Should suppliers help fund retailers’ omnichannel investments?

Discussion
Source: Walmart Canada
Feb 22, 2021
Tom Ryan

In Canada, Walmart and Loblaw are stoking controversy by raising fees for suppliers during the pandemic to cover upgrades designed to help the chains handle the accelerated shift to digital retailing.

In July, Walmart Canada began charging a 1.25 percent “infrastructure fee” on the cost of all goods sold to suppliers, plus an extra five percent on items sold online to cover the cost of a five-year Canadian $3.5 billion modernization plan. The program covers more distribution centers, enhanced online functionality and store renovations.

The moves have been covered in the Canadian press. It’s uncertain if similar steps are being taken in other regions. The chains are adding the fees on top of standard in-store promotions or shelf placement fees.

Following the release of fourth-quarter results last week, Walmart Canada president Horacio Barbeito told the Financial Post the investments are necessary because increasingly “channel agnostic” consumers are more expensive to serve. Vendor fees cover a “very, very small portion” of the modernization effort and vendors are already benefiting, he added.

“Our suppliers know what kind of a customer we are. We trust them. They trust us,” Mr. Barbeito said.

In the quarter, Walmart’s Canada’s same-store sales grew 8.6 percent on a 229 percent e-commerce hike. Operating income, however, declined slightly due to stronger lower-margin growth (food and online grocery), higher costs to operate during the pandemic and additional investments in customer experience.

In October, Loblaw similarly alerted some larger suppliers to extra fees in a letter to help offset pricing pressures. The grocer urged vendors to “keep in mind” that the company is investing $6 billion over the next five years to upgrade its stores and online operations.

Loblaw said in a statement to the Toronto Star, “As we face pressures, one option is higher prices for customers, but we don’t want to take that approach as Canadians are facing enough financial pressures Instead, we’re asking primarily our biggest suppliers to help us keep prices low,” she added.

Montreal-based grocer, Metro, has reportedly implemented similar fees.

Industry groups representing food producers have complained the fees are unfair and are calling on federal and provincial governments to regulate the country’s big grocers with a code of conduct to rein in alleged bullying tactics. Independents claim the fees charged by the largest chains create an unfair advantage since smaller grocers are unable to do the same.

DISCUSSION QUESTIONS: Should suppliers be expected to cover some of the retailers’ costs for overhauling in-store and digital operations? What will be the net effect of these upfront fees on vendors, retailers and consumers?

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"Time and competition sort these things out, and it is always an uncomfortable trip along the way."
"...today suppliers have alternate routes to the consumer, including DTC options. This might be the time for suppliers to push back."
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23 Comments on "Should suppliers help fund retailers’ omnichannel investments?"


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Mark Ryski
BrainTrust

When costs go up at major retailers either they’re passed along to consumers or suppliers. It’s not surprising that suppliers are now getting squeezed to help pay for the new services and infrastructure required to deliver goods today. Ultimately, the largest suppliers who have leverage will be able to negotiate lower fees, while the smaller suppliers will need to suck it up and pay — if they can afford to do so — or risk having their products de-listed.

Gene Detroyer
BrainTrust

Really? “Mr. Supplier, our business is up and we are building new stores. New stores are very expensive, so we are going to charge you an ‘infrastructure fee’ to help pay for those stores.”

And then there is this bizarre comment by Loblaw, “As we face pressures, one option is higher prices for customers, but we don’t want to take that approach as Canadians are facing enough financial pressures. Instead, we’re asking primarily our biggest suppliers to help us keep prices low.” No Loblaw, the supplier will raise their prices to you, you will raise your prices to your customer.

If a retailer can’t handle what it will cost to invest in their own future, maybe they should consider that the future is not for them.

Dick Seesel
BrainTrust

It’s fair game to ask vendors to partner in store remodels benefiting their sales — and by the same token it’s appropriate to ask suppliers to help pay for the physical requirements of omnichannel. But the key word is “ask.” Retailers have had a checkered history of issuing chargebacks (often related to gross margin recovery) without prior vendor agreement, and unauthorized fees feel the same. Walmart has all the leverage in this situation, but it’s still a questionable practice even if the rationale is valid.

Gene Detroyer
BrainTrust

Is there a quid pro quo?

Dick Seesel
BrainTrust

It wouldn’t be surprising. “Don’t fight the fees or you’ll lose shelf space.”

Gene Detroyer
BrainTrust
Jeff Sward
BrainTrust

It’s appropriate to suggest that suppliers participate in an upgrade of operations that they will benefit from in the long term. It’s part of the “partnership” of the retailer/supplier relationship. But I don’t think I exaggerate when I say that retailers have been known to take unfair advantage of these partnerships over the years. It’s very tough to know what is truly fair and appropriate in the long run. There is a push/pull that is always at work in these relationships, but the retailer usually has the upper hand.

What I object to is the Loblaw statement that they don’t want to go the route of higher prices. Higher prices are probably exactly what is called for as part of offering new and upgraded services that customers are demanding. So the retailer pushes the burden to the supplier, as though the supplier is not also experiencing new burdens and costs. Time and competition sort these things out, and it is always an uncomfortable trip along the way.

Zel Bianco
BrainTrust

They truly do need each other to get through this new normal that will be with us for quite some time. Passing costs on to the consumer is not a great idea at least at this time when so many families are hurting. Partner now for a better future for all.

Trevor Sumner
BrainTrust

They have plenty of profits to take the hit themselves. They just raised the dividend, for example, in last week’s earnings. They just choose not to.

