Walmart returns to ‘playing offense with price’

Discussion
Apr 02, 2015
George Anderson

Walmart has a message for its vendors: keep those trade funds and put them toward the cost of goods. Walmart wants even lower prices so it can use the savings to put more distance between itself and competitors, many of whom depend on vendor dollars.

While it’s not unusual for any retailer to pressure manufacturers for lower prices, the move by Walmart, first reported by The City Wire’s Kim Souza in February and again this week by The Wall Street Journal, is seen as significant because of increasing competition from a wide range of rivals including Aldi, Costco, Dollar General and Kroger.

According to both reports, Walmart CEO Doug McMillon said the chain was going back to its roots and "playing offense with price" to help achieve market share gains.

The company’s increased emphasis on price was recently borne out by a Credit Suisse study, which found the price gap on consumables between Walmart and its competitors grew to 17.9 percent in January, above the one-year average of 16.2 percent.

"It’s a proven business model that works," Deisha Barnett, a spokesperson for Walmart, told the Journal. "We think the smart investment is to put the dollars into price."

While net pricing may benefit Walmart, the Journal piece points out that it may not always work to the advantage of vendors who use trade funds, in part, to differentiate from their competitors. Relying strictly on price with no control over displays and promotions could lead to further commoditization within CPG categories.

Vendors are also likely to hear grumblings from Walmart’s competitors, many of whom already believe their larger rival receives preferential treatment from manufacturers when it comes to price and distribution.

What will Walmart’s return to its pricing basics mean for the chain, its competitors and suppliers?

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27 Comments on "Walmart returns to ‘playing offense with price’"


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Keith Anderson
Guest
5 years 8 months ago

What a shocking 360-degree turn for Walmart.

Walmart’s brand and economic model have always been anchored in low prices. The last 15 years have been characterized by internal power shifts between marketers and merchants, and it looks like the pendulum is swinging again to the merchants.

Suppliers are quite sophisticated at managing these types of requests and the halo of pressure from other industry players. They’ll manage their NPD pipelines, trade funds and shopper marketing strategically to balance this initiative.

The bigger challenges I see for both Walmart and suppliers are how to define and deliver on price leadership in an increasingly transparent and complex landscape. The old playbook works some of the time, but it won’t work all of the time.

Max Goldberg
Guest
5 years 8 months ago

The Walmart brand is built on the core story of having the lowest prices. Finding ways to keep prices low is consistent with that story. Suppliers will have to adjust and try to display their products on shoestring budgets. Competitors will demand the same pricing. And so the lower prices slope grows more slippery.

Chris Petersen, PhD.
Guest
5 years 8 months ago

Competing on price is in Walmart’s DNA. Always has been, always will be.

To be fair, Walmart has been a worldwide leader in lowering prices by reducing costs of supply chain, logistics, etc.

If you are a supplier and have ever made a trip to Bentonville, the negotiation sessions always include price, and marketing dollars, and in-stock rates and a host of KPIs on Walmart’s scorecard. Suppliers are asked to “fund” Walmart’s competitive prices in many ways beyond lowering their margin.

What’s different now is the host of competitors competing on price: the dollar stores are taking core store customers, and the Amazons and Alibabas are increasingly capturing consumers at all levels online.

Who pays the price for low price? Mostly the suppliers. The question now is, how much more can they be squeezed? Pushing for even lower prices will lead to more commoditization of products, and then it will ultimately be the consumer who will “pay a price” in terms of lower quality and less selection.

David Livingston
Guest
5 years 8 months ago

Walmart squeezing suppliers—when did that suddenly become news? I wonder if Walmart lowered prices a bit if it would really have much of an impact. Keeping prices low is just business as usual. Regardless of what Walmart does they are not going to beat Target (when using the REDcard), Aldi or any of the radical regional grocers like Woodmans, WinCo and Crest.

Dr. Stephen Needel
Guest
5 years 8 months ago

If Walmart really means it (and I have no reason to doubt them) then it is a great move for them. Their strength is perceived low price and this move should help them reinforce that perception. Expect this to continue to hurt their competition, especially if Walmart continues their low-price advertising. If competition wants lower prices, they too could give up trade dollars.

Suppliers lose a potential tool for shopper marketing, although lower prices could be negotiated with occasional promotions and/or displays in-store as part of the conditions. On the other hand, we’ve been seeing research for years that suggests trade dollars are often not a good investment.

