The Supply Side: Suppliers near Wal-Mart 30% rule to see more pressure

Wal-Mart CEO Doug McMillon’s renewed focus on the “every day low price” model and away from promotional pricing may result in pressure on large and small suppliers near the boundaries of Wal-Mart’s 30% rule, which is the limit of sales the retailer wants any one supplier to have within its stores.

Driving prices lower is one of Wal-Mart’s core strategies and it works with a vast supplier base to negotiate the rock bottom prices. But McMillon made a point earlier this year to tell suppliers that buyers would be asking them for “best price” deals and steering away from promotional and shared marketing strategies to better align with its every day low price agenda.

Retail analysts like Ali Dibadj, of Sanford Bernstein, have recently noted this pricing crackdown. 

"We get the impression from (Wal-Mart) management that negotiations with suppliers will be tougher,” Dibadj said in a note to investors.

Joseph Feldman, an analyst with Telsey Advisory Group, said driving prices down is Wal-Mart's core strategy and many product companies have learned to live and thrive with it. However, Feldman said smaller suppliers might feel a bigger pinch from Wal-Mart than mega-product producers.

"If I'm from the consumer packaged goods side, I may be concerned," Feldman said. "But at the same time Wal-Mart is one of their best customers and they probably have the best relationships."

According to Bloomberg 2014 data, companies pushing the 30% rule with sales to Wal-mart include:
• J.M. Smucker: 30% of its $7.67 billion in revenues, or $2.35 billion
• Hillshire Brands: 27% of its $4.1 billion in revenues, or $1.1 billion (Hillshire Brand was acquired by Tyson Foods in late 2014. Tyson Foods’ business to Wal-Mart was 14.6% in 2014, outside of Hillshire’s business.)
• Clorox: 26% of its of its $5.6 billion in revenues, or $1.5 billion
• Kraft Foods: 26% of its $18.2 billion, or $4.7 billion
• Tootsie Roll: 23.7% of its $543.5 million in revenue, or  $129 million
• Kellogg: 21% of its $14.6 billion in revenues, or  $3.1 billion

Bill May, a retired Wal-Mart executive, recently spoke to small suppliers at the Selling to the Masses CPG School in Bentonville. He urged suppliers to step up and tell Wal-Mart the truth anytime the pricing pressures are too strong.

“You can’t agree to deals that will put you out of business. If you can’t deliver the price a buyer wants then tell them why you can’t do it. It does no one any good to agree to unsustainable terms,” May said.

He also said buyers and their teams can work with suppliers to find efficiencies in the supply chain if they know a buyer is struggling with cost containment.

Tanya Lewis, inventor of the Green Glide mop head and a new supplier to Walmart Stores, told The City Wire she was amazed at the willingness of her buyer to work with her on the logistics side of the business given that she is testing a product in 300 stores stretched across 49 states. Having orders spread among 42 distribution centers could be cost prohibitive for this small supplier, but tapping into the retailer’s freight collect consolidation program, Lewis said she is able to sell the product $3 cheaper at Wal-Mart than she can sell it on her own website.

Lewis said buyers want to see their vendors succeed but negotiating the best price is going to be part of the deal.

“This is good for the consumer and hopefully generates more overall sales for all concerned,” Lewis said.