Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices

Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices

Retailer urges them to pull back on jointmarketing
efforts to bring cost down
With the growth of dollar stores and other
discounters, Wal-Mart is facing ever more
competition on price, which for many customers
is the most important selling point. PHOTO: JOE
RAEDLE/GETTY IMAGES
By PAUL ZIOBRO and SERENA NG
March 31, 2015 WSJ
Wal-Mart Stores Inc. is increasing the pressure on
suppliers to cut the cost of their products, in an
effort to regain the mantle of low-price leader and
turn around its sluggish U.S. sales.
The retailing behemoth says it has been telling
suppliers to forgo investments in joint marketing
with the retailer and plow the savings into lower
prices instead. Makers of branded consumer
products from diapers to yogurt typically earmark
a portion of their budgets for marketing with WalMart,
spending on things like eye-catching
product displays and online advertisements.
Wal-Mart has long had a reputation for pressing
its suppliers to cut costs to help lower prices, but
the retailer’s new leadership has embraced the
concept with fresh vigor. Wal-Mart’s price
advantage against its competitors has been
eroded, and it has steadily been losing market
share in the U.S. since the recession ended, while
rivals including Kroger Co. and Costco Wholesale
Corp. gained share, according to data from the
consultancy Kantar Retail.
With the growth of dollar stores and other
discounters, Wal-Mart is facing ever more
competition on price, which for many customers
is the most important selling point.
The new dictate on prices is creating tension with
companies that supply the hundreds of thousands
of products on Wal-Mart’s shelves.
While lowering prices by shaving down
marketing budgets may help Wal-Mart draw more
customers, it gives suppliers less control over how
their products are displayed or promoted, and less
ability to make them stand out against store
brands or other rivals. That is an issue when WalMart
and other chains are trumpeting their
private-label house brands.
The zeal on pricing is part of a push by new Chief
Executive Doug McMillon and U.S. head Greg
Foran to turn around Wal-Mart’s core domestic
business, which booked $288 billion in sales in
the year ended Jan. 31, 60% of the company’s
total. While U.S. sales were up 3% last year, the
growth was a scant 0.5% excluding newly opened
stores, and the division’s profit fell.
With the heavy investments related to its promise
to raise wages and the development of a vast ecommerce
business, Wal-Mart has fewer options
for chipping away at costs, putting suppliers in the
cross hairs.
‘They kept pushing, ‘We’re going back to basics,
it’s all about low pricing.’’
—A supplier who attended February meeting
Messrs. Foran and McMillon laid out the pricing
message during a private meeting with suppliers
in February. They want suppliers to operate with
the same everyday low cost model that Wal-Mart
employs from top to bottom.
“They kept pushing, ‘We’re going back to basics,
it’s all about low pricing,’ ” said one supplier who
attended the meeting.
Mr. Foran, who became president and CEO of
Wal-Mart’s U.S. business in August after leading
the Asia division, plans to address Wall Street
analysts Wednesday to lay out in more detail his
plans for the U.S. business.
Financial arrangements between suppliers and big
retailers aren’t just a matter of coming to terms on
volumes and a wholesale price. They often also
bundle in a host of extras including slotting fees,
funds for special promotional discounts and
money to pay for shared marketing. The latter is
particularly important for makers of branded
consumer goods.
“We want to get back to a point where we are
playing offense with price because of the way we
go to market,” Mr. McMillon said, according to a
transcript. “Our pricing strategy is aimed at one
objective, and that is building trust.”
The effort to get suppliers to reallocate the
marketing investments reinforces the company’s
long-standing business strategy to keep costs low,
said Deisha Barnett, a Wal-Mart spokeswoman.
“It’s a proven business model that works,” she
said. “We think the smart investment is to put the
dollars into price.”
Former Wal-Mart employee Derek Ridenoure
now works at C.F. Sauer Co., a company that
supplies the retailer with spices, seasoning mixes
and other packaged food products. He said a team
at Wal-Mart closely monitors commodity prices
and asks suppliers to reduce costs when it
observes downward trends in ingredients prices.
After a long slide left soybean prices at a
multiyear low recently, the retailer asked Mr.
Ridenoure this year to cut his prices. Soybean oil
is a key ingredient in many condiments made by
C.F. Sauer.
Wal-Mart’s U.S. division is in the early stages of a
turnaround, having just posted two straight
quarters of positive same-store sales after a long
slump. Low gasoline prices have helped. PHOTO:
JOE RAEDLE/GETTY IMAGES
“I pushed back initially,” Mr. Ridenoure said,
reasoning that soybean prices could march higher
if farmers switched to other crops.
Wal-Mart’s response was that if soybean prices
marched higher, suppliers could take their prices
up again. Mr. Ridenoure’s company ultimately
agreed to cut costs by giving discounts for bigger
orders.
Recently, in what was widely seen as a move to
pressure Procter & Gamble Co. to lower prices of
its popular Tide detergent, Wal-Mart struck a deal
with consumer products company Henkel AG to
introduce a new premium-priced detergent brand,
Persil, exclusively in its stores. Wal-Mart is
selling Persil at the same price as Tide, and
displaying it on shelves next to Tide.
Ms. Barnett said Wal-Mart decided to start selling
Persil in the U.S. to broaden the assortment in its
laundry aisle. A P&G spokesman declined to
comment about its relationship with Wal-Mart,
but said the company welcomes competition in
the detergent business.
Wal-Mart’s U.S. division is in the early stages of a
turnaround, having just posted two straight
quarters of positive same-store sales after a long
slump. Executives at the retailer have attributed
part of the increase to falling gasoline prices,
which have led some shoppers to spend more and
to make the longer drive to the stores.
The gains are tenuous, however, and Mr. Foran
has been meeting with former executives to
understand what gave the retailer an edge during
its heyday. The native New Zealander is a devotee
of former Wal-Mart executive and board member
Jack Shewmaker, who developed the company’s
everyday-low- price strategy and died in 2010.

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