Wal-Mart Is Quietly Cutting Prices, Squeezing Vendors In Deflationary Supply-Chain Shock

Tyler Durden's picture

The scramble for America's bottom dollar is on, and according to a troubling report by Reuters it has prompted America's largest low-cost retailer Wal-Mart to not only cut prices, but to squeeze suppliers in a stealthy war for market share and maximizing profits, a scramble for market share which is oddly reminiscent of the OPEC 2014 price fiasco and is certain to unleash a deflationary shock across wide portions of the US economy.

In its contested analysis (because JPMorgan has already come out to deny that anything contained in the report is credible), Wal-Mart has been running a "price-comparison" test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi and domestic rivals like Kroger. Citing vendor sources, Reuters adds that Wal-Mart launched the price test across 11 Midwest and Southeastern states such as Iowa, Illinois and Florida, focusing on price competition in the grocery business that accounts for 56% of the company's revenue.

The legic behind the "price test", which is a more respectable way of saying "price cut", is simple: get shoppers to spend more.

Wal-Mart's tests are aimed at finding the right price point across a range of products that will attract more shoppers, and then adjusting prices as needed. Spot checks by Reuters on a basket of grocery items sold by competing Aldi and Wal-Mart stores in five Iowa and Illinois cities showed Wal-Mart's bid to lower prices is already taking hold. Wal-Mart consistently offered lower prices versus Aldi, an improvement over recent analyst estimates that Wal-Mart's prices have been as much as 20 percent higher than Aldi on many grocery staples. 

 

The competition at these stores is intense, with both competitors selling a dozen large eggs for less than a dollar. A gallon of milk at some stores was priced at around $1.

While Wal-Mart is considering cutting prices to match its competition, the near-monopoly retailer it is also seeking offseting cost cuts from its own vendors, in what - if implemented - could lead to a deflationary shock across the entire US retailer supply chain, with dropping prices leading to margin collapse within the entire industry. 

WalMart also held meetings last week in Bentonville, Arkansas, Reuters reports, with food and consumer products vendors, including Procter & Gamble, Unilever PLC, Conagra Brands Inc, and demanded they reduce the cost they charge the retailer by 15 percent, sources said.

Wal-Mart also said it expects suppliers to help the company beat rivals on head-to-head pricing 80 percent of the time, these vendor sources said. The wide-ranging meeting with suppliers - where Wal-Mart discussed other topics - was also attended by Johnson & Johnson and Kraft Heinz Co, among others, sources told Reuters. The consumer goods companies did not respond to Reuters requests seeking comment.

These Wal-Mart moves signal a new front in the price war for U.S. shoppers, as the pioneer of everyday low pricing seeks to regain its competitive pricing advantage in traditional retailing.

For more than a year, Wal-Mart said it is investing in price while not sharing specifics. When asked by Reuters about the test and demands on grocery suppliers, Wal-Mart spokesman Lorenzo Lopez said the company is "not in a position to share our strategy for competitive reasons."

This relentless competition assures that whether or not Wal-Mart is implementing price cuts now, it will have no choice but to do so in the future. Germany-based discount grocer Aldi is one of the relatively new rivals quickly gaining market share in the hotly competitive grocery sector, which already boasts Kroger, Albertsons Cos Inc and Publix Super Markets as stiff competitors on price. A second Germany-based discount grocer, Lidl, is planning to enter the U.S. market this year, and together the German discounters pose a serious threat to Wal-Mart's U.S. grocery business.

The potential market share stakes for Wal-Mart, and other big box retailers, are huge. According to Scott Mushkin, managing director of Wolfe Research and a leading pricing analyst, the retailer would need to spend about $6 billion to regain market share from all of its grocery rivals. Reuters adds that Wal-Mart would also needs to find ways to cut prices without further damaging its bottom line. In its latest quarter, gross margins slipped 8 basis points, while net income dropped 18 percent compared to the year-ago quarter. The company attributed the decline to factors such as price investments, which is essentially the cost of cutting prices.Vendors said Wal-Mart has told them it intends to maintain margins on average and lose money on some goods as part of its pricing plan. Wal-Mart told vendors it will absorb some of the losses so suppliers can adjust to the new pricing demand.

What is the extent of the cuts? A supplier of consumer goods said Wal-Mart cut prices on some of his company's products by as much as 30 percent in some stores over the past few months.  "It helped them figure out the sweet spot that drives traffic," the person said. The person did not elaborate how he would offset this collapse in revenue, absent lowering wages and laying off workers.

