The Supply Side: Contract changes ask more from Wal-Mart suppliers

The local supplier community across Northwest Arkansas is buzzing this week as insiders and consultants compare notes on recent contract amendments that Wal-Mart Stores sent out to roughly 10,000 of its suppliers of all sizes.

First off, the retail giant is asking for extended payment terms on items that don’t sell quickly. Wal-Mart also wants an additional 1% cash discount for paying early. Wal-Mart did not release details on the new terms to the media, but the retailer did tell The City Wire that being an everyday low price company isn’t easy and sometimes the retailer has found itself in the middle of the road.

“We are getting back to a place where we focused on ‘everyday low cost’  and ‘everyday low price’ in an effort to best serve our customers,” said Deisha Barnett, corporate spokeswoman for Walmart U.S.

The letters went out to suppliers beginning June 17 and Wal-Mart has asked it vendors to agree to the new terms by July 1.

One pet supplier said their new agreement asked for an additional 1% discount on what was a 20-day payment term, except Wal-Mart now wants to extend that payment window to 90 days. This scenario gives Wal-Mart 105 days between invoice submission and payment. The retailer is asking for the extension because more time is needed to sell the products through.

It’s important to note that Amazon.com already employs a similar strategy to prevent carrying inventory.

SUPPLIER CONCERNS
Three local supplier consultants told The City Wire that small to medium-size supplier clients are being asked to provide a 2% discount out to 90 days and Wal-Mart is adding additional charges via deeper price discounts for products that enter a distribution center.

Small suppliers on social media sites say they have no choice but to sign on because they don’t have joint business plans with Wal-Mart and are afraid of possible repercussions from the retailer. The recent amendments are the most debated and costly for suppliers in several years, according to local insiders.

Carol Spieckerman, CEO of NewMarketBuilders, offers another view.

“Most of the suppliers I work with consider Walmart to be their cleanest business, devoid of the games and punitive practices that plague their other retail relationships,” Spieckerman told The City Wire.

She said the recent move shouldn't change that perception. 

“These types of charges certainly aren't unprecedented in retail yet no doubt many will portray Walmart's ask as a slippery slope that runs counter to its everyday low price proposition. In reality, Walmart is cleaning up its policies and applying them more uniformly across its supplier base,” Spieckerman said.

DISTRIBUTION CENTER CHARGE
The biggest change for supplier with the amended contracts is the added 1% handling charge Wal-Mart is requiring for products that enter a distribution center. This alone is a significant dollar profit center for the retailer who handles more than one billion cases of product annually through its supply chain network.

Insiders with deep history at Wal-Mart say this change is the biggest surprise because founder Sam Walton was adamantly against slotting fees and other tack on charges related to stocking products.

“Walmart’s business model is simple – operate at everyday low costs to provide customers with everyday low prices. It was Sam Walton’s plan more than 50 years ago, and it’s the plan for our company today. Operating under this model affects all we do at Walmart, including how we negotiate with our suppliers, how we advertise and how we go to market with price,” Barnett told The City Wire.

However, suppliers see the recent amended contract terms has anything but simple. Some suppliers have said Wal-Mart offered to negotiate a low interest credit line with third party lenders who will pay the supplier early so long as the retailer get’s the 2% discount out more than 100 days.

Analysts are not surprised to see Wal-Mart go after more margin amid sluggish revenue growth over the past couple of years. Wal-Mart also is investing in its next generation supply chain by modernizing distribution centers that will allow items to be within 2-day delivery of more than 96% of the U.S. population ordering online. This investment comes at a cost of between $1.2 billion to $1.5 billion this fiscal year, according to Charles Holley, chief financial officer for Wal-Mart Stores. Last year Wal-Mart spent $1 billion on its e-commerce business. Holley said the greatest investment of capital and in operating loss for the e-commerce operations will cover over the next 18 to 24 months, and then the company would expect to see that investment start to moderate in fiscal 2018.

“We are focused on creating an endless aisle and appealing to our customers’ changing needs,” Holley explained earlier this year, “and these investments will include technology, infrastructure and other areas to support e-commerce and digital initiatives to serve customers.”

Charging suppliers for distribution center handling is just one way Wal-Mart can recoup some of that spending. The supplier groups believe the tech spending as well as the $1 billion investment in store worker wages earlier this year is the primary reason Wal-Mart is amending its contract terms.

“Honestly the increase in pay will eventually just go towards the cost of goods because suppliers will have to address the impact to their bottom line. It will be a challenge to absorb for many. Cash is king and the flow must be in sync with agreements that were already in place before this change,” said Jami Dennis, a local supplier consultant.