As American as apple pie, but now Wal-Mart is eating humble pie

The retail giant with homely values but a huge appetite for growth is having to take stock as sales stagnate, its employment practices are savaged and local communities resist its advance. Katherine Griffiths writes from New York

At Wal-Mart, America's un-disputed king of low-cost retailing, some surprising things are turning up on the shelves. There are cotton sheets with a 400-thread count, and extra-thick towels in fashionable hot orange. In its fridges, "key lime pie", a speciality of Florida, is stocked alongside nine-layer lasagne. These luxury goods are the result of months of testing behind closed doors by Wal-Mart's cooks and designers, who have been trying to come up with products to tempt a new group of middle-class customers.

At Wal-Mart, America's un-disputed king of low-cost retailing, some surprising things are turning up on the shelves. There are cotton sheets with a 400-thread count, and extra-thick towels in fashionable hot orange. In its fridges, "key lime pie", a speciality of Florida, is stocked alongside nine-layer lasagne. These luxury goods are the result of months of testing behind closed doors by Wal-Mart's cooks and designers, who have been trying to come up with products to tempt a new group of middle-class customers.

Critics say the changes are overdue: the world's largest retailer has hit a block with the large slice of Americans on very limited budgets who have traditionally poured through its doors.

Wal-Mart said on Thursday that it was "disappointed" with performance in the first quarter of the year, when sales at its US stores that have been open for more than a year grew by just under 3 per cent. The results went down badly with investors, who dumped shares, pushing down the entire Dow Jones index.

Wal-Mart, which is several times as large as its next-biggest competitors put together, posting $285bn (£153bn) in sales last year, has recently made other changes to improve its image.

The retailer has been trying to show it is listening to the army of environmentalists, community groups, unions and politicians in the US, who claim it is bad news for towns when Wal-Mart moves in. The company recently announced a partnership with the National Fish and Wildlife Foundation to conserve one acre of natural habitat for every acre it develops. The agreement to save important areas of land and water is the largest-ever by a company, and will cost it $35m over 10 years.

Lee Scott, Wal-Mart's chief executive, said: "We've changed as a company. We're trying to get past the idea that everyone who criticises you has an ulterior motive and wants you to fail."

If Wal-Mart feels sensitive, it is perhaps understandable. The company faces a multitude of lawsuits over its employment practices, while some states are campaigning to keep it out on the grounds that it kills off local businesses.

Last month, it also became the subject of a federal grand jury investigation in Arkansas into whether its former vice-chairman was orchestrating a covert, illegal campaign against union organisers within Wal-Mart's workforce.

On Wall Street, as a result, the company is out of fashion. Its shares have been trading at a five-year low, with investors fearful that a groundswell of opposition to the retailing juggernaut may stop it in its tracks.

Perhaps in a less contrite mood than when he professed he was listening to the criticism, Mr Scott said on a separate occasion recently that it mattered "diddly squat" if Wal-Mart had come under attack - as long as customers kept coming through the doors.

With its distinctive corporate culture and lack of sympathy with those who do not share the values of the American heartland, Wal-Mart has had a bunker attitude in the past. Until this year, few journalists have been allowed inside its HQ in Bentonville, Arkansas, and financial analysts have had to make do with few of the briefings normally given by executives at big companies.

Having gone from not existing 50 years ago to revolutionising retailing around the world, Wal-Mart has historically chosen to concentrate on churning out goods at rock-bottom prices and expanding its empire of cavernous supercentres.

The cash tills are certainly still ringing - it reported more than $10bn in profits last year - and Wal-Mart is the number one seller in America of products ranging from dog food to diamonds. It owns 3,719 stores in the US and another 1,596 around the world, including Asda in the UK.

Yet even though pockets of the Wal-Mart empire are still growing, especially in Latin America and China, there are clear signs that the growth engine overall is slowing down.

Asda, in particular, has become a drag on the business, with Wal-Mart also revealing on Thursday that the once-rising star had endured a "challenging" first quarter. The UK chain failed to meet its operational income target, while underlying sales rose only in the low single digits - something Wal-Mart blamed on increasingly stiff competition in the UK.

Compared to its modest 3 per cent rise in US same-store sales in the first quarter, one of its largest rivals, Target, managed to squeeze out a 6 per cent increase during the same period.

In recent times, one of Wal-Mart's big problems has been that its low-income customers have been hit particularly hard by the rising price of oil, which has translated into historic highs at the gas station.