Wal-Mart also said it wants vendors to make logistics improvements that would help vendors get $1 billion more in sales, though it did not specify the time period. The retailer asked vendors to work harder on shipping orders in full and on-time, which would trim delivery costs, reduce re-orders, and reduce out-of-stock problems that have vexed the retailer and hurt sales in recent years, vendor sources who attended the meeting told Reuters.

"Wal-Mart is trying to go back to where they were 10 years ago when they were absolutely the low price leader," a large packaged food supplier told Reuters on condition of anonymity. "We understand they are willing to give up profits to a large extent in some cases, so they can invest in their own brand."

Meanwhile, Reuters writes that its spot check in markets where Wal-Mart is running its new U.S. pricing program indicates the retailer has already taken the price battle to Aldi. The Reuters check of Wal-Mart and Aldi stores in five Midwestern cities where Wal-Mart is running its test found Wal-Mart's prices for a basket of 15 staples averaged 8 percent less than Aldi's products.

Reuters conducted the price comparisons in Dubuque and Davenport, Iowa, and Moline, Dixon and Galesburg, Illinois. At each, Reuters collected prices for a basket of 15 similar-sized products including private-label packages of butter and milk, along with branded items like Crest toothpaste and 2 liter-bottle of Coca-Cola. Reuters conducted the price comparisons in Dubuque and Davenport, Iowa, and Moline, Dixon and Galesburg, Illinois. At each, Reuters collected prices for a basket of 15 similar-sized products including private-label packages of butter and milk, along with branded items like Crest toothpaste and 2 liter-bottle of Coca-Cola. Wal-Mart is also conducting the price comparisons in Georgia, Indiana, Kansas, Kentucky, Michigan, North Carolina, South Carolina and Virginia, according to sources.

Some statistics on the coming deflationary price war:

  • In the United States, Aldi is starting from a small base and Lidl has not yet opened its first store. Aldi, with roughly 1,600 U.S. stores, accounts for only about 1.5 percent of the U.S. grocery market - but it is growing at 15 percent a year. Mushkin of Wolfe Research estimated Aldi and Lidl together could grab as much as seven percent of the U.S. market over five years.
  • Wal-Mart currently controls about 22 percent of the U.S. grocery market, and its U.S. sales are estimated to grow about 2 percent this year, according to analysts.
  • Over the past few years, Aldi's prices have been about 20 percent lower than Wal-Mart's, said Mushkin of Wolfe Research. When Mushkin in December compared Wal-Mart and Aldi prices in Connecticut for private label goods - the retailers' own brands, typically the lowest-priced goods in each category - he found the German chain's prices were 24 percent lower.

For now WMT's vendors appear to be collaborating with the big box giant: after all, Wal-Mart is so big, it has virtually unlimited leverage. However, should the supply-chain organize (or perhaps "unionize") and respond with a coordinated response, forcing WMT to seek price cuts elsewhere, the most likely place where the Bentonville giant will look for cost-cuts is its own workforce, which at 2.3 million has the potential of becoming substantially smaller should WMT shareholders demand a rebound in profitability.

And then there is the question of what happens to Amazon, the online retailer that has become the source of countless nightmares for America's traditional brick and mortar retail outlets: should WMT and the rest of the US retail industry escalate what is rapidly becoming a life or death war, and lodge a grievance to Donald Trump against AMZN and its boss Jeff Bezos, who needless to say is not on Donald Trump's holiday card list, then things could really get interesting.

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Logan 5's picture
Logan 5 (not verified) Feb 27, 2017 6:00 PM

They needed the cash to pay for those OSCARS ads.

 

But hey, what they LOSE in 'lost leader' negative margins they'll make up in VOLUME right?

Peterman333's picture

Or in pillows, bedding, curtains, vitamins, liquor.. higher margin stuff.

nuubee's picture

Why the hell hasn't Overstock already replaced WalMart with internet sales?

CheapBastard's picture

Walmart must have new management because:

1) they are hiring very polite people;

2) they now compete with Little Caesars and sell $5 peperoni pizzas from 4-7pm (they don;t taste bad either!);

3) price cuts.

And still maintain a "Mens" and separate, "Womens" bathroom.

That's something.

SilverRoofer's picture

Please don't squeeze the Charmin

 

 

Vardaman's picture

Deflation is a fancy term for "it's only worth what people will pay."

