The Supply Side: Survey of suppliers shows some concern for Walmart business

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.
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A recent survey of Walmart suppliers found that 46% said their Walmart U.S. sales rose 5% or better last year, but just 31% expect those same results in 2016.

Nearly 40% of suppliers expect their sales at Walmart to range from 1% to 5% this year, according to a poll conducted by Cleveland Research Council last month in connection with the retailer’s Year Beginning Meetings (YBM) in Indianapolis.

Reasons for the more cautious sentiment among Walmart suppliers include the retailer’s stagnant fourth quarter results, margin pressures, declining overall consumer attitudes about the broader economy and the slowed expansion in new store openings for Walmart this year. Walmart’s new square footage fell to a 3% annual growth rate in 2015 and is expected to move toward 1% growth by 2017. The Bentonville-based retailer averaged between 8% and 9% growth from 2001 to 2009.

Analysts have said the days of suppliers growing their sales on the back of Walmart’s aggressive U.S. store expansion are likely over. Now the reality is that competition from deep discounters and off-price chains pressure Walmart’s everyday low cost model and forces the retailer to double down on pricing efforts with its suppliers.

Adhering to lower prices was the major theme discussed by Walmart management at the recent YBM meeting as the retailer continues to move further away from promotional incentives, asking suppliers to apply their trade marketing budget to the give Walmart the lowest possible cost.

Andy Barron, executive vice president of general merchandise for Walmart U.S., told suppliers at the recent meeting that the retailer wants to work with vendors to pursue disciplined inventory management as spelled out in their contracts with respect to payment terms and allowances that are based on days of supply.

He shared a recent success in the beauty category where suppliers were willing to partner on price lowering actions that resulted in improved sales. The supplier’s applied former co-op marketing money to lower the overall price which was consistent with Walmart’s everyday low cost strategy. Barron said because of the improved sales the suppliers and Walmart reaped rewards. He said partners willing to invest in prices will see faster sell-through rates and receive improved payment terms.

Tony Rogers, Walmart’s new chief marketing officer, echoed that sentiment saying, “we must win on price first and foremost.” Rogers reiterated that co-op marketing will be reserved for holiday sales only because otherwise it is counter to the retailer’s everyday low price strategy and “this does not work.”

STORE CONDITIONS
The CRC survey also asked suppliers to weigh in on store improvements which have been at the top of Walmart U.S. CEO Greg Foran’s agenda. Foran’s “Fast, Clean and Friendly” agenda, boosting the number of store workers, reducing the number of displays and cleaning up the back rooms, and continuing to transition more vendors to the retailer’s global replenishment system are viewed by suppliers as “necessary improvements.”

In the fourth quarter, which ended Jan. 31, just 5% of suppliers surveyed said they saw meaningful better store conditions versus the prior 90-day period. Another 44% saw slightly better store conditions and 41% viewed store conditions the same, with 9% saying store conditions worsened.

There also seems to be some differences in the assessments of whether Walmart U.S. stores are meeting Foran’s “Fresh, Clean and Friendly” goal. Just 8% of suppliers surveyed believe that 76% of the retailer’s stores have met that goal like Foran noted in the recent earnings call. One in three suppliers believe that more than half of Walmart’s U.S. stores are up to the standard. Another 37% said between 25% and 50% of the stores are meeting Foran’s goals.

“Walmart seems focused on the right areas to improve its business and we expect the efforts around store conditions to bear the most fruit,” noted by the Cleveland Research analysts. ”Still (we have) questions about how much Walmart can truly improve price leadership and see challenging with improving performance in fresh foods.”

CRC analysts said the ongoing margin investments are “painful but necessary,” and said Walmart was likely over-earning the last several years due to under-investment in labor while also noting that prior efforts to push changes in store operations did not solve the issues.

The analysts forecast comp sales growth at Walmart to be 0.5% through the first half of this year, with total sales growth of 0.8%, versus 3.6% growth last year.

ONLINE iNVOLVEMENT
The analyst group also said Walmart’s e-commerce and digital/physical integration have not made as much progress as expected given the level of investment. Just 43% of the suppliers polled by CRC indicated they have a team dedicated to the Walmart.com business. Another 14% plan to add one and 37% have no plans to add e-commerce teams for their Walmart business.

While Walmart.com continues to lag the growth rates of U.S. e-commerce and Amazon it does represent a major focus for Walmart in its plan to use stores to bridge the gap between digital and physical shopping experiences.

It remains to be seen how Walmart will grow its overall e-commerce sales faster than its competitors when a majority of its suppliers are slow to join the effort. One in three suppliers polled expect their sales on Walmart.com to grow materially over the next three years. The majority sees little change. In 2014 Walmart.com’s sales were 2.5% of the retailer’s consolidated divisional revenue.

Over the next three years the suppliers expect roughly 7% of their Walmart sales will be come from Walmart.com. Looking five years out they project 10% of their sales will be driven by Walmart.com with a ceiling of 15% by over the long term.

The suppliers were asked whether they were increasing their own investments into Walmart.com in the past two quarters and 53% said they did so in the fourth quarter and 62% said they increased investments in the third quarter. One way Walmart.com is hoping to expand online offerings is by having buyers for brick and mortar integrate with the online buyers in San Bruno, Calif. The retailer said it was pushing its merchants toward having all in-store items being available online.