food and Commercial Workers union in April and has since gained 115,000 members. Last week it began airing TV ads to tout the new movie. Wal-Mart Watch, which leaked the benefits memo, also launched last spring, with funding from the Service Employees International Union.

The movie, filled with ex-employees who trash the company, breaks little new ground. You're probably familiar with the central allegations: that Wal-Mart destroys small-town businesses, pays so poorly that many employees rely on public assistance, and mistreats workers, who've filed a number of lawsuits alleging gender discrimination and being forced to work off-the-clock. (Wal-Mart hasn't seen the entire movie, but has disputed much of what it has seen.) And the movie's earnest tone puts it in contrast with fun-to-watch documentaries such as "Roger & Me" or "Super Size Me." Since the film's release, Wal-Mart has tried to point out inaccuracies, with some success: the former owners of an Ohio hardware store, who are featured in a segment that depicts their shop's closing due to competition from Wal-Mart, recently told reporters that Wal-Mart didn't cause their store's demise.

Fighting back against critics has never been the retailer's strong suit. Wal-Mart has traditionally focused on selling, not spinning; it's an orientation that stems from the views of its founder, Sam Walton. "Sam's historical posture was 'Let's do the right thing ... [but] let's not try to get publicity for it'," says Don Soderquist, Wal-Mart's former senior vice chairman. Outsiders are less charitable. Says former Wall Street Journal reporter Bob Ortega, who wrote a book critical of Wal-Mart in 1998: "There's still this thin-skinned defensiveness, like they just can't believe anybody would attack them." Last week, at a screening of Greenwald's movie in New York, the filmmaker spotted a Wal-Mart PR consultant allegedly trying to record the movie and threw him out. (Wal-Mart says he wasn't recording anything.) Even Ron Galloway, who recently produced a documentary that paints Wal-Mart in a positive light, found the company unskilled at telling its story. "They're lousy at it," Galloway says. "Wal-Mart hasn't made the case for itself."

The company believes its customers aren't paying much attention to the headlines. Its research shows only 8 percent of adults are openly hostile toward Wal-Mart, so it's wise to largely ignore opponents and instead focus on getting its 100 million-plus weekly shoppers to buy more. Outside PR experts agree that fighting back too hard can backfire, by drawing more attention to critics.

And in fact, the company has stepped up its image-management efforts in recent years. The effort began in 2002, when Wal-Mart board members were growing concerned about the company's reputation. In response, Wal-Mart commissioned surveys, which showed Americans were worried about the quality of Wal-Mart jobs and its impact on communities. So the company began making changes. It designed new store facades to blend in better with towns' existing architecture. It trained store managers to join civic boards and sprinkle donations around more effectively. It opened a corporate-diversity office. It also began talking up its promote-from-within ethos, and the fact that most employees have better insurance at Wal-Mart than they did before they were hired. "We're making real substantive business changes," says spokeswoman Mona Williams. "It'd be a mistake to act like all of this was a PR campaign."

The counteroffensive has grown in the past year. The company has hired outside PR consultants and bought more image advertising. Lee Scott, Wal-Mart's usually low-profile CEO, has embarked on a series of speeches. "The time has come to speak, to better define who we are," Scott said in an address to employees in late October, in which he announced a series of environmental and energy initiatives—and a new $23-per-month health-insurance plan for employees. Scott's speech was mostly forgotten, though, when activists leaked the benefits memo the next day.

Wal-Mart insists the rising volume of criticism hasn't hurt sales. Despite calls from the activists for a Halloween boycott, the company says it had its best Halloween ever. But Chris Ohlinger, CEO of the consulting firm SIRS, says his company's consumer surveys have shown a significant drop in shoppers' trust in Wal-Mart in recent years. His models suggest the falloff could cut short-term sales by 1 percent, though he doubts it will hurt Wal-Mart in the long term. Why? Even if Wal-Mart offends shoppers' consciences, most will find it too hard to resist its low prices, he says. On Wall Street, stock analysts' reports cite the potential costs of litigation and unionization as worries to investors. But mostly they fret over Wal-Mart's rising costs (much of them due to health care) and slowing same-store sales growth. The result: the stock, which traded near $48 last week, is off more than 20 percent from early 2002, when it traded above $60.

Many of the volleys between Wal-Mart and its critics ignore the larger context. Rising health-care costs and the declining earning power of low-skilled workers are national problems, and not unique to Wal-Mart. CEO Scott has tried making this argument, without finding much traction. But he's right. General Motors, which offers the kind of benefits that union activists wish Wal-Mart gave its cashiers, is losing billions as a result; it's in such peril its union workers have agreed to shoulder more of their health costs. A telling moment in Greenwald's Wal-Mart documentary comes when an elderly grocery-store owner laments the closure of his family business, which he attributes to Wal-Mart. "Where will our families and where will our children be? What will they have to do to work and be competitive?" In fact, due to globalization, plenty of people whose livelihoods are unaffected by Wal-Mart are asking similar questions.

That angst is one reason we'll continue hearing about these issues. On Friday Wal-Mart hosted an economics conference, where academics chewed over papers on the chain's impact. (Like previous research, most concluded its lower prices create benefits that more than offset its low wages.) The anti-Wal-Mart side will host its own conference to tout negative research next week. It also vows to make Wal-Mart's practices a key issue in the '06 congressional elections. In the meantime, Wal-Mart's army will soldier on. In New York last month to unveil Metro 7, a new fashion-forward line of apparel, chief marketing officer John Fleming shrugged off the chain's critics. "We're focused on continuing to make Wal-Mart a great place to work," he said. Wal-Mart may have mastered the art of the sale, but until this PR firestorm dies down, that may be a tough sell.

With Susanna Schrobsdorff and Nicole Joseph