Photo: Walmart
How should vendors respond to Walmart’s reluctance to raise prices?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
Vendors tell me it’s just about impossible to get a price increase through Walmart, even after showing their costs have risen significantly. Should they continue doing business with the big box despite untenable margins? Should they drop what is likely their biggest customer?
Smaller vendors wonder if Walmart is harder on them than the big brands, but I couldn’t find evidence of that. Walmart apparently beats up everybody equally.
Says one trading partner, “They will still push back at you even if you bring in a cost breakdown. Some folks are just saying, ‘I can’t continue to ship to you because my costs are rising and there has to be an increase.’ Concessions are rare. Walmart has become increasingly demanding on a lot of fronts in the last 18 months or two years. It wants to keep that 15 percent price spread against their competitors. Sometimes they can, sometimes they can’t.”
It’s a frustrating dilemma for many vendors who face increases in such things as health care costs, utilities, commodities and wages. One thing is sure: Quality will drop as vendors are forced to cut corners. That will be true for vendors who decide to stay with Walmart, or with new vendors replacing the ones that walk away. And because of Walmart’s enormous power in the marketplace, there will be a ripple effect across much of the grocery industry.
Don Stuart, managing partner at Cadent Consulting, sees Walmart as ground zero where pricing starts. “Let’s say that for whatever reason, Walmart is enjoying a 15 percent pricing advantage. That’s where the industry’s pricing starts. Then pricing ripples out to the first ring of influence — let’s say Kroger. And then out to a second ring of influence — let’s say Publix.”
Walmart declined comment, saying they “don’t talk publicly to our negotiations with suppliers.”
Yet Walmart doesn’t want its relationship to other retailer pricing to change. And what with Amazon.com, Aldi, Lidl and others putting on the squeeze, as well as Walmart’s own sluggishness in the recent past, it’s easy to see why the mega-chain is worried and pushing on same-store sales growth.
Discussion Questions
DISCUSSION QUESTIONS: What should vendors do about retail customers being unwilling to support higher prices amid rising underlying costs? What leverage may vendors have in such pricing negotiations?
Poll
BrainTrust
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
Kiri Masters
Founder and CEO, Bobsled Marketing
If a vendor needs to take a price increase, they need to take a price increase. As long as they are increasing across all chains, Walmart retains its price advantage. This is their leverage and should be a non-issue. If they are just trying to raise Walmart’s wholesale price then they are in strategy mode, asking themselves whether it’s worth doing business with Walmart. It may be okay to say no, it’s not worth it.
There are two ways to sell a product: price or quality. If it’s price, there’s little a vendor can do when today it seems to be all about price with so much information readily available online. If a company has been fortunate enough to build an image of their brand the price is less of an issue, but that’s not easy. Walmart is doing everything they can to compete with Amazon and other companies. They have always been a price-conscious company since day one, along with having a reputation for being tough on vendors. It’s also how they have managed to be successful. Any vendor doing business with Walmart has to realize they are not going to change Walmart’s approach to vendors or demands. So if they can provide their products at the price Walmart needs they will sell merchandise and if they can’t, Walmart won’t be right for them.
As other companies are continuing to become more cost competitive, many vendors are going to find themselves with an uphill battle. Vendors will either have to market themselves differently or continue to find ways to keep their prices down.
Walmart has always been tough on its suppliers when it comes to costs — it’s part of the company culture. Recall several years ago when suppliers were dealing with escalating cotton costs but Walmart didn’t budge on the prices charged to its customers. And the company is not going to cede its price leadership to Amazon if it can help it.
What can vendors do? As the article suggests, they can try charging more to other customers, they can find cost savings in their supply chains or (the least desirable but most probable outcome) they can compromise product quality.
There is one thing about the whole pricing argument that puzzles me. If the issue for Walmart is “maintaining pricing relative to other retailers” then a blanket increase of equal magnitude for all customers from a vendor should not disrupt that status quo. That assumes that all retailers will maintain their current margins on the vendors’ new list price of course — but if all grocery retailers are working as close to the bone as they claim on margin it seems logical that they would.
