There is a growing area of vulnerability in suppliers’ relationship with retailers. For each item, retailers must decide the price they will charge consumers to buy it. But, with increasing frequency, suppliers are being held responsible for selling price decisions the retailer made.
In recent months, Wal-Mart Stores has been employing margin audits — yet another in a growing list of cost shifts burdening suppliers. If you look at Wal-Mart’s financial results, overall margins have been declining. German grocers Aldi and Lidl — both deep discounters — are making a strong push in the U.S., threatening Walmart’s price leadership, as is Amazon.com online. Earlier this year, select suppliers attended a meeting where Walmart reportedly conveyed an expectation of a 15% cut in their cost of goods, while maintaining margins.
In our practice, we hear many of the margin audit horror stories, like an eight-figure demand of a Sam’s Club supplier or lose shelf space and a seven-figure ask of a Walmart supplier because Walmart elected to keep its price static, despite a national cost increase.
Why? Because Walmart didn’t make as much money as it wanted to. Walmart is quick to tell suppliers it alone controls retail prices, yet comes back hand extended when its pricing decisions don’t yield the financial results they were hoping for.
Margin audits have been around for years. Any time there is a promotional event, it’s customary for a retailer — not just Walmart — to want to true-up the event on the back end, balancing sales and purchases at the special price. If an event cost a bit more, suppliers pay for it out of trade funds. No big deal; there would just be a bit less for promotions later. Many retailers are now expanding that concept across the entirety of their business. That promises to drain trade funds faster. The result: fewer deals and higher prices for consumers — not just at Walmart, but across all chains.
And, it gets worse, especially in the e-commerce space. While Walmart’s approach feels like they are demanding guarantees, Amazon.com asks suppliers to sign a “Guaranteed Minimum Margin Agreement.” The agreement requires a monthly true-up between actual margin and what was guaranteed, so long as it is in Amazon’s favor. The agreement also explicitly states Amazon will set its selling prices independently, with no limitations.
Given the dynamic pricing models of Amazon and other online retailers, this creates a huge liability for suppliers. Under this type of agreement, Amazon is free to sell below cost — perhaps even give stuff away — with a full expectation the supplier will cover it. And, much like Walmart, they just deduct what they think they are owed from the next check cut to the supplier.
We’re told guaranteed margins are also on the radar in the drug channel at Walgreens and CVS.
• It’s important to stipulate in your offers what you agree to and what you don’t agree to.
• Tie any supplier support for promotional events or lower costs to retail performance — make sure the retailer doesn’t just take your lower cost and do nothing in return.
• If subjected to a margin audit, stand firm. Good recordkeeping of all correspondence and agreements with your customer are essential to defending your position. Failure to do this sets a precedent that may cost you millions more over time.
Editor’s note: Boyd Evert is the president of Bentonville-based Harvest Revenue Group, a deduction management firm that helps retail suppliers manage and solve pricing, defective, shortage, post audit, on-time shipping and other types of claims with their customers. The opinions expressed are those of the author.