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 The discount store behemoth has always had a reputation for
demanding lower prices from vendors but Reuters has learned from
interviews with suppliers and consultants, as well as reviewing some
contracts, that even by its standards Wal-Mart has been turning up
the heat on them this year.
"The ground is shaking here," said Cameron Smith, head of Cameron
Smith & Associates, a major recruiting firm for suppliers located
close to Wal-Mart's headquarters in Bentonville, Arkansas.
"Suppliers are going to have to help Wal-Mart get back on track."
For the vendors, dealing with Wal-Mart has always been tough because
of its size – despite recent troubles it still generates more than
$340 billion of annual sales in the U.S. That accounts for more than
10 percent of the American retail market, excluding auto and
restaurant sales, and the company increasingly sells a lot overseas
too. To risk having brands kicked off Wal-Mart’s shelves because of
a dispute over pricing can badly hurt a supplier.
On Wednesday, Wal-Mart stunned Wall Street by forecasting that its
earnings would decline by as much as 12 percent in its next fiscal
year to January 2017 as it struggles to offset rising costs from
increases in the wages of its hourly-paid staff, improvements in its
stores, and investments to grow online sales. This at a time when it
faces relentless price competition from Amazon.com Inc <AMZN.O>,
dollar stores and regional supermarket chains. Keeping the prices it
pays suppliers as low as it can is essential if it is to start to
claw back some of this cost hit to its margins.
Helped by investments to spruce up stores and boost worker pay,
Wal-Mart believes it can grow sales by 3 to 4 percent a year over
the next three years, or by as much as $60 billion, offering
suppliers new opportunities to boost their own revenues.
QUESTIONS NOT ALLOWED
The squeeze on suppliers was clear to those selling to Wal-Mart’s
Sam’s Club warehouse clubs around April this year. Sam’s Club’s
buyers summoned major vendors to meetings and told them a "cost gap
analysis" showed they should be delivering at a lower price, and
demanded millions of dollars in discounts on future purchases,
according to emails reviewed by Reuters and interviews with
suppliers and consultants involved in the talks.
Unlike in prior talks, which featured give and take, vendors were
told they could not ask questions at the meetings, with queries to
be handled later via email, according to suppliers and consultants
involved in or briefed on the meetings. One food supplier, for
example, eventually agreed to cut costs by a few percent, after
being asked for a much larger reduction, people familiar with those
talks said.
Sam's Club said it is continually talking with suppliers in an
effort to save costs and lower prices. Spokesman Bill Durling said
the company, whose merchant teams are separate from those at the
Walmart chain, had recently changed its structure so that one
account head now manages the relationship across various products,
with the ability to see across the work of multiple buyers. This was
done with the aim of improving merchandise and wringing out
efficiencies, he said.
"There might be unpleasant conversations but ultimately we want to
do right by our suppliers because we want to create strategic
relationships," Durling said. "We want them to be along with us for
the ride as we continue to grow.”
NEW FEES SOUGHT
In June, vendors to Walmart stores got word of sweeping changes to
supplier agreements that seek to extend payment terms in some cases
and introduced new fees to warehouse goods and place product in new
stores. Then, in recent weeks, Wal-Mart told suppliers producing in
China they should share any benefit gained from the decline in the
value of the Chinese yuan.
Wal-Mart spokeswoman Deisha Barnett stressed that it sees its
relationships with suppliers as critical to the company's success.
"We will work with every supplier to ensure that terms and
agreements are mutually agreed upon," she said.
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Wal-Mart has told suppliers the new terms are aimed at helping it
keep prices low, applying fees more consistently across vendors and
bringing its practices in line with industry norms. The charges to
store goods in distribution centers and for delivery to new stores
are common at other retailers but had not normally been the case at
Wal-Mart.
The moves followed February’s announcement that Wal-Mart would hike
the minimum pay rate for its workers to $9 an hour by April, and to
$10 by February 2016. The first move is costing $1.2 billion this
year and the second an additional $1.5 billion next year, including
other labor costs, such as placing more department managers in
stores. The additional expense for its workers is accounting for 75
percent of the projected earnings decline in fiscal 2017.
Chief Executive Doug McMillon, who became CEO 18 months ago, and
other executives said they are seeing a payoff in the form of
improved customer service.
Greg Foran, head of the U.S. business, said on Wednesday the company
has assessed that two-thirds of its 4,500-plus stores now have a
"passing grade" in problem areas - cleanliness, checkout speed, and
other factors affecting customer satisfaction. That is up from just
16 percent in February.
With its stores in better shape, Wal-Mart now is redoubling its
focus on beating competitors on price. Over the next three years,
the company said it would spend several billion dollars on keeping
prices low.
Foran said vendors will benefit. "We lower the cost of goods, which
in turn generates savings and we invest that in price. Lower prices
see an increase in traffic and basket, which in turn grows sales and
gains share," Foran said.
Late last year Wal-Mart broke a stretch of six straight quarters
without growth in same-store U.S. sales, and logged a 1.5 percent
gain in its second quarter ending in July. But that falls short of
Target Inc’s <TGT.N> 2.4 percent growth, and Kroger’s <KR.N> 5.3
percent increase, excluding results from sales of gasoline.
SLIPPERY SLOPE
Wednesday's announcement sent ripples through the supplier community
in the Bentonville area, where more than 1,000 have offices to stay
close to Wal-Mart.
"Now we know why they have been pushing so hard," said an executive
at a major consumer goods supplier to both Walmart and Sam's Club,
adding that his team was shocked by the projected decline in
profits. "Maybe they were banking on more suppliers rolling over on
the terms."
Wal-Mart's success in boosting profits could hinge in large part on
the willingness of suppliers to sign on to its new terms and agree
to its price demands. Despite signs of resistance, one consumer
goods supplier reckons most will eventually give in to Wal-Mart’s
market power, though not without a fight.
He pushed back after the retailer asked him for new terms that cut 2
percent off his annual sales. They settled on 1 percent, but he
fears further demands down the road.
“I just worry that this is a slippery slope of them going in this
direction," he said.
(Reporting by Nathan Layne in Chicago; Aditional reporting by Tim
Aeppel in New York; Editing by Martin Howell)
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