Perhaps vendors should not start their pricing discussions with Walmart, but end them there instead. Unless they fear that Walmart would try to gain even more advantage against the market by still refusing the price increase …
This one is a tough one. The true holistic answer is to ensure that your model works, and when a customer doesn’t fit that model, you need to walk away to keep a healthy model.
This is partially true when it’s a 900-pound gorilla that happens to be powering your business. Having said that, diversifying your customer base is key before you go back to Walmart. There are alternatives — find a way to build a Walmart pack that provides the value they’re looking for without endangering your everyday pack (read: club pack — something with a different price point and bonus, etc.) or push Walmart to help you with something they’re good at (logistics is really common but dangerous in its own way).
At the end of the day, you need to keep your cost structure intact to stay in business. If Walmart’s not going to respect that, you’re going to have to spread out and make a living with everybody else.
The only vendors with any leverage with most retailers including but not limited to Walmart are the leaders in large categories, any vendor with specialty items that are not on the radar for price comparisons and any store brand vendor that has a stranglehold on their category costs or a special formula for items. The rest (most vendors) have to make the same decisions that they have been making for two decades: how do I deal with this pressure?
Most are already constantly streamlining operations to be more efficient. National brands have real quality decisions to make and store vendors have formula and operating decisions (i.e., keeping plants and lines running). There’s no easy answer and each vendor must approach this based on their own circumstances. Many thought this problem would ease when sharing costs became more prevalent, unfortunately this has not been the case.
It’s tough for all vendors, there are just different situations. Large vendors should have the ability to get leaner rather than the alternative of losing their Walmart business. Smaller vendors — especially new vendors — can rationalize based on the incremental growth. The worst position would be for small incumbent vendor where there are lots of substitutions. Unless you have retail leverage on Walmart, you don’t have much choice other than to adjust elsewhere in your business.
This is really nothing new to Walmart. They have always been notorious about price and if a supplier wanted to raise their price, there had to be some kind of change to the product that justified it. Be it new packaging, new ingredient, whatever.
Let me just add that some 15 years ago, as a consultant for another big box retailer, the offices we were given to work in were among the vendor meeting rooms. You have never heard such language, loud voices and arguments. Before that, I had only heard stories about vendor negotiations. And they come out laughing and shaking hands, sometimes. Is it right? It seems pretty harsh and hard on the players but seems like it has been a way of business for a long time.
When the game is all about price, something’s gotta give. For my 2 cents.
It might be an interesting tactic to offer Lidl, Aldi, Amazon and others a “non-Walmart compete” benefit. That is, offer a product you (deliberately) “can’t” get at Walmart to help drive traffic away from Walmart, toward the prospective customer retailer. Perhaps the manufacturer could use this tactic to induce them to take more facings, displays and features as a way of helping differentiate their retail experience.
It is a conundrum. The Walmart brand promises lower prices … always!
If the brands Walmart markets had the same adherence to their own brand promises the dialog here would be quite different. So the real culprits here are the individual brands that have left the fight for preference in the column of distribution. What are you willing to give away? The answer seems like a bottomless pit to me. You need Walmart MORE than Walmart needs you.
With one important exception. Apple.
Walmart markets Apple products within pennies of the Apple store itself. This is because Apple has invested in its brand and it carries greater preference than any single distribution channel.
So, stop eating your young and invest in a brand promise that is emotional and not simply rational.
This story has been known for a very long time. Many will deal with the issue on economic and marketing terms but it may have become a moral issue.
St. Paul quoted an economic directive from Moses when he wrote “Do not muzzle the ox that treads out the corn.” He added, “The laborer is worthy of his reward.” The admonition doesn’t need much explanation. The ox did nothing but walk in circles harnessed to a huge stone that ground the corn into flour. Some tried to keep costs down by preventing the ox from eating some of it. But that economic strategy caused the ox to get weak, slow down and wear out faster … a costly strategy in the long run.
