Walmart adds supplier fees to cover costs
Is Walmart sending mixed signals? Earlier this year, the retailer indicated it would ask suppliers to cut promotional funds from contracts in an effort to get to the lowest cost of goods. Now come reports Walmart has sent notices to 10,000 suppliers notifying them that it will begin charging stocking fees for items in new warehouses and stores, seeking larger discounts for early payments and extended payment terms.
According to Reuters, one supplier received notice that it would be charged a one-time fee of 10 percent of its inventory value going to new stores and warehouses. It would also be charged an on-going fee of one percent of its inventory’s value stored in Walmart’s existing warehouses.
For its part, Walmart maintains the terms detailed in its letter are similar to what it has done in the past. The difference is that the terms are being applied uniformly across its supplier community.
When it appeared earlier in the year that Walmart was moving to a net pricing approach, industry watchers heralded the change as a return to Sam Walton’s original vision of the company. But a report in April that the company would ask vendors to help fund its Savings Catcher program — along with the latest news — suggests the chain’s approach is not quite so straightforward.
Photo: Walmart
Individuals who spoke with RetailWire said a combination of factors, including investments in warehouses to support its digital efforts and higher employee wages, are driving up costs for Walmart. The company has yet to achieve the level of sales it needs to offset costs and as result is turning to suppliers to help pick up part of the tab.
Carol Spieckerman, CEO of newmarketbuilders, told The City Wire that suppliers find Walmart among the easiest companies with which to conduct business. She doesn’t expect that will change.
"These types of charges certainly aren’t unprecedented in retail yet no doubt many will portray Walmart’s ask as a slippery slope that runs counter to its everyday low price proposition," Ms. Spieckerman said. "In reality, Walmart is cleaning up its policies and applying them more uniformly across its supplier base."
Discussion Questions
Do you see the latest news about Walmart’s vendor terms as being in line or working against its stated policy of getting to the lowest possible price on goods? What will the net result be for Walmart’s business?
Poll
BrainTrust
Tom Redd
Global Vice President, Strategic Communications, SAP Global Retail Business Unit
Tony Orlando
Owner, Tony O's Supermarket and Catering
Walmart’s position with suppliers has always been quite unique in that the rules have been very simple: provide Walmart with the lowest possible every day cost and in turn the supplier would not have to pay for stocking fees, promotions or nearly any of the other expenses normally charged to the supplier by other retailers.
This way of doing business has actually made doing business with Walmart very simple.
Often when other retailers would demand from the suppliers to have the same pricing as Walmart, the supplier would justifiably explain that since Walmart doesn’t charge suppliers for much of anything, that is why they are offered a true every day lower cost.
If Walmart is now going to charge some of the fees that other retailers do, it could be a game-changer in that sense, but I can understand and appreciate why Walmart might need to find other ways to stay ahead of the game and continue to be profitable. My interpretation is that this might have become a necessity.
Carol is on track with Walmart’s real operation. As a vendor, these charges are not much in exchange for having access to the millions of people that shop Walmart everyday. Great article for all the Walmart haters to make noise about. I love it. Many people cannot stand Walmart and won’t even shop there. Why? So many stupid reasons. A core one is that deep inside most of them see themselves as too well off to shop at Walmart. They do not want to be seen there, but I bet you’d find those people at TJX or Marshalls.
Shop Walmart and save! Also, help your local Walmart employees by shopping and helping their store grow.
Whether I agree or disagree with Walmart’s new policies, the company could position this as its way of getting the lowest cost. Is it possible that they asked for the lowest cost but didn’t think they were actually getting it so they decided to assess some fees to ensure that they did?
On the other hand, is it more likely that they determined that they had gotten the best price but needed more to maintain or grow corporate profits in the highly price-competitive market? Having asked for the best price, the way to do it would be gaining more from backside fees, discounts or extended terms.
The problem for their suppliers is simple. Do they make more money with Walmart as a customer than they do if they lost them? For the vast majority the answer is likely to be that they make more dollar profit with Walmart. Even if they break even on a fully loaded cost basis, Walmart’s volume covers a lot of overhead, etc., allowing the supplier to make more margin from other customers.
If Walmart’s actions are an act of “fairness” to apply uniform conditions and fees, then suppliers at least have a sense of a more level playing field.
This is not really anything new, Walmart has built its business and profits on the basis of driving costs out and corresponding support from suppliers.
The interesting dynamic today is the question of how hard Walmart can squeeze suppliers. There are alternatives named Alibaba and Amazon. Suppliers now have some benchmarks to compare the actual costs of selling goods all the way through to the consumer (e-commerce is NOT always cheaper for suppliers).
Walmart’s holistic view of the supply chain, push toward inventory turns and efficiency of doing business should not be underestimated by suppliers.
At the end of the day, it is always a cost/value equation, and it’s very hard for suppliers to give up the sales volumes that Walmart can still drive.
The article says it all. Walmart is paying its employees more and has yet to see enough growth in sales to offset these costs, so it is asking its suppliers to make up the difference. There is going to be a ruffling of feathers before the current, and in my opinion necessary, trend in wage hikes to make its way through the manufacturing and retail cycle. In the end prices may have to rise. Walmart may still offer the lowest prices, but those prices will be higher than before.
