The pressure’s on.
Retail giant Wal-Mart Stores Inc. is hitting suppliers with new fees in an effort to cut its own costs and reclaim its famous pricing advantage.
Wal-Mart, which has pushed its suppliers for years to slash wholesale prices, is now looking to charge vendors for stocking items in its new stores and holding inventory in its warehouses.
About 10,000 of Wal-Mart’s 11,000 vendors in the U.S. will be impacted, a Wal-Mart spokeswoman said. Some categories of goods are excluded, including adult beverages and produce.
“The reason we’re making these changes is to ensure that we are adhering to the Wal-Mart business model of operating at everyday low cost to provide everyday low prices,” the spokeswoman said. “We’re working with suppliers for our shared customers. We want to make sure we’re bringing those prices to the stores.”
That Wal-Mart, the world’s dominant retailer with sales of $486 billion last year, feels it needs to up its game illustrates just how competitive retail has become as chains battle against unenthused consumers, lower traffic and more online commerce outlets.
The fees are designed “to drive consistency in business terms across our supplier base with a focus on simplification,” the spokeswoman said. “It’s about consistency and simplification.” As president and chief executive officer of Wal-Mart Stores Doug McMillon told a supplier group earlier this year, “When we get away from our pricing model and find ourselves in the middle of the road, we get run over.”
The spokeswoman said, “We found ourselves in the middle of the road and we wanted to get back to focusing on ELDC and EDLP.”
Wal-Mart also learned that some of its competitors have lower operating costs. “Based on our research, the adjustments we’re seeking will more closely align us to the costs of our other competitors,” the spokeswoman said. “Where [competitors] are with their agreements with suppliers, this will more closely align us with them.”
Andrew Jassin, managing director of Jassin Consulting, said he has a couple of food clients who sell to Wal-Mart, and they aren’t very happy about the new fees. “In addition to stocking fees, there’s now an additional fee above that,” he said.
One vendor said the charge for inventory sitting in the warehouse is new. “Wal-Mart certainly has not been consistent, so firming it up to make sure it’s uniform will be meaningful. Wal-Mart used to do something called ‘dialing for dollars’ where they’d call vendors and flat out ask for money if they needed additional gross profit dollars.”
Wal-Mart declined to discuss specifics of the agreements. Reports detailing the new structure range from a 1 percent fee on the value of the inventory to be held in warehouses to 10 percent for food suppliers on the value of goods shipped to new stores.
“If the 10 percent figure is true, these are truly massive charges and smaller suppliers will have trouble coping,” said a vendor. “Large suppliers, such as P&G, have more weight as well as brands Wal-Mart needs to have.”
Wal-Mart suppliers started receiving letters about the new charges last week with more notices expected to be sent through the end of the year.
Carol Spieckerman, president of Newmarketbuilders, said the types of fees Wal-Mart is charging are not new in retail.
However, she said, “Wal-Mart is stepping into the fray with a new spin. What stands out most is Wal-Mart’s reference to suppliers’ ‘use of the Wal-Mart supply network.’ This speaks to an ongoing shift happening across all of retail with Wal-Mart leading the charge. Retailers are beginning to operate as platforms rather than just places that sell merchandise. A shift in accountability naturally follows as suppliers build scale by leveraging retailers’ platform assets including warehouses, store shelves, digital spaces and more. Whether Wal-Mart is flexing this positioning in order to make up for shortfalls elsewhere really doesn’t matter. The big takeaway is that retailers are starting to own their assets, all of them, and suppliers will have to pay for the privilege of playing on retailers’ platforms.”
Craig Johnson, president of Customer Growth Partners, said, “They’re trying to take another nickle or two out of the hide of manufacturers. It’s another version of price negotiation between a wholesaler and retailer. It’s not dissimilar to chargebacks. There’s always a battle, from Macy’s on down, of chargebacks and markdown allowances. It’s a little bit different because in a fashion business when you have a miss, you don’t know whose fault is it — the brand or the buyer. Here, you’re primarily talking about consumable goods and groceries.”
Johnson pointed out that inventory has physical holding costs.
“Wal-Mart is under a lot of pressure to be more efficient,” he said. “They’ve made some modest strides in getting a few quarters of [comparable-store sales] growth. Part of that is due to some food inflation. So how much comp growth is there?”
Johnson also noted that Wal-Mart’s going to be making additional outlays for a plan to increase wages for sales associates and managers.
“How do you fund it and still meet your profit goals,” he said. “People up and down the supply chain are going to be asked to belly up and there will be some hard negotiations. Wal-Mart is becoming more efficient by properly aligning costs, how costs are incurred and how costs are defrayed. This will force suppliers to become more efficient.”
Wal-Mart has been encouraging suppliers to cut costs for months, asking them in February to forego investments in joint promotions and advertising in favor of using those funds to lower the price of goods.
There were reports in recent months that Wal-Mart wanted help from suppliers to fund the cost of Savings Catcher, its app that compares Wal-Mart prices with those of competitors, and provides consumers with the difference if the same product is found elsewhere at a lower price.
When the world’s largest retailer is looking for some extra help, more price and cost pressure could start to build up in the system.