So to Walmart and other mega retailers: You are successful because many thousands of vendors have succumbed to your terms and have kept in the grind. It might be a good idea to let them eat a little better.
In which bubble are you? The prosperous urban one or the struggling rural one?
In which area are most Walmart stores? Walmart’s original real estate strategy was C and D counties, rural communities. Surely now most revenue comes from the suburban/urban stores, but the number of stores skews rural. If shoppers cannot afford to shop in a store, they will find one they can afford. Ergo, the growth of “Dollar” stores.
Walmart wants to protect its base, vendors will need to help if they want to remain on the shelf. Packaging, supply chain, allowances and other cost levers remain to be tweaked.
It’s Walmart’s choice to do business this way. It’s the vendor’s choice to do business with Walmart. Short-term decisions can have long-term ramifications. Both sides need to think hard about how this will impact retailer/vendor relationships down the road. A vendor who can’t afford to do business with Walmart shouldn’t go forward. This reminds me of the old saying … “We lose money on every sale, but we make up for it with volume!”
Walmart has been beating up vendors for years. Yes, I do not like Walmart simply because of the way the system works. They created this environment and they want to continue to pound the vendors for more discounts while we, the independents, subsidize the vendors by paying more for the same products. The scenario is changing in retail and maybe, just maybe, some of these vendors will walk away from this, and that would be welcomed by many other retailers. I could go on but I’m sure you understand my point of view, so have a great day everyone.
Without contribution from both sides of an argument, the decision to assign problematic cause on the absentee is fundamentally prejudicial and therefore in error. There are several well known factors that we can supply to the absentee side of the equation that cannot be supported as the full truth of the focused retailer’s abilities, but do predominately exist in the market for companies of that size and scope.
Price increases are met with very high degrees of consumer skepticism as a practice. The public is almost always left with the feeling of defenselessness and aims their meager retributions at the closest culprit. It is believed by the customer that the company that is paid the increase is totally at fault. This is supported by the market’s widespread price differences for same products and services. There is almost no consumer research to determine the exact nature of the increase.
While it is always quoted that the buyer is responsible for their own actions there are several prohibitive restraints that come into play. The greatest obstacle in making the general public freely aware is functional illiteracy. While this too is a condition owned by individual effort, there is an acceptance of effective communication in vendor and retailer relations that must be held as accountable for the sake of full disclosure.
On a more practical exchange of argument, the face value of products over a lifetime of buying has and continues to see unrealistic price increases. For that reason we may conclude that very large companies have the resources and ability to determine fair market pricing and to project accurate landed costs. This is a high corporate priority where selling price is the market banner.
So what vendors and manufactures are hearing is public feedback that is sifted, analyzed and reported to them by a single name like Walmart. To view a single name as the sole deterrent to the increased price as set forth is simply more miscalculation that needs further examination and understanding from those asking. Kind of sounds like some other problems the market and consumers are having, doesn’t it?
Vendors need to realize the absolute nuclear war Walmart is in with Amazon. Pure survival of the fittest. As partners, not vendors, they’re going to have to bite the bullet on a lot of things, just like Walmart, until the smoke clears. Which, honestly, may not be for years to come.
It’s a consumer paradise right now, not vendor heaven. Suck it up. Get smarter. Figure it out. Work together. It’s your only hope.
As with any relationship, vendors will have a hard time walking away from Walmart if their business relies heavily on those purchase orders. Best practice from a financial management standpoint calls for no greater than 20% of receivables due from any one customer.
If vendors are following this logic, they can stand up to Walmart by knowing they could take a hit.
Vendors are in a tough spot concerning Walmart. Walmart is really just trying to compete with Amazon right now, so raising prices might not be in their best interest. Then again, they’re also changing their delivery window policy, making it harder on vendors. I can’t help but wonder what Walmart would do if these vendors decided to abandon them and sell through Amazon instead? Vendors could probably have more leverage over Amazon than they think.