W. Frank Dell II
Guest
5 years 8 months ago

No supplier should divert advertising dollars to price reduction unless they no longer want to communicate with consumers. Walmart has always pushed suppliers to put their trade dollars into the product price so they could be the everyday price leader. But then Walmart pushed/demanded trade dollars for promotions, i.e., the price roll-back program which is a trade promotion by another name. Putting the two together could mean Walmart was getting a better deal than other retailers, which is against the law.

Walmart has problems with dollar stores which are meeting or beating their prices. Suppliers can agree to Walmart’s request, but they must stand firm that there will be no other trade dollars, there will be no other roll backs, etc. Retailers have a choice of either Every Day Low Price or Hi-Lo. They must choose one or the other, not both. Maybe suppliers should be looking at Walmart’s grow margin and compare with other retailers before agreeing to anything.

Gib Bassett
Guest
5 years 8 months ago

It doesn’t seem like good news for the suppliers wanting to use trade funds to differentiate in the store, but it seems like a good move for Walmart. When I think about what Walmart stands for (low price) and that pretty much defines their CX, this is right in line with serving their customers better. For the suppliers/brands, I would think it places greater emphasis on using out-of-store/digital means of differentiating their products. Some are better equipped than others to really scale that in a highly personal way with relevancy.

For competitors, chasing lowest price is probably not a good idea. It maybe adds a lot greater urgency to focusing on what defines their retail brand from a CX perspective. The challenge right now is that price is such a huge factor that you almost have to overcompensate in other dimensions like convenience or service to compete.

Tony Orlando
Guest
5 years 8 months ago
As a competitor of this giant, this is not news to me. The playing field for regional stores and independents is skewed heavily in Walmart’s favor and has been for years. Now they want to squeeze the vendors even more as their sales are dropping. It is going to get ugly for us as center store sales continue to drop, and we as independents are going to subsidize Walmart even more than before, as the real cost of cost of goods is going to be passed on to everyone else. Is this fair? Of course not, and I have no solution for this, since the power we have to negotiate a great deal on pop or staples is very weak. There a tons of low-end limited store formats and dollar stores out there selling goods at or below Walmart’s prices every day, and it infuriates them. Now they are going to use their big stick to beat up vendors, asking for more and more to gain market share, which is no surprise to anyone.Either way,… Read more »
Gene Detroyer
Guest
5 years 8 months ago

I don’t know what Walmart has been doing for the last 10 years, but this is exactly the philosophy that they had when they were my biggest and most profitable customer. Yes, most profitable customer. For Walmart we netted out all the trade promotions that Target, K-mart, Walgreens, Rite Aid and CVS insisted on. We sold Walmart at a flat price that turned out to be higher than the minimal product the other retailers bought at list and the over-buying they bought on promotion.

Every retailer should operate this way. Most retailers see promotion allowance as a profit center rather than something that helps them sell product. What is the percentage of product that a retailer buys on promotion that is actually reflected to the customer? Certainly no more than 50 percent, as most retailers buy out 30 to 90 days inventory on their last promotional buy without reflecting a cent to the consumer.

My experience says suppliers will win with Walmart. Competitors will lose.

Tom Redd
Guest
5 years 8 months ago

Good move, Walmart! Sam would be proud. Move the money from the back of the process and use it to drop prices for the shoppers. The bottom line of all this is that the move benefits the shopper. And many people really depend on Walmart to have low prices so that they can feed their families. Ignore all the WSJ stuff and all the other analysis—this helps Walmart help people.

Ian Percy
Guest
5 years 8 months ago

There’s ancient advice that goes something like this: “Do not muzzle the ox that grinds the corn.” We’d all do well to heed it.

When your MO is to wring the lifeblood out of your suppliers it will come back on you many times over. Hopefully suppliers will have the courage to say “that’s enough” before all they have left to sell is their soul.

Adrian Weidmann
Guest
5 years 8 months ago

It’s deja vu all over again. The squeeze continues. The retailer power merry-go-round cycle between marketing and merchandising is apparently now returning to the merchants. Squeezing vendor prices is an easy way for Walmart merchants to flex their muscles to get short-term sales results. It is certainly not creative but it does help secure your quarterly bonuses.

It does nothing to strengthen the historically strained working relationship between the retailer and manufacturers. It will further ignite those brand vendors to figure out how to establish a direct digital line of communication to consumers.

Wall Street rewards short-term financial results. Commercial interests will always trump creating a sustainable “customer for life” strategy. Maybe that strategy is addressed by guaranteeing the lowest prices?