Logan 5's picture
Logan 5 (not verified) Vardaman Feb 27, 2017 6:02 PM

I'll pay one Andrew Jackson for two Harriet Tubmans. On 2nd thought... Nevermind.

Escrava Isaura's picture

Squeezing Vendors?

Wait. I was told by some Hedgers last weekend that this doesn’t happen, because the contractors would walk away.

So, this title must be wrong.

“The naive doesn’t see the danger until it is at his throat.” — Noam Chomsky

 

sixsigma cygnusatratus's picture

"Socialism is to economics as perpetual motion is to thermodynamics." - Sixsigma

Hey, I could get used to this quotes gig...

Golden Phoenix's picture

Socialism is to economics as perpetual motion is to thermodynamics."

- Sixsigma

                  - Michael Scott

Billy the Poet's picture

The vendors are not being squeezed. If you ask me to produce a product and sell it to you at a price that is lower than my costs plus my desired level of profit I won't do it. Will you? If I demand that you sell me cashmere sweaters for a buck eighty seven will you do so?

Bollixed's picture

As someone who has dealt with WM as a product designer I can tell you without question WM squeezes the living daylights out of their vendors. I've help put around a dozen products in WM and they are beyond brutal. The reason a seller will put up with the abuse is because the volume offsets some of the fixed costs associated with the product relative to purchasing raw materials and manufacturing infrastructure to name but two. Think economies of scale. It's a trade off that has to be looked at. If WM, as a real life example, moves 20,000 units a month and buys for $X and Kmart only moves 5,000 units a month but buys for $Y, Y being more than X, in the grand scheme of things it's a prudent decision to sell into WM. Not all mfrs/reps will put up with the gouging and will not sell to WM. But if the bottom line makes sense then the bottom line makes sense.

Billy the Poet's picture

It's the customer with whom the demand for lower prices originates. If there is any gouging going on it is being done by those in the check out lines. But this isn't gouging, it's just business.

 

First you present us with an example of a reasonable business decision:

"If WM, as a real life example, moves 20,000 units a month and buys for $X and Kmart only moves 5,000 units a month but buys for $Y, Y being more than X, in the grand scheme of things it's a prudent decision to sell into WM.


But then for some reason you declare this very reasonable bit of market interaction to be "gouging" on the part of one entity in the chain:

Not all mfrs/reps will put up with the gouging and will not sell to WM.

 

Your summation also suggests that Wal-mart is involved in voluntary negotiations with willing partners and not twisting anyone's arm:

But if the bottom line makes sense then the bottom line makes sense.

 

That's not gouging.

Bollixed's picture

There is no way to convey in depth what goes on in negotiations with a company like WM in these short comments. You may not be aware that WM has no quams about going in after the fact and renegotiating the price for any number of reasons. That could be because they say your tooling has been amortized, your raw materials could be sourced cheaper, they found a competitor who will build it for less, or a revised model has now hit the market and you'll get no additional orders, as examples. To imply WM never gouges a vender is simply semantics related to the word gouging. Try putting a product in WM. Let me know how that goes for you. (Not my junks, btw)

 

Billy the Poet's picture

Are any of these indescribable acts engaged in by Wal-mart during negotations violent or fraudulent in any way?

Bollixed's picture

Violent or fraudulent in any way? Not the acts themselves, but I can tell you from experience laying off 158 people working in our factory in one day because of failed renegotiations sure seemed violent or fraudulent to our workers who lost their jobs. When a company goes behind your back and re-sources a product without so much as a heads-up it's fair in business but it does have consequences in the broader scheme of life. Could we have done things differently? Sure, we could have passed on the whole arraingement in the first place. We'd have saved the $3 million we lost on that deal.

The point being, companies like WM, among many, are as cutthroat as they are allowed to be. It's part of the understanding one has going into the game. Sometimes you win, sometimes you lose. I've had many wins with WM and some big losers. So the answer to your question is 'no'.

Billy the Poet's picture

I can tell you from experience laying off 158 people working in our factory

Why would you lay them off?  You seem to get offended when Wal-mart gets the best value for their dollar. Stop valuing that dollar yourself and pay it to those workers regardless of the return to your company.

 

Could we have done things differently? Sure,

That's why your problems can't realistically be blamed on Wal-mart.

 

The point being, companies like WM, among many, are as cutthroat as they are allowed to be

You're describing the normal course of business in pejorative terms once again.  I don't understand your motivation in doing so.

