Will Wal-Mart and Its Customers Pay More?
By George Anderson
The cost of energy and other raw material costs has continued to go up but consumers, for the most part, have been immune to inflationary pressures as both manufacturers and
retailers have held the line on prices.
Now, however, consumer product manufacturers are looking to raise prices on some goods but the question is, will retailers agree to pay more?
Scott Krugman, spokesperson for the National Retail Federation, told Bloomberg News, “The very last thing they want to do is to increase prices for the consumers.”
Barry Bosworth, a senior economist at the Brookings Institution, said, “Over the past few years, the pricing power in the marketplace has shifted away from the manufacturer to
the distributor-retailer like Wal-Mart. These chains are so big, they have the upper hand in setting prices. If products don’t sell, they eliminate them from the shelves.”
Wal-Mart’s Karen Burk said, “When suppliers bring price increases to us, we don’t just accept it. We ask them to show us that raw materials costs have actually gone up and that’s
the reason for the increase.’
Even then, said Ms. Burk, “if suppliers’ costs are going up, it doesn’t necessarily mean it’ll be reflected in our stores. If there’s any way we can not pass the price increase
on, we try not to.”
Moderator’s Comment: Will large retailers such as Wal-Mart accept the higher prices suppliers want to charge for goods? How would you describe the current
state of trade relations relative to pricing and other issues? –
George Anderson – Moderator
We have seen lots of “stealth” price increase already. These are of the variety of 32 oz to 30 to 28 now 25 oz packages. So you get a 15-20% increase but the retail remains the same.
Most of the CPG makers today are lean and mean and well-managed, so I think the price increases will stick whether the big box retailers like it or not. Price increases may be highly scrutinized now, but inevitably they are going to go through.
Two different questions. Why should Wal-Mart accept price increases they don’t want? Answer — hard to say. What’s the state of trade relations on prices? I’m not sure I even understand the question, but I think the answer is those with the least supply chain leverage are forced to live with the tightest margins.
Reality is raising its ugly head, and it’s becoming a day-to-day issue of how much of that reality will be accepted by each party along the value chain.
Oil prices are at an all time high (record as of yesterday). Plastics are made from petrochemical feedstocks, and plastic prices are directly linked to oil prices as well as production capacity. Everything, and I do mean everything, links back to this basic fact. Natural fiber apparel prices increase because synthetic fiber prices increase (factories seeking to capture economic benefit). Toys, appliances, housewares….everything dependent on plastic goes up. Period.
The actual component costs of most products are primarily in the material (as well as amortized tooling or machine costs). Labor, unfortunately, in most cases, does not represent the largest component of costing, which means that importers, faced with bona fide raw material increases, simply cannot offset those increases by moving to lower cost sources of labor…which means that the importer’s cost of goods IS going up.
The simple fact is that buyers are not supposed to accept price increases, no matter how well documented or justified. In addition, marketplace dynamics almost always put someone in the position of trying to capture market share through predatory pricing. The fact that these predatory prices are not sustainable isn’t part of the model. From the retail perspective, if the product is a commodity or commoditized, as long as you can meet quality and reliability standards, why NOT let someone run on unrealistically short margins? Particularly if there always seems to be someone willing to do it?
Wal-mart and others are accepting price increases…..when they have to. Suppliers with defensible product niches, brand equity and other “must have” components are successful in passing along minor cost increases. The art of this process is in trying to do it in a way that keeps the retail price from changing. Every supplier knows the gross margin or markup requirements from every mass market buyer they deal with. It doesn’t take rocket science to anticipate when a cost increase will result in a retail price increase.
Economics is pretty basic. The supplier absorbs the raw material and production cost inflation as long as they can, and still operate profitably or according to operating objectives. The retailer does exactly the same thing. When the category margin requirements can’t be met, the retail price goes up. Then the consumer responds….and the product was either elastic or inelastic at the new price. If it was very elastic, the product will get dropped in favor or a different product. And that is EXACTLY what is supposed to happen.
So Benjamin should have taken that advice all those years ago to go into plastics. Virtually everything we buy today is either made of it or wrapped in it. Nothing is real, least of all prices. What do they really reflect? Do bottom of the supply chain producers actually get paid a living wage? Do customers at the opposite end of the supply chain pay anything that resembles a fair price? Only the middlemen are making money and if one or both ends of the supply chain put their collective foot down, that is going to change once and for all.
Certainly British retailers are complaining about poor sales and producers are complaining that they are being squeezed. I read today that Polish producers are also standing up against supermarkets who they feel are inflicting undue pressure on prices. In China and Russia and probably other countries supplying Western retailers and manufacturers, lots of people are making lots of money but even more people are not improving their standard of living a great deal at all. In fact, some of them are getting killed for daring to complain. Fat cats are literally getting fatter (i.e. obesity is becoming a crisis globally not just in the US and Europe). Under these circumstances, with the threat of falling revenue from disenchanted consumers, why on earth would retailers accept higher prices that they must either pass on or absorb?
There are other ways of dealing with prices and individuals will always find them. If Huggies are going to cost more, parents might switch back to using washable diapers. This, in turn, could indicate a switch to more service industry jobs becoming available as laundries are used to save the poor mom and dad’s time in having to do the washing and drying. Simple really. Retail sales down, service revenue up, no impact on busy lifestyles. And of course better for the environment. Many birds, single stone. All because retailers had to pay higher prices for raw materials.
Bernice, if you think consumers will switch from disposable diapers and start washing their own cloth diapers……click your heels twice and you’ll be in Kansas!
Les – My point was that people WON’T wash their own diapers, they will simply instigate yet another transition from manufacturing and retailing (disposables) to service industry (someone else to do the job for you). Whatever difference in cost there is will be more than made up by the demand for continuing convenience, who cares who does the work? Actually, thinking it through further, it could even result in increased employment for low-paid immigrants either legal or not.
Really the only time a retailer should accept higher prices is when the vendor threatens to stop doing business with the retailer at all because of not getting a good enough price. And, in that scenario, the vendor should be prepared to be undersold by a competitor.