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It’s been about a year since Walmart began telling suppliers of planned changes to contract terms that involved a 1% warehousing allowance, new store allowances and asking for extended payment terms on items that don’t sell.
The initial reaction from some small to medium size suppliers was to ignore the letter, because they were not sure how to respond, according to Boyd Evert, president of Harvest Revenue Group in Bentonville.
Evert has met with hundreds of small to medium-size suppliers over the past year regarding the contract changes which he says is partly responsible for Wal-Mart’s better financial results in recent months. The financial benefits to Wal-Mart from the contract changes could be massive. The 1% on millions of dollars of inventory any given day and the float on payment with longer time to pay is benefiting Wal-Mart’s bottom line, Evert said.
Bentonville-based Wal-Mart Stores on May 19 reported net income for the quarter of $3.079 billion, down 7.8% from the same quarter in the previous fiscal year. However, per share earnings of 98 cents blew past the consensus estimate of 88 cents per share. Total revenue of $115.904 billion was up 0.9% compared to the same quarter in the previous fiscal year, and was well above the consensus estimate of $113.22 billion.
Wal-Mart shares (NYSE: WMT) received a boost from the better than expected net income, rising from around $63 prior to May 19 to trading Wednesday (June 1) around $70.50.
Evert said after Wal-Mart’s stock price fell sharply in October, the company began to more heavily enforce the contract changes down to the buyer level. Evert said suppliers were being pushed to sign an agreement that included a 1% warehouse allowance for any product that touched a warehouse. Suppliers are also being asked for a 10% new store or distribution center allowance to help shield some of the retailer’s added operation costs.
This is not a charge foreign to the industry. Amazon and other retailers commonly charge warehousing fees. But Evert said Wal-Mart has historically not done so because it conflicted with the simple pricing structure that founder Sam Walton championed throughout his career.
“When suppliers asked Wal-Mart for something in return for the 1% allowance such as another promotion the message they got was it’s not up for negotiation. Wal-Mart wanted no strings attached to the fee,” Evert said.
The biggest issue at hand for smaller suppliers is that they are finding it hard to come up with the 1% allowance in addition to the extended payment terms and still guarantee Wal-Mart the lowest possible price.
“They can’t afford afford to wait longer to be paid for the goods they sell to Wal-Mart. Many are tied into payments with their own suppliers and those may not be amended,” Evert said.
Wal-Mart has offered to negotiate loans at lower interest rates for suppliers who can’t wait to be paid. Boyd said that shows Wal-Mart understands the requirements are tough for some suppliers who struggle with cash flow.
The only way some of these suppliers say they can stay in Wal-Mart and meet the new operational costs is to raise prices, which is not acceptable given Wal-Mart’s Everyday Low Price strategy and the hundreds of price rollbacks the retailer plans to unveil in the coming months.
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. While this is a strategy used by Amazon, there is not the lowest price requirement at Amazon as is with Wal-Mart.
Wal-Mart said in June last year that the contract changes were about keeping the pricing model simple. Lowest price is required, with no high-low games. But demanding the lowest possible price, while also adding operational charges and taking longer to pay suppliers is asking more than what some suppliers may be able to give, Evert said.
Some suppliers have told Evert there is no way to make the numbers work unless they reduce staff size. He said Wal-Mart could be harming itself in the long run by requiring suppliers to accept contract terms that result in lower overall supplier profits, which would push suppliers to focus on retailers where their margins are higher.
He said large suppliers can make it work given their size but the danger is that Wal-Mart is pushing an agenda that benefits the retailer but may not necessarily benefit the broader supplier community He said Sam Walton was clear that suppliers were partners in a relational way, but the push to profit Wal-Mart seems more one-sided.
Evert said there could be some fallout from the stepped up contract requirements in the form of higher overall consumer prices or less assortment because some suppliers have pulled out of Wal-Mart.