This is really not an issue. Walmart has their terms of doing business. If you are building a product for Walmart, supply just that SKU to Walmart. Create other SKUs for other channels (club, grocery, etc.) Any smart supplier will recognize this and adjust their model this way. Trying to “leverage” Walmart in the retailing game is a losing (and often illegal) proposition. Pricing collusion is the other side of the coin that this avoids as well as efficient target market differentiation.
Unless you’re Amazon — and maybe some day even them — businesses need to sell things for more than they pay for them (or more than it costs to make them, for manufacturers), so at some point, you have no choice, and must accept the loss of a customer, and a smaller market. Before that point, though, you (simply) have diminishing profits, so it’s a question of what one can live with.
And it’s really here where the question of “who is hurt more” comes into play: larger businesses generally have more resources to ride out storms, but are usually answerable to “the market” in what is expected of them. Smaller firms OTOH usually have fewer resources, but may have greater flexibility in what ownership will accept financially,
The predominant trend in the grocery market is now one of eroding margins and profitability; it will remain this way for years to come.
More price competition from discount players including Aldi/Lidl and the dollar stores, more choice as players like Amazon get serious about grocery, higher costs from investments in technology, slimmer margins as a result of online ordering and delivery, hikes in wages and operational overheads, and a more price sensitive consumer — are just some of the myriad of unhelpful trends.
Retailers are reluctant to pass cost increases to consumers, Walmart doubly so as it does not want to sacrifice its price leadership position. As such, pressures are being passed down the supply chain to vendors.
What can be done? The unfortunate truth is that for any firm that deals with the big retailers, there are not many strategies to mitigate this trend. Working with the retailer to increase volumes, take new innovative lines, develop wider price architectures with some higher margin products, may help — but they can only be used if the retailer is willing to cooperate.
For smaller vendors, there are opportunities outside of the big retailers: selling direct, dealing more with local and niche chains, exploring new channels, and so forth, may offer new and more exciting opportunities for growth. What’s right and what works will depend on each brand, but creativity and thinking beyond traditional distribution strategies is key.
I don’t agree that “pricing starts with Walmart.” My experience of consumers is that they consider a lot of things — price is just one. We obsess about price because it’s easy and that lets us be distracted by relatively small price issues. It’s far more powerful to create value that consumers want. What’s the Sergio Zyman quote? In the absence of other meaningful data, consumers will fall back on price. But that means there’s far more than price — we too often leave value, meaning, utility, and the rest sitting on the table while we chase price.
But Walmart does have exceptional power. I once worked with a manufacturer with a tremendous innovative new product. They wanted to maintain margins in the beginning and chose not to take it to Walmart first round…except their sales guy did. And Walmart offered to take it on (big order) but at a price that destroyed their ability to get margin for their innovation. It was exceptionally hard because once that deal was on the table, it threw off all other efforts for a sane introduction.
Unfortunately, in a situation like this, manufacturers are caught in a nasty bind — if they walk away Walmart will just fill the category with a competitor. Each company will have to sort out their own way forward with this.
Supplying Walmart with merchandise has never been an undertaking for wimps. Of course we should expect a chain with its huge buying power to pressure vendors to hold the line on price.
Brands would certainly like to pass every cost increase through in the form of higher retails, but that’s really a lazy way out. Innovation should never cease when it comes to COGS and the total product delivery system, while vendors need to respect Walmart’s imperative to maintain its price image with shoppers.
I think the negotiating pressure can be a spur to innovation. Large suppliers have the means and the standing to pressure Walmart back on other issues. What guarantees can the retailer provide that re-orders and On-Shelf Availability will be competently managed in every store? Recouping lost sales due to OOS may go a fair distance toward improving manufacturers’ total margins.
It’s tougher for smaller suppliers who may not ship in full carloads or enjoy manufacturing economies of scale. These brands may need to cultivate a diverse set of customers so they don’t rely too much on Walmart to keep the factories running.
Tough as it is, at least Walmart seems to be fairly transparent about its position.