Bollixed's picture

You should teach at a university...

"Why would you lay them off?  You seem to get offended when Wal-mart gets the best value for their dollar. Stop valuing that dollar yourself and pay it to those workers regardless of the return to your company."

That was the production line assigned to build the specific product that was re-soured to China. No product to make = no jobs. Econ 101. Getting the best value for the dollar should not include absconding with technology we invented in-house but what's a company to do... Throw good money after bad? (rhetorical question)

You're describing the normal course of business in pejorative terms once again.  I don't understand your motivation in doing so.

In your world things must be different. In the world I worked in we left the rainbows and unicorns at home with our children. Cutthroat was a word used to describe how business transactions often became. In the real world...

 

 

Billy the Poet's picture

That was the production line assigned to build the specific product that was re-soured to China. No product to make = no jobs. Econ 101.

Why do you believe that Wal-mart is exempt from the lessons of Econ 101? Your company pays according to the value provided to it and so does Wal-mart.

 

Getting the best value for the dollar should not include absconding with technology we invented in-house but what's a company to do... Throw good money after bad?

When you use the word "absconding" it sounds like you possess evidence of an actual crime. Did you seek redress?

 

In your world things must be different. In the world I worked in we left the rainbows and unicorns at home with our children. Cutthroat was a word used to describe how business transactions often became. In the real world..

Cutthroat is fine word for use by those who fight hard and expect others to do the same. You're the one who's seeking a world of rainbows and unicorns in which the other players don't try too hard to win. Maybe you should just print yourself a participation trophy and make the most of it.

Billy the Poet's picture

Now imagine that you can look into your computer screen and see each of your fellow ZH readers.

Bigly's picture

I truly am not a snob but I cannot bring myself to shop there, even for low prices

Primarily it is the clientele. See Peopleofwalmart.com - and I get pissed when the 5 people in front of me pay EBT.

That said, i can see it would be brutal to get shelf space there and one penny differential will get someone displaced.  That sucks and it is probably THE reason why the shelves are stacked with cheap, substandard Chinese crap

Billy the Poet's picture

Wal-mart has the exact same items available at other stores in my town at about 40% less. Many are produced not only in the US but right here in Pennsylvania.

canisdirus's picture

Due to the amount of the market that Wal-Mart represents, losing them as a customer could cost them more than slashing prices below actual cost and letting other customers pay for it.

It's a weird dynamic. Usually, vendors have considerable control over what they will accept, but they ultimately must move product. Wal-Mart buys a lot of product, which is a lot of cash flow, which is something critical to your valuation.

Ultimately, of course, this is quite deflationary.

PTR's picture

I think since Sam Walton died, this has pretty much been the nature of maintaining a relationship with walmart.  Cut or be culled.

Croesus's picture

Oy vey, I love a bargain! But I hate WMT.

"Anywhere, but Wally-World" when it comes to shopping, even if it means paying more. I'd rather keep it local.

Billy the Poet's picture

The local workers at my local Wal-mart make more than the workers at the other grocery story in town and the prices are about 40% less. It must be great for you to be able to pay more for things than they are worth just for kicks but not all of us can afford to do that.

Croesus's picture

@ Billy:

I shop at the Amish-owned grocery, most of the time (local chain, 5 stores). I can typically buy about $300 worth of groceries, for $75-100, so the net-savings there, allows me to pay higher for other things elsewhere (and avoid Wally World). No great mystery, my friend.

Frugality is my middle name, and regardless of wealth, I'll always be frugal.

Where WMT is concerned, it's a matter of principle for me; they screwed Papa Croesus over, on a supply deal years' ago, and knowing that, plus how they treat their employees...kind of hard for me to walk in there...without wanting to torch the place.

Billy the Poet's picture

"How did I forget the Amish grocer!" he said with a slap to his forehead. "I'm gong to hitch up the team and take a drive over there right now."

Croesus's picture

Not sure where you live, but if you're anywhere near PA, BB's is well-worth the drive. They have car parking, a cooler section, a freezer section, lights, and cash registers...they're just owned by the Amish (a guy named Emmanuel, to be specific). Hahaha.

Billy the Poet's picture

Lancaster is about a three hour drive by car and substantially longer by covered wagon. It hardly seems worthwhile to drive that far to do my weekly shopping and line the pockets of the oil companies in an attempt to deny Wal-mart my business.