David Biernbaum
Guest
5 years 8 months ago

Actually, I wish every retailer in the industry was as easy to do business with as Walmart. Every day low cost and every day low price, when it’s practiced and executed authentically with no strings, makes doing business easy for suppliers because there are no hidden costs for extracurricular slotting, promotions or other types of funding that ultimately shock the supplier’s budget and its own P&L. I think many suppliers would gladly offer any other retailer the same playing field if they could execute on EDLC/EDLP as cleanly and realistically as Walmart.

Marc Millstein
Guest
Marc Millstein
5 years 8 months ago
It will mean good news for Walmart for at least the near term. Lower prices will attract more shoppers and spending, and it sounds as if the lower costs will come by diverting from trade funds practices into lower product prices, so Walmart will be able to enact the strategy without lowering margins. It is bad news for everyone else—meaning competitors first and foremost but also I believe suppliers. Walmart squeezing suppliers in such a way as to put suppliers at odds on a larger scale with other retailers is not good. Or forcing, directly or indirectly, the creation of problems for other retailers for their benefit is worrisome. Of course this is all part of capitalism and the winners should do what is needed to keep winning. But Walmart has to be careful. Putting pressure on suppliers in a manner that overly influences the “level playing field” concept could lead to problems down the road for a company with the massive influence and size of Walmart. Mandating changes that limit how suppliers de facto… Read more »
Richard J. George, Ph.D.
Guest
5 years 8 months ago

For Walmart, it simplifies its claim of “always low price, always.” For competitors, it appears that Walmart is going to aggressively defend the lowest price position. Therefore it is incumbent to develop a non-price point of difference.

For suppliers, there will be a need to develop “pull” promotions as it appears that part of the “push” promotions will be eliminated or minimized.

Graeme McVie
Guest
Graeme McVie
5 years 8 months ago
For years Walmart has been known for squeezing as much as possible out of COGS and the supply chain to give itself a price advantage over competitors. In some of the most public examples this led to manufacturers suffering badly from a financial perspective (remember the experience of Vlassic pickles?). As Walmart looked to move beyond the single, price-only dimension of their value proposition and attract additional groups of customers by expanding into other areas of the holistic retailer value proposition (e.g., better in-store service, higher quality produce, etc.) they suffered from some negative pricing publicity as local competitors were providing lower total cost of basket to shoppers. The rise of the hard discounters coupled with the renewed shopper focus on price as a result of the economic squeeze caused by the Great Recession returned price to the top of the priority list for a number of grocers. So Walmart’s move back to a focus on price is not surprising and is a clear signal to their suppliers that they are demanding lower COGS so… Read more »
Robert DiPietro
Guest
5 years 8 months ago

It is a win for Walmart to strengthen the price position and will likely hurt the suppliers who will have to make good with some of the other distribution partners with cost concessions. The price lever is only a good one to pull when you are the leader from a volume perspective. This move will put pressure on the manufacturers but will be a win for consumers.

Winston Weber
Guest
5 years 8 months ago
Back to the 1990s and early 2000s. As the industry evolves to a shopper-centric marketplace with an emphasis on enhancement of the in-store shopping experience, Walmart reverts back to what it knows best: Price, price and price, at a time when consumers rate the Walmart shopping experience as one of the worst in the industry. Yes, price is why many consumers shop at Walmart. Yes, this may be a short term fix. But they better start thinking about what is the real drag on sales growth. Suppliers have already invested significantly in Walmart’s “net cost” negotiating approach. They should not transfer to Walmart one additional dollar from trade promotion, shopper marketing and consumer promotion budgets. These funds are essential to driving brand and category growth, and must be maintained at the current level. I am not even mentioning the Walmart-specific shopper research conducted by some major suppliers to help Walmart better understand their customers. While I understand why it is important for Walmart to try to place more cost and price pressure on its suppliers,… Read more »
Ed Rosenbaum
Guest
5 years 8 months ago

It bothers me when a retailer like our friend Tony is caught between a rock and a hard place when he has to compete against Walmart. How can a small retailer do it and be successful? Also bothering is the vendor with a knife at it’s throat managing the threat of “do it or someone else will” and being threatened with losing their business. Their is only one winner here: Walmart. Sure those who shop there will benefit in the short run from lower prices. But that is short-term only. The prices will rise but the vendors’ lower prices will remain thus increasing the profit line. The glory of being a Walton.

Let’s all admit it. This is definitely nothing new. Walmart and those vendors who think Walmart can make them rich have been going round and round on this cycle for years. Sort of like the story of the donkey and the carrot. It is just the latest news on an otherwise slow news day.

