At Wal-Mart corporate, the idea of “everyday low costs” is something of a religion and it’s the cornerstone of the retail behemoth’s business model.
Unfortunately for employees and suppliers alike, maintaining “the low cost leader” title isn’t consistent with high wages or leniency vis-a-vis the supply chain. That explains why, after committing to spend some $1 billion to raise the wages of its lowest-paid employees, the company moved immediately [5] to squeeze more cost savings from suppliers.
Put simply, when passing rising labor costs on to consumers isn’t an option, it’s the supply chain that suffers and now, in a frantic attempt to extract every last penny of savings in order to offset the cost of paying hundreds of thousands of workers $9/hour versus $8, Wal-Mart is effectively demanding price cuts from anyone with a connection to China in the wake of Beijing’s move to devalue the yuan. Here’s Reuters [6]:
Wal-Mart Stores Inc is seeking price cuts from suppliers that produce goods in China, saying the retailer should share in the savings generated by China's devaluation of the yuan, people with knowledge of the matter said.
Wal-Mart managers in recent weeks have contacted more than 10,000 suppliers in various countries, all of which have manufacturing facilities in China, seeking cost cuts of 2 percent to 6 percent on mainly general merchandise including home furnishings, apparel, health and beauty products, appliances, electronics and toys, according to a consultant who advised Wal-Mart on the move and spoke on condition of anonymity to protect his relationship with the retailer.
The company is telling suppliers that they should pass on the savings arising from the yuan devaluation so Wal-Mart can achieve EDLC, or "everyday low cost," its term for the tight cost controls needed to keep prices low for consumers, according to executives at two vendors of durable goods, who also requested anonymity. Both were asked for cuts in the lower half of the 2 percent to 6 percent range. Both said they planned to negotiate a reduction in the proposed cuts.
This is at least the third push Wal-Mart has made this year to force suppliers to lower their costs. The first attempt came in late March when the company told suppliers to reduce marketing expenditures. Then, earlier this month, Bloomberg reported that Wal-Mart had begun adjusting payment schedules [7] and charging storage fees. Here's Reuters again:
Wal-Mart's latest overture to suppliers comes as it seeks to push through broader changes designed to lower its costs through changes to vendor agreements. In June, Wal-Mart began asking all suppliers to pay fees to store inventory in Wal-Mart warehouses and in some cases has sought to extend the time Wal-Mart takes to pay its vendors.
Wal-Mart has been struggling to shore up its profit margins, which have been weighed down by a $1 billion investment announced earlier this year to increase wages for half a million store-level workers and other cost pressures. The company's stock is down 26 percent so far this year.
Spokeswoman Deisha Barnett said the new vendor agreements are aimed at making its terms more consistent across suppliers, and were part of its efforts to keep prices low at the store.
"It's change at the end of the day and that's not always easy, but we think what is best for our business and ultimately best for our customers," Barnett said.
Maybe so, but it's certainly not what's best for the supply chain and make no mistake, if Wal-Mart continues to apply pressure, suppliers will eventually be forced to cut jobs (just as we predicted earlier this year) because as Leon Nicholas, a senior vice president at Kantar Retail, which advises dozens of Wal-Mart suppliers told Bloomberg [8] a few weeks ago, "you can push and push, but at the end of the day you know where the power lies."