Walmart can ask for anything they want and can make vendors squirm quite easily. There is a ton of business to be had and Walmart knows this, so the question becomes: is it worth it dealing with Walmart if I can not turn a profit that helps my business grow? There is no easy answer here and Walmart makes no apologies for its aggressive tactics, so if you want to do business with them, be prepared to deal with it.
The customers will win, and that is the bottom line for Walmart.
Although not unprecedented in retail, some suppliers will likely not take kindly to this new measure imposed by Walmart.
From a cash-flow standpoint, Walmart must do something to offset its increased expenses (especially labor). On the other hand, I’m not sure how some suppliers will be equipped to offer both the lowest possible price and then offer an additional percentage to Walmart. I imagine availability of some items will disappear from Walmart’s shelves because suppliers cannot meet these new requirements, some suppliers may change their SKU sizes and/or pricing strategy, and other retailers may begin imposing similar models.
At the end of the day consumers may be most affected by this new directive.
It will be the usual industry case of robbing Peter to pay Paul, so I see little change after the dust settles. Vendors will raise their prices to cover the costs and Walmart will seemingly gain margin. The only real losers will be consumers, but nothing major. Some vendors won’t be selling to Walmart anymore as a result, which could harm efforts by the chain to differentiate except on price. But I doubt that matters much to Walmart.
These latest demands will cause the largest manufacturers to look again at how they are doing business. Years ago all vendors went through the net cost process of doing business with Walmart and were called on the carpet by other retailers to insure a level playing field. I went through hours and hours with company lawyers to insure that our large vendor company was being fair and equitable in the marketplace. Those vendors who did that (most of the large companies) began reducing trade spending by utilizing consumer insights to reach consumers more directly through customized communications, digital marketing and targeted offers.
This latest move by Walmart is so ’90s that the largest vendors need to make a stand. Either raise prices to Walmart or cut profits everywhere to keep the playing field level. A tough decision for many of them who are too reliant on the Walmart volume to make a stand for the status quo!
This policy of going back to suppliers for more money would appear to have been set in motion by wider issues than paying for the Savings Catcher program. Walmart’s sales and earnings have not been showing good growth over the past year and, in fact, sales and earnings both declined in the first quarter of the current fiscal year.
However, it is of particular interest that, in the first quarter, the cost of sales (what Walmart pays suppliers) decreased year-over-year more than sales did, and this provided the chain with marginally higher gross margins, year-to-year, at 24.14 percent vs. 24.05 percent to be exact. So suppliers are actually already getting less. On the other hand, operating and SGA expenses grew 2.8 percent, producing an expense ratio this year of 19.7 percent vs. 19.2 percent the year before. This prompted an abrupt drop in operating earnings.
So internal costs, not what suppliers are getting for selling their product to Walmart, are one of the problems here. Perhaps part of the issue is improving standards of pay to associates. The discussion also mentions greater digital support. It is my belief that Walmart is approaching a crossroads relative to its big box stores which have been challenged to generate comp store growth in a marketplace in which shoppers are more and more splitting their purchases between several different merchants as opposed to one-stop shopping.
In sum, one can wonder if sticking it to supplier partners is a good way to solve the dilemma, rather than working with them in more supportive ways or investing substantially in smaller formats and digital, areas in which Walmart is showing excellent growth.
As I read this item and the related post one thought comes to mind: This sounds exactly like what the airline industry has done to its passengers. If you want to fly with us we may advertise low prices but here come the extra charges. Sounds exactly like what Walmart is doing to its suppliers.
Maybe I will drive or take the bus.
With more consumer attention being spent on the online side of the business, it seems to me that retailers that get “in the way” of the transaction rather than adding value between shopper and products will find their business model outmoded. Slotting is a false economy that is an operational necessity for those that need to be bolstered due to their inability to compete. There is only one pot of money — use it as you choose (slotting or promotion or other uses). Which road you take will determine where you wind up as a destination.
I wonder whether anyone will have the intestinal fortitude to take this up at the Robinson-Patman legal level, since any change in terms that creates a differential advantage for Walmart, is, at least in theory, a violation of the law.
Walmart has lots of lawyers and probably figures no one will have the guts. But someday, on the other side of all this, when and if Walmart is unable to continue to drive profits and growth through efficiency and is finally unable to press for more from vendors who cannot justify the exposure to their own lawyers and the rest of their customers (who are collectively larger than Walmart, after all), awaits something that sounds suspiciously like A&P, which used the same tactics a lifetime ago and caused Robinson-Patman to exist in the first place.
Wait till Wakefern hears the details. Or HEB. Or Ahold/Delhaize once they get themselves squared away. This is a supplier nightmare.
This change in policy puts the costs of carrying products more on the supplier’s shoulders. If Walmart, or any retailer doesn’t realize that this will come back in higher prices in future price increases, then they are not being reasonable. Someone has to shoulder the costs which are imposed by Walmart, and it will eventually mean higher prices (i.e. the consumer). This is clearly contrary to Walmart’s stated policy of getting to the lowest price.