Shep Hyken
Guest
5 years 8 months ago

I’m not so sure that this is new. To be the low price retailer, you have to buy product at low prices. Walmart needs the vendors to give them the best pricing they can. Margins are thin for both, but volume makes up for it. So, nothing new here.

Todd Kozee
Guest
Todd Kozee
5 years 8 months ago

I have always thought that managing your business based on “price” was an effective but difficult strategy to manage, especially on the scale of a global retailer like WMT. One presumes that too much attention on price as a “driving force” without the same in other key areas like customer experience, well-merchandised stores (WMT needs help here), supplier health (yes, I said supplier health), and employee satisfaction (yeah, I said that too).

I think Walmart is a solid retailer, but due to their long-term focus on aggressively squeezing suppliers is directly correlated to missing the mark on customer experience, and supplier and employee experience. All of which, contribute to losing market share and profitability to rivals. How much more would we all spend with WMT if they were they were hands-down the best company to work for and had the best merchandised stores?

David Zahn
Guest
5 years 8 months ago
Walmart is engaging in a blinking contest with their suppliers. They will squeeze until enough suppliers balk. Reminds me of an example I heard from a famous negotiator—he said that he views the other negotiator as a “wash cloth.” At the end of the shower, he twists and squeezes the cloth to get all of the water out of it before he hangs it to dry further. Even after he has stopped seeing water drip from the cloth though; he still gives it another tug or two. As long as the cloth continues to drip, he continues to squeeze (even another couple of times—just to make sure!). His counsel was “Stop dripping!” Could going to a consignment model be far behind as the push to lower prices continues? Of course, it is real easy to be on the sidelines and say what others should do when playing their money and business. Far different when it is your business and Walmart is your account. Still, as much as it may be wishful thinking, I would love… Read more »
James Tenser
Guest
5 years 8 months ago

Isn’t Walmart’s latest re-focus on net-net-net pricing an echo of prior events?

I’m sure its EDLP orthodoxy faces continuous assault from competition, vendors, in-store goals, economics, deal structures and more. The result is a kind of “bracket creep” on vendor pricing that can advance over time. At certain occasions in years past (and now) the company has chosen to re-set this bar.

Stripped-down prices make a certain sense where they eliminate promotion funds negotiations, in-store expenses, undesirable clutter from off-shelf displays, SKU changes, reconciliations and other complications, while returning those investments to the bottom-line cost of goods. Vendors cry ouch and marketers feel insulted, but they also get the reasoning.

Competitors will respond as they always have – with sharp promotional prices on known value items and attention to the in-store experience.

Lee Peterson
Guest
5 years 8 months ago

When I worked for The Limited back in the day, we used to have periodic “squeezes” like this too. The idea is that every so often, you have to break the comfort level between merchants and vendors. That relationship needs to be a business relationship vs a buddy-buddy scenario and initiatives like this go a long way to confirming that.

The difference is, this makes good PR AND good business for Walmart.

Arie Shpanya
Guest
5 years 8 months ago

Walmart is really just trying to uphold its image as a loss leader. The competition is fierce and in order to consistently provide those low prices, the giant is taking steps to make sure that it will be able to cut costs. But competitors could also negotiate similar deals with suppliers, so this is likely a short-lived advantage.

Nathan Grimm
Guest
Nathan Grimm
5 years 8 months ago

Walmart’s main competition on price is from online marketplaces like Amazon who have low overhead and highly efficient price competition.

Through Amazon’s third party marketplace, they get a 15% commission no matter what the price is. On marketplace orders, they had no inventory, storage, or fulfillment costs. They incentivize a low price through the buy box, where only the best offers get any sales. You can see a highly gratifying spike in sales just by lowering your price.

Once inventory has been sold, product companies don’t have any leverage over price so the only way to protect margins and make sure you can differentiate your brand in the long run is to establish a consistent pricing and distribution model that works for customers, retailers, and your own business.

Onn Manelson
Guest
5 years 8 months ago

I agree with Chris Petersen and Nathan Grimm regarding the increasing competition Walmart are seeing from the likes of Amazon and other online players.

Walmart is doing everything in its power to continue its price dominance and although they’ve gone a long way in this battle, according to a recent pricing analysis we’ve performed, Amazon is still beating them in the majority of cases.

It will be interesting to see how Walmart continues its attempt to secure its dominance in the grocery sector as this seems like Amazon’s next area of expansion. Will there be something new or will they rely solely on the “Savings Catcher”? I guess we’ll know pretty soon.

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