When Wal-Mart moved to hike wages for its lowest paid employees earlier this year, we were quick to note [4] that the fallout would end up rippling through the supply chain. Here’s what we said in April:
The irony is that while WMT (or MCD or GAP or Target) boosts the living standards of its employees by the smallest of fractions, it cripples the cost and wage structure of the entire ecosystem of vendors that feed into it, and what takes place is a veritable avalanche effect where a few cent increase for the lowest paid megacorp employees results in a tidal wave of layoffs for said megacorp's vendors.
Subsequently, the retailer embarked on a series of efforts to extract every last penny of savings from suppliers including i) an effort to compel vendors to forgo marketing expenditures, ii) adding storage fees [5] and manipulating payment schedules, and iii) demanding [6] that suppliers pass along any savings from China’s yuan devaluation.
As we’ve been at pains to explain, this was absolutely inevitable.
When “everyday low prices” is the corporate religion, you can’t pass along rising labor costs to consumers. Add it the fact that WalMart’s customers largely belong to the same tax bracket as the company’s meagerly compensated hourly employees and raising prices simply is not an option.
That means either suppliers suffer, hours are cut, people get laid off, or all of the above.
At Wal-Mart, it’s been all of the above, as workers at some stores report reductions in hours and the Bentonville office looks to cut hundreds of management level positions.
Meanwhile, some of the retailer’s higher paid workers have become disgruntled at the company’s failure to preserve the wage hierarchy (i.e. when you summarily hike wages for one group of employees and not others, you have distorted the pay ladder).
Now, after last week’s dramatic guidance cut [7] and subsequent stock price plunge, suppliers are bracing for the worst. Here’s Reuters [8]:
Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Wal-Mart Stores. Now they are bracing for the pressure to ratchet up even more after a shock earnings warning from the retailer last week.
The discount store behemoth has always had a reputation for demanding lower prices from vendors but 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 them this year.
"The ground is shaking here," said Cameron Smith, head of Cameron Smith & Associates, 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 $340 billion of annual sales in the U.S. That accounts for more than 10 percent 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.
On Wednesday, Wal-Mart stunned Wall Street by forecasting that its earnings would decline by as much as 12 percent 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. This at a time when it faces 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.
Speaking of Amazon, recall the following which we posted in the aftermath of the guidance cut:
[9]
Back to Reuters:
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.
Yes, no questions allowed, and as we've pointed out before, WalMart can sadly get away with this type of approach to dealing with vendors because after all, if you're a supplier, you're not going to cut your nose off to spite your face by rebelling against your largest revenue stream. Or, as Leon Nicholas, a senior vice president at Kantar Retail, which advises Wal-Mart suppliers put it last month, "you can push and push, but at the end of the day you know where the power lies."
And after last week's carnage, the supply chain is finally beginning to understand why WalMart has become even stingier than normal.
Wednesday's announcement sent ripples through the supplier community in the Bentonville area, where more than 1,000 have offices to stay close to Wal-Mart.
"Now we know why they have been pushing so hard," said an executive at a major consumer goods supplier to both Walmart and Sam's Club, adding that his team was shocked by the projected decline in profits. "Maybe they were banking on more suppliers rolling over on the terms."
Wal-Mart's success in boosting profits could hinge in large part on the willingness of suppliers to sign on to its new terms and agree to its price demands. Despite signs of resistance, one consumer goods supplier reckons most will eventually give in to Wal-Mart’s market power, though not without a fight.
He pushed back after the retailer asked him for new terms that cut 2 percent off his annual sales. They settled on 1 percent, but he fears further demands down the road.
“I just worry that this is a slippery slope of them going in this direction," he said.
A slippery slope indeed, much like the slippery downward slope the company's earnings seem to be on, and between the above mentioned pressure from online retailers and fierce competition from no frills dollar stores, one is left to wonder if perhaps WalMart's move to hike wages may have set the legendary discounter on a path to becoming the next K-Mart.