Jeff Weidauer
BrainTrust

Suppliers have always paid their way with retailers; slotting fees, co-op advertising, promo funds — the list goes on. But today suppliers have alternate routes to the consumer, including DTC options. This might be the time for suppliers to push back.

Gary Sankary
BrainTrust

This is a good example of a negotiation tactic playing out in a public forum. Putting specific charges to a line item on a PO calls out the costs associated with providing these services, services consumers clearly want. But at the end of the day this isn’t any different that charging vendors a shrink allowance or new store stocking fees. All things I’ve seen done my career.
I do think it’s a bit disingenuous to suggest that they’re charging these fees to avoid raising prices for their customers. The price increases will come from the vendor in the near future and at some point will be passed along to the consumer.

Trevor Sumner
BrainTrust

Retailers have often used trade and co-op dollars to subsidize marketing and promotion and these days that includes e-commerce and omnichannel infrastructure, where Walmart has invested $3.5 billion in Canada alone. With Walmart competing on value which disincentivizes price hikes, it’s a balance of taking a profit hit or passing it on to suppliers – and Walmart has the scale to push around suppliers.

George Anderson
Staff

Slotting fees by any name are just that. EDLP retailers that have eschewed upfront fees to focus on driving top line sales have consistently outpaced Hi-Lo operators for years. This seems like it could be a short-term fix and just another incentive for brands to develop their own direct-to-consumer businesses.

Gene Detroyer
BrainTrust

…”just another incentive for brands to develop their own direct-to-consumer businesses.” or in other words, retailers shooting themselves in the foot.

Suresh Chaganti
BrainTrust

Big retailers pressuring their suppliers is not new. It’s been happening forever in one form or the other. Small businesses are the worst hit. Until the behavior reaches monopolistic levels, retailers like Walmart and Amazon will try to get away with it. When you see everyday low prices, something has to give — doesn’t it?

Gene Detroyer
BrainTrust

While I agree that overall small retailers will be the hardest hit. I disagree with your examples. As a start-up, my company was small by most measures. Our biggest customer was Walmart. Amazon ranked fourth. We had to fight hard to protect ourselves from other retailers taking advantage of us. Sometimes by legal means. But the two most consistent and reliable retailers, Walmart and Amazon, gave us no pressure and were the easiest to do business with. They were the easiest to deal with and our most profitable.

Suresh Chaganti
BrainTrust

I see your point, Gene. Several retailers run their back-office departments as profit centers, with chargebacks, dumping returns beyond what is accepted, etc. And then some are based on unequal relationships — forcing their suppliers to do drop-ship, Amazon coercing to sell 1P, etc.

Ananda Chakravarty
BrainTrust

They already do in some form or another. The supply chain is always in motion and smaller suppliers unwilling to adjust to these added prices will find it hard to compete against vendors who do. As mentioned this works with the larger retailers and can be a challenge with smaller ones. Whether they call it infrastructure fees, omnichannel fees, increased slotting fees, or loyalty credits doesn’t really matter- they’re increasing the cost to the supplier. Combine this with delivery constraints and you have a real squeeze on the supplier. Net effect: increase product prices passed on eventually to the consumer.

Craig Sundstrom
Guest

The way the issue is presented seems a little … ummmm, naive: it’s really “how many retailers have sufficient power (as a buyer) to dictate what price they’ll pay?” I suspect the answer is “few.”

Ricardo Belmar
BrainTrust

In many ways, this is not a new dynamic, and it’s very analogous to the retailer/landlord dynamic we are seeing during the pandemic. In the end, every commerce partner throughout the chain from supplier to end retailer needs to remember it’s still a partnership, otherwise, everyone loses. Is this that different from asking a supplier to share in marketing costs for a promotion? Possibly — it really depends on the terms and the size of the fees themselves plus the question of how it is applied to suppliers of all sizes the retailer is engaged with throughout their operations.

Then there is the question of consequences — what happens when the supplier pushes back when the retailer asks for those fees? Or, put another way, does the retailer apply more favoritism to the suppliers that pay more in the same category? It’s a slippery slope to be sure!

Rachelle King
BrainTrust

The vendor-retailer funding relationship has always been as much a source of strain as it has been (at times) reward. Sometimes, there can seem a never-ending list of “asks” by retailers that can make supplier-partners weary to even pick up the phone But this is the nature of the relationship. Suppliers pay. Retailers sell.

There are a whole host of questions that can be surfaced around fair competition for smaller retailers whose voice isn’t as loud; perhaps even some questions around business ethics. But at the end of the day, suppliers and retailers have a complex, co-dependent relationship where funding can either keep them together or tear them apart any given day of the week. Still, nearly all the relationships seem to withstand these dynamics, daily.

Kai Clarke
BrainTrust

This is a classic case of largess rule. The biggest suppliers will better manage these costs and the others will have to suck it up. These are the demands of our new competition and only the strong will survive. The weak will either adapt or perish.

Oliver Guy
BrainTrust

Grocery margins are razor thin so delaying investment can be understood from some perspectives. Amazon is looking for wallet share from the retailers seeking them to act. So why should the suppliers help? Well one reason could be that CPG manufacturers are also at threat from Amazon. Their own-label brands are on the march and seeking share from the CPG manufacturers — Amazon is going to push its own brands first.
This alone creates a compelling case for the CPG companies to consider how they might help retailers with their omni-channel offering.

wpDiscuz
Braintrust
"Time and competition sort these things out, and it is always an uncomfortable trip along the way."
"...today suppliers have alternate routes to the consumer, including DTC options. This might be the time for suppliers to push back."
"Passing costs on to the consumer is not a great idea at least at this time when so many families are hurting. Partner now for a better future for all."

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