Features, Strategy & Operations

Walmart Bites the Hands That Feed It

RR_walmart_LLewisThere’s a smell of desperation in the air and it seems to be coming from the direction of Bentonville, Arkansas.

This malodorous scent is Walmart’s plan to hit as many as 10,000 suppliers with warehousing fees, product placement fees for new stores and linking payments to inventory movement—all of which are efforts to shore up its flagging U.S. business, bump up profit margins to offset recent wage hikes and huge investments in e-commerce.

This is no nickel and dime idea. It has the potential to spill billions of dollars in easy money into Walmart’s coffers and, to be honest, being a toll taker is far easier than being a car salesman. But let’s skip the metaphorical niceties. It’s about making money on the buy rather than the sell.
This is the latest chapter in the “I hate Walmart” saga. And if you listen closely you can hear the mentally exhausted anchorman Howard Beale in the movie Network screaming: “I’m mad as hell and I’m not going to take this anymore!”

Of course, it’s more of a silent scream. Poking the bear is not a favorite pastime among suppliers—especially if the bear accounts for a sizeable portion of your business. But a little poking or prodding is in order.

I’ve never been one to constantly characterize Walmart as The Great Satan, a deflowerer of innocent virgins or overseer of downtrodden employees.
The chain, in the best tradition of Sam Walton, has simply been a hard bargainer. They will pummel suppliers for every penny they can get on products then turn them upside down to get at the loose change in their pockets. Business is business and if you’re being honest with yourself you’d do the same thing if you had their clout.

Stocking fees are not unknown in retail. Slotting fees reached epidemic proportions in grocery when supermarkets complained that a deluge of new products with a high failure rate cost too much to carry in warehouses. That may have been true, but slotting fees were, and are, simply easy money.
Slotting is less prevalent these days. Some retailers were shamed into eliminating them. Others just couch them in terms like “promotional funds” or another euphemism and hope no one kicks up a fuss.
But this broad spectrum of fees is a cancer that must be cut from the body retail before it metastasises. It has broad implications for Walmart as well as the industry at large and could end up hurting the chain’s bottom line more than helping it.
One reason Walmart got rock bottom pricing from vendors was that it stayed away from fee-based game playing—mostly! As someone noted recently, you can’t increase the cost of doing business and still expect to get the best cost.

If you’re a mega supplier like Procter & Gamble or Coca Cola the new terms may be a bitter pill to swallow but the financial consequences will be relatively minor and perhaps non-existent if they can be negotiated away. And waiting as long as 90 days to get paid instead of 30-day terms isn’t a big deal either if you happen to be a Fortune 500 company.

It’s the smaller suppliers that will feel the pinch. They can’t afford to lose business or be relegated to a less prominent shelf placement as punishment for not paying or complaining about fees. And they already lowered prices earlier this year when Walmart told them to cut back on marketing and promotions to save money. As one observer noted: This isn’t about Walmart taking cost out of the system to get the lowest prices to consumers. They are simply adding costs.

Adding insult to injury Walmart is encouraging vendors on less frequent payment schedules to take out low interest loans from Walmart’s own financing program.

In some ways, Walmart’s demands run counter to what the industry has been trying to achieve for so many years—real collaboration between retailers and manufacturers. To a degree, the adversarial relationship between the two factions will never really end. People are rewarded for making money—not being good collaborators.

Nonetheless, I believe real progress has been made over the past several years in collaborative planning, forecasting and replenishment. Even those who have not eliminated fees entirely are embarrassed enough to keep them at a minimum and under wraps.

But Walmart’s actions are likely to setback CPFR efforts by others in the industry, especially for smaller manufacturers where additional fees on top of low ball pricing could stifle innovation. The fact is that there is so much competition for the consumer dollar these days I can easily imagine what was once unimaginable—a time when Walmart is no longer in the driver’s seat.

To be fair, manufacturers are no angels. They are taking advantage of Walmart’s extensive supply chain and, despite getting beat up on price, have made a lot of money in the process. And so many have clogged up the supply chain with a deluge of “me-too” products that were doomed to fail
The end result is akin to the old “trickle down” economic theory.

  1. Walmart raises its fees to vendors.
  2. Vendors pass along those cost increases to their suppliers.
  3. Suppliers offset price increases by laying off workers, limiting salaries or closing and consolidating plants.
  4. Inefficiencies result in price increases which are ultimately passed along to consumers.
  5. Consumer backlash in the form of reduced spending.
  6. Everyone’s screwed!

The final question should be whether suppliers, acting in good faith of course, should have to be penalized for the inadequacies of any retailer’s buying and merchandising machine?

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