But there also concerns that the company has been tardy in picking up new trends, such as offering more fashionable lines at low prices, and targeting those on higher incomes who want value for money but also more quality and choice than has traditionally been found at Wal-Mart.

The big fear among investors is that Wal-Mart, once a pioneer followed by other retailers religiously, has lost its focus. One analyst who follows the company said: "Its attempts to improve its public image and the changes to its range recently will go some way to eliminating some of its problems, but they do not significantly offset the headline risk."

Paradoxically, one of the biggest issues unsettling Wall Street is Wal-Mart's stridently negative view on unions. Despite employing almost 1.7 million people globally, it has managed to keep its workforce almost entirely union-free. The exceptions are in China, where workers are allowed to join an official union not known for encouraging members to agitate, and in Canada. A store in Jonquiere, a small town in northern Quebec, last year became the first unionised Wal-Mart in all of North America.

That store was closed by Wal-Mart two weeks ago, after a bitter fight between the company and workers, and amid allegations by union organisers of intimidation and threats of violence.

Speaking to The Independent on Sunday, Johanne Desbiens, a cashier at the Jonquiere store where she has just lost her job, said: "There was always a bunch who were against the union and who were intimidating. There have been third parties saying we were going to be beaten up."

Wal-Mart emphasises that it has a zero-tolerance attitude to threats against workers, whether or not they are in a union. "We would never, ever support the intimidation of anybody. It would be grounds for dismissal," said a Wal-Mart spokesperson in Canada.

Yet that is exactly what Thomas Coughlin, Wal-Mart's former chairman and a hunting buddy of its founder, Sam Walton, is being investigated for in Arkansas. Mr Coughlin was sacked in March, but if he is found guilty then there could be serious implications for the company, which could face government penalties and yet another raft of lawsuits.

Wal-Mart says it is co-operating fully with the investigation and insists it has found no evidence of anti-union skulduggery among its senior people.

But it is not just the union issue with which Wal-Mart must contend. Politicians, consumer groups and communities who want to keep the company out of their area are becoming increasingly hard for Mr Scott to ignore.

Five members of Congress lent their support to a campaign urging consumers to boycott Wal-Mart for America's Mother's Day on 8 May - in support of 1.6 million current and former female employees who are suing the company for allegedly routinely under-paying women and refusing to promote them to management positions

It has also had to pay $11m to bring a government investigation to an end into charges it used illegal immigrants to clean its stores. Recently, it handed over a symbolic $135,540 to settle allegations that it allowed workers aged under 18 to use dangerous equipment including chainsaws.

In February, the company was ordered to pay $7.5m to Patrick Brady, a former employee with cerebral palsy who was hired to work in one of its pharmacies but was rapidly reassigned to collecting rubbish and rounding up shopping trolleys in the parking lot.

Douglas Wigdor, a lawyer in New York who is representing Mr Brady, said: "Wal-Mart has a brazen attitude and believes it is above the law. Rather than accepting the jury's verdict and saying they are going to make changes and make sure people with disabilities are treated fairly, they are still saying that they have done nothing wrong."

It is no secret that Wal-Mart is not like other companies. Founded by Mr Walton in 1962, it has mushroomed by driving down prices for consumers across the US.

Opening his first Wal-Mart in Rogers, a town in the heart of America's Bible belt, Mr Walton called his employees "associates" and built a rural dime store with old-fashioned values into a shopping behemoth.

Yet the sheer size of the company has caused mounting opposition. It was identified in Thomas Friedman's recent book, The World is Flat, as a key driver of the negative aspects of globalisation.

According to the New York-based research house Sanford Bernstein, Wal-Mart's prospects for further growth are now "under siege in several regions of the country from growing opposition by local communities".

This is particularly the case in New York and parts of California, two of the most lucrative areas for retailers in the US, where some communities have waged successful campaigns to stop Wal-Mart in its tracks.

A spokesperson for the borough of Queens in New York, where a property company abandoned a deal with the retailer earlier this year, said local legislators "had concerns about Wal-Mart's history with labour and with its national record".

It doesn't help that the company, whose pharmacists are not allowed to sell the morning-after pill, and where magazines such as Cosmopolitan are covered up on the shelves for being too risqué, may be out of tune with liberals. It also doesn't help that it is one of the largest donors to the Republican party.

Yet Texas, the home state of President George Bush, has put up one of the biggest fights to keep Wal-Mart out. And its trailing sales figures show it has its work cut out to win back loyal customers even in the states where the retailer was once a national hero.