TxExPat's picture

Not just keeping it local.  Their squeeze of the suppliers means that they are peddleing lower quality goods that break/wear out quickly.  Even "Name Brand" suppliers typically have a 2nd tier of distribution for Walmart.  Take those items that would fail quality control checks to a reqular customer, and push them out through the walmart channel.  And Locally at least (Tennessee), whoever is running their grocery department seems adept at purchasing produce at a steep discount just before it goes bad, buy their produce, and you had better plan on eating it within the next day or so, or forget about it.  ("Just In Time" inventory doesn't seem to work all that well with produce...).

 

Bodhi's picture

Gallon of milk is $0.78 at the local Wally.   Cheaper than water at that price.

ZD1's picture

Maybe, but is it worth waiting in long lines and having to see some of the fattest, weirdest, and ugliest people in the world who all seem to congregate at Walmart?

cossack55's picture

at $.78/gallon, you just found out where the "milk" comes from

Logan 5's picture
Logan 5 (not verified) cossack55 Feb 27, 2017 6:29 PM

It's the same milk they use for the lobster bisque...

Bigly's picture

I am nauseous.

Seriously...where the the cows that produce so EFFICIENTLY that they can charge less than half of sale prices elsewhere?  Can someone answer this?  I am asking a serious Q as i am trying to visualize the 'farm' conditions.....thanks.  

 

Moe Hamhead's picture

Cows!?!  Who said anything about cows?  All it says is "Milk"!

Billy the Poet's picture

Depends on where "elsewhere" is. In Pennsylvania the government sets minimum prices for milk.  So we pay more and it has little to do with efficiency or quality.

Billy the Poet's picture

Maybe, but is it worth waiting in long lines and having to see some of the fattest, weirdest, and ugliest people in the world who all seem to congregate at Walmart?

 

I live in the rust belt and lots of the folks I encounter are some kind of walking wounded.  Most young people with talent move on to greener pastures and the aging faces of those left behind can look worried and bleak, the people sometimes shuffle or stutter or succumb to personal failings.  No one at Wal-mart looks any better or worse than folks I meet anywhere else. I don't have contempt for these people.

You can avoid long lines by checking out in the garden center.

vealparm's picture

Where is local? Here in Utah, at Wally World milk is around $2.00/GAL.

I shop at WINCO here for our groceries......way lower prices than WalMart.

stant's picture

I ve been going around and around with wallmart . After all these yrs working on it . They have screwed up their payment system . My last email today was my truck ins. I had to send a copy . With they said wasn't enough. And they had to be named on the certificate . So fukem the juice ain't worth the squeeze . But I did find out Iam not covered by - war declared or undeclared . Civil war and insurrection . Revolution or rebellion. Guess I need to go over and see what the " General" has

slightlyskeptical's picture

WalMart making money = Good

Anyone else making money = Bad

 

Billy the Poet's picture

"Wal-Mart is trying to go back to where they were 10 years ago when they were absolutely the low price leader," a large packaged food supplier told Reuters on condition of anonymity. "We understand they are willing to give up profits to a large extent in some cases, so they can invest in their own brand."

wizteknet's picture

When Walmart let me go 10yrs ago I went & worked for there competitors, they wont be like 10yrs ago unless they fire their aging whole workforce & start at minimum wage!

Billy the Poet's picture

That might be the case. But I'm amazed by those on this site who absolutely hate Wal-mart for providing the lowest possible price to customers living on a meager income. I can't think of any other examples where people cry out, "That evil store charges people too little! The poor can actually afford food and clothing if they shop there!"

okyoureabeast's picture

So in other words, they're doing what they set out to do in their business plan? Why is this notable?

Businesses compete, this is called capitalism.

CyberSecArtist's picture

why is this news? it's _literally_ Walmart's business model and has been from the very, very beginning.  even their much-vaunted vendor management system is build _specifically_ to squeeze vendors as hard as possible.

Peterman333's picture

I think they're just getting out of their own way which is great, finally. Free 2 day shipping on anything over $40 and they carry almost everything Amazon has at the same price? It's about time Amazon gets some competition. People like their stuff fast and hated it when Amz upped their yearly subscription fee.

Joe Sichs Pach's picture

My experience has been:

Walmarts online shopping sucks dick and is loaded with fuckups.

And as much as I hate to say it,

Amazon bends over to suck your dick when they fuckup which has been a rare occurrence