Wal-Mart Stores Inc. wants to take advantage of the savings its suppliers that manufacture in China are realizing as a result of the devaluation of the yuan, and the retailer is said to be asking vendors to lower their wholesale prices.
The retailer has more than 20,000 suppliers in China. So far, the yuan has dropped almost 3 percent versus the dollar and experts believe it could fall by another percentage point by the end of the year. For the nearly $500 billion retail giant, even a 2 percent savings — if vendors and Wal-Mart were to meet each other halfway — would be significant.
Most of Wal-Mart’s offering — 57 percent — consists of grocery products, the majority of which comes from the U.S. Most of the retailer’s apparel, footwear, home goods and toys are made in China, said Craig Johnson, president of Customer Growth Partners. Carter’s Inc., G-III Brands, Signature by Levi Strauss & Co., Riders by Lee and Danskin Inc., along with Wal-Mart’s private label home and apparel, are mostly made in China, he said.
Vendors, not surprisingly, aren’t eager to share their cost savings with Wal-Mart. “We almost never disclose information specific to a customer at that level of detail,” said a representative at G-III when asked if the company had been contacted by Wal-Mart regarding prices. A Carter’s spokesman declined to comment. A VF Corp. spokesman said, “We don’t comment on anything that pertains to our customers.”
“The relationship between Wal-Mart and vendors has become more antagonistic,” said Walter Loeb, president of Loeb Associates. “The attitude of management has changed because of the pressure to show a profit to shareholders.”
Becoming more profitable “is going to be difficult for them unless they eliminate some unprofitable operations and unprofitable stores,” Loeb said. “They need to shrink the company to be profitable.” For example, he cited sporting goods and electronics as categories the retailer could exit. “There’s no money in electronics,” he said.
In addition, sales are shifting to the Internet, where Wal-Mart is battling Amazon. There is also Wal-Mart’s previously revealed plan to increase the wages of 500,000 associates to $9 an hour, at a cost of $1 billion.
Johnson noted that the currencies of other manufacturing countries have been devalued, such as South Korea, which is down 9 percent, and Thailand, down 10 percent. But China remains the single largest source origin country for Wal-Mart. China last month devalued its currency in an effort to spur growth and shore up imports.
“If earnings are going to be challenged because comps are low or relatively flat, why shouldn’t they look for a little value-added on the margins,” Johnson said. “You would think that [Wal-Mart’s] contracts would anticipate and make contingencies for some of this ahead of time, but it wasn’t addressed in the sourcing agreements, so they have to go back and try to get vendors to share some of the benefits.”
A Wal-Mart spokeswoman said, “We won’t be commenting on the China question.” She added that work on implementing new vendor agreements has been under way since June.
The yuan situation is emblematic of Wal-Mart’s single-minded focus on reining in costs. The retailer recently began requiring suppliers to pay fees for storing products in its warehouses. “They would front-load shipments to a Wal-Mart distribution center and expected it as a convenience,” Johnson said of suppliers.
Wal-Mart should also be taking advantage of lower prices at the pump. “Wal-Mart should be re-cutting deals in terms of freight transportation charges,” said Johnson.
To offset the increase in wages in China over the last few years and help create U.S. jobs, Wal-Mart in 2013 pledged to buy an additional $250 billion worth of products made in America. The company has said that it’s on track to reach its goal by 2020.
Wal-Mart also has targets to hit in terms of sustainability. The retailer joined the RE100, a campaign created by the non-product The Climate Group and environmental data company CDP. The retailer in 2005 identified three aspirational sustainability goals, including to be 100 percent supplied by renewable energy, generate zero waste and sell products that sustain people and their environment.
A Wal-Mart spokesman said the aspirational goal of using 100 percent renewable energy “is not time-bound,” but some interim goals include producing or procuring 7 billion kilowatt hours of renewable energy by 2020 and expanding the development of on-site solar, wind, fuel cells and other technologies. Today, 26 percent of Wal-Mart’s electricity is supplied by renewable sources and the company has more than 380 renewable energy projects in operation or under development worldwide.