(Bloomberg)—In its race to catch Amazon.com Inc. in online retailing, Walmart Inc. issued misleading e-commerce results and fired an executive who complained the company was breaking the law, according to a whistle-blower lawsuit. Walmart shares fell as much as 2%.
Amazon is ranked No. 1 in the Internet Retailer 2017 Top 500, while Walmart is ranked No. 3.
Tri Huynh, a former director of business development at Walmart, claims he was terminated “under false pretenses” after repeatedly raising concerns about the company’s “overly aggressive push to show meteoric growth in its e-commerce business by any means possible—even, illegitimate ones.”
Under CEO Doug McMillon, Walmart has invested billions to catch up with Amazon in e-commerce over the past few years, and last year enjoyed quarterly online sales growth rates surpassing 50%, well above peers that include Target Corp. (No. 20) and Best Buy Co. (No. 10).
Huynh claims Walmart mislabeled products so that some third-party vendors received lower commissions, failed to process customer returns and allowed offensive items onto the site. Huynh’s dismissal in January 2017—just a day after a retail-industry publication singled him out as one of the sector’s rising stars—was in retaliation for warning senior executives about the misdeeds, he said in the lawsuit, filed Thursday by employment litigation attorney David M. deRubertis in San Francisco federal court.
“Walmart sacrificed and betrayed its founder’s key principles of integrity and honesty, pushing those core values aside in its rush to win the e-commerce war at all costs,” the 70-page complaint says, referring to founder Sam Walton. “In doing this, it realized it must silence any whistle-blower who spoke up against its ‘win at all costs’ approach.”
Walmart said it investigated the allegations and found they had no merit. Greg Hitt, a company spokesman, called Huynh “a disgruntled former associate.”
Along with the 2016 acquisition of Jet.com, the rollout of two-day free delivery and the recruitment of sought-after web engineers, Walmart’s strategy also includes building up its marketplace site, where third-party vendors sell their wares and pay the retailer a fee, usually around 15%. The number of products available on Walmart’s site has soared, from 7 million in 2015 to about 75 million as of February.
Walmart overlooked basic internal controls in its quest for growth, according to the lawsuit. For example, Walmart’s systems sometimes failed to label marketplace items in the right product category, resulting in some vendors paying higher commissions than they should have. The company also failed to process customer returns on items totaling more than $7 million, which resulted in reporting inflated sales, Huynh said.
Huynh, a native of Vietnam, joined Walmart in 2014 from Amazon. He claims he warned his superiors and the company’s ethics department that if “Walmart did not properly address these issues, its failure to do so could have serious long-term implications for its critically important e-commerce business.”
He said he was told to stop raising such concerns, and when he eventually brought them to U.S. e-commerce chief Marc Lore in early 2017, he was “abruptly terminated” as part of a broader workforce reduction that took place later that month.
Huynh sued, accusing Walmart of whistle-blower retaliation in violation of the Sarbanes-Oxley Act, retaliation in violation of California labor code, failure to prevent discrimination and wrongful termination. He seeks unspecified damages for lost wages and economic losses, special damages and punitive damages.
Over the past three years, Walmart has spent billions to revitalize its once-moribund web unit, expanding delivery options, hiring fresh talent and making acquisitions. While sales soared last year, the spending has taken a toll on profitability. When the company reported slowing online growth and disappointing margins during the critical holiday quarter, investors pummeled the stock. And the business could bleed even more red ink this year, Chief Executive Officer Doug McMillon said last month.
However they play out, the allegations are an additional headache for Lore, who’s trying to take the website upscale with new apparel, home decor items and a partnership with the Lord & Taylor department store. Walmart has said it will focus more of its marketing spending on Walmart.com and less on Jet.com, the urban-focused startup that Lore co-founded in 2014 and sold to Walmart in 2016. That will hamper growth at Jet, which focuses on younger, more affluent customers.
Still, Walmart has maintained its growth forecast for the online unit. One bright spot has been the online grocery business. Walmart’s existing fresh-food supply chain gives it an advantage over Amazon, which, despite its acquisition of Whole Foods Market Inc., is still better at selling batteries than bananas.
Walmart said this week that it will expand home delivery of groceries to 100 metro areas this year. It has 1,200 stores where customers can pull up and have their orders brought to their cars.
“Online grocery pickup is going very well for them,” said Laura Kennedy, an analyst at Kantar Retail LLC.
The lawsuit, along with slowing growth, could prompt increased scrutiny of all aspects of Walmart’s online business. It shows that even a retailing behemoth can experience growing pains.
“E-commerce is a fast-paced business,” said Kirthi Kalyanam, director of the Retail Management Institute at Santa Clara University’s Leavey School of Business. “So it is not uncommon that some controls might have slipped. Is this much deeper? It’s hard to tell.”