Walmart Calls Some Extra Shots from Suppliers

By Brian Moore, Global Retail Consultant and CEO of EMR-NamNews

Earlier in October, Walmart issued an unprecedented profit warning, indicating a 12% reduction in its 2016-17 earnings. And we all know that Walmart don’t do profit downgrades…

Following rising costs resulting from increases in wages of its hourly-paid staff, improvements in its stores, and investments to grow online sales, the company aims to restore its profitability, and your aim can help…

Some early warning signals came via the April meeting with Sam’s Club’s major vendors, where Walmart demanded millions of dollars of discounts on future purchases, according to Reuters. Interestingly, in a reminder of who calls the shots, unlike in previous ‘give and take’ talks, vendors were told they could not ask questions at the meetings, with queries to be handled later via email…!

In June, vendors to Walmart’s stores got word of sweeping changes to supplier agreements that seek to extend payment terms in some cases, and introduce new fees to warehouse goods and place product in new stores, ‘in line with industry norms’. Then, in recent weeks, Walmart told suppliers producing in China they should share any benefit gained from the decline in the value of the Chinese yuan.

Joining these dots with the recent news that Asda is scaling back its Click & Collect operation and placing its London expansion on hold to help restore profitability, and keeping in mind that it is unlikely that Asda will be permitted to dilute Walmart global profitability, it might benefit NAMs to anticipate similar moves in the UK…

First, for the avoidance of doubt, Walmart are not breaking any laws or regulations. The demands are not retrospective, but merely apply to future dealings, ‘or else…’, with suppliers retaining their ‘freedom to choose…’.

That said, giving a reflex ‘No’ is almost as bad as saying ‘Yes’ in isolation…

For the moment, Walmart are asking for four additional concessions that have to be challenged by NAMs:

  • Extension of payment terms: Such moves have a cost and value, and are easily calculated. Unless any increases in DSOs are neutralised via acceptance of appropriate increases in price, the supplier’s fair-share is being diluted…
  • New fees to warehouse goods: Presumably ‘cost of rental’ while awaiting sale. Unless current agreements detail such rentals, a new fee would represent a further fair-share dilution.
  • Listings in new stores: Presumably a reflection of administration costs at store level, and logically a de-listing fee for the same amount can be anticipated?
  • Benefits of falls in the value of the Chinese yuan vs. the dollar: In other words the supplier benefits from a ‘wind-fall’ profit in that their cost of production falls, and Walmart wants a piece… This condition is unreasonable unless both parties also share the increased costs resulting from the yuan rising against the dollar. Traditional difficulties in incorporating currency movements in supplier-retailer agreements have always been regarded as an ongoing and individual business risk, and most companies, including Walmart and its suppliers, presumably hedge against the downside of such moves…

In other words, the four new concessions outlined above, represent incremental cost increases for suppliers and increased value for Walmart.

If Walmart – and Asda – really mean to play a fair-share game with their suppliers, they have to expect resistance…

In practice, this means that suppliers have to calculate the full cost of their current agreements with the retailer, and be able to demonstrate the value of each element of the ‘total offer package’ to Walmart/Asda, as a basis for downright refusal to accept any unilateral demand for additional contributions to the partnership.

It follows that suppliers must be prepared to invoke their ‘walk-away’ options – via face-to-face discussions or by email – should Walmart/Asda insist on holding their ground. Again, in terms of risk-management, it is obviously vital to calculate the incremental sales required to cover profit losses should the customer reveal that an offer has been made that cannot be refused…

See KamTip: When the Buyer Wants Even More – an Opportunity for a Partnership Recast?

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