Wal-Mart squeezes suppliers in price war

posted by Su-San Sit
31 March 2017

Wal-Mart has increased pressure on its suppliers to cut costs in an effort to regain its spot as the US's low-price leader.

Last month Wal-Mart held a summit near its headquarters in Arkansas with their product suppliers, including Johnson & Johnson, Unilever and Kraft Heinz, to demand they reduce the costs they charge the retailer by 15%, according to Reuters

Suppliers who attended the summit told Reuters that during its presentation, Wal-Mart said they expected suppliers to help the company beat rivals on head-to-head pricing 80% of the time.

To accomplish the retailer’s demands, the suppliers said they would have to cut their wholesale prices or make other cost adjustments to shave the required 15%. 

When asked about the claims, Wal-Mart’s communications department told Consumerist it was “investing in price”.

“We continuously look for ways to deliver savings to our customers—it’s part of our DNA,” it said.

“But we’re not in a position to share our strategy for competitive reasons.”

The move follows a price comparison test the retail giant launched last month in 1,200 US stores to find the right price point against Germany-based discount grocery chain Aldi and domestic rivals Kroger, according to Fortune.

Wolfe Research estimates that Wal-Mart controls about 22% of the US grocery market but its prices have been as much as 20% higher than Aldi’s prices on many grocery staples.

A supplier of consumer goods to Wal-Mart told Fortune that the retailer had cut prices on some his company’s products by as much as 30% in some stores over the past few months.

“It helped them figure out the sweet spot that drives traffic,” he said. 

The sources who attended the summit also revealed Wal-Mart wanted suppliers to make logistics improvements that would help them get $1bn more in sales by working harder on shipping orders in full and on-time, which would trim delivery costs, reduce re-orders, and reduce out-of-stock problems. 

Jason Goldberg, the head of commerce practice at SapientRazorFish, a digital agency working with large brands and retailers, said the brands who agreed to play ball with Wal-Mart could expect better distribution and more strategic help, while those who chose not to would see their distribution limited.

“Once every three or four years, Wal-Mart tells you to take the money you’re spending on marketing initiatives and invest it in lower prices,” he said.

“They sweep all the chips off the table and drill you down on price.”

Wal-Mart’s new focus on price competition comes as Amazon has increased its aggressiveness in its pricing on the same branded goods it distributes alongside Wal-Mart. 

Amazon has invited some of the world’s biggest brands to its Seattle headquarters in May to persuade them to start shipping products directly to online shoppers and bypass chains like Wal-Mart, according Bloomberg.

In an invitation, seen by Bloomberg, the online retailer said it aimed to rework the supply chain to focus on designing products that can be shipped quickly to customers’ doorsteps.

“Times are changing,” the invitation said. “Amazon strongly believes that supply chains designed to serve the direct-to-customer business have the power to bring improved customer experiences and global efficiency. 

“To achieve this requires a major shift in thinking.”

Ken Cassar, analyst at Slice Intelligence, told Bloomberg that despite the long relationships between brands and traditional “bricks and mortar” stores, Amazon had leverage to convince manufacturers to rethink their operations. 

Cassar added that the online retailer had 300m shoppers and it could make its own products if brands were not willing to sell on its marketplace.

“Fear, more than anything else may compel these companies to pay attention.”

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