[191115.EN.BIZ] Wal-Mart Steps Up Pressure On Suppliers To Cut Prices

WALMART, the world's biggest retailer by revenue, has a reputation for demanding lower prices from vendors but things have changed since last month when the discount store behemoth has been turning up the heat on suppliers for more price cuts.

Wal-Mart last month stunned Wall Street by forecasting that its earnings would decline by as much as 12 per cent 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.

Faced with relentless price competition from Amazon.com Inc, 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.

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 suppliers.

"The ground is shaking here," said head of Cameron Smith & Associates, Cameron Smith, 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 US$340 billion of annual sales in the US. That accounts for more than 10 per cent 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.

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.

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.

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 centres 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 US$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 labour costs, such as placing more department managers in stores. The additional expense for its workers is accounting for 75 per cent 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.

Head of the US business, Greg Foran, said 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 per cent 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.

Mr 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," he added.

Source : HKSG.