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Title: "Smaller Suppliers Will Go Out Of Business": Hail Mary Time For Wal-Mart, As Vendors Pushed To Brink
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URL Source: http://www.zerohedge.com/news/2015- ... suppliers-will-go-out-business
Published: Oct 26, 2015
Author: Submitted by Tyler Durden
Post Date: 2015-10-26 11:15:21 by HAPPY2BME-4UM
Keywords: walmart, wal mart
Views: 129
Comments: 4
Just last week, we revisited the Wal-Mart vs. vendors saga, noting that in the wake of the retail behemoth’s rather dramatic guidance cut, suppliers finally woke up to what’s going on. “Now we know why they have been pushing so hard,"one executive at a major consumer goods supplier told Reuters. The reference there is to Wal-Mart’s move to squeeze the supply chain for every last penny of savings following the company’s (possibly misguided) decision to implement an across-the-board wage hike for its lowest-paid employees. Paying those who used to make $9/hour $10/hour going forward is set to cost Wal-Mart some $1.5 billion and as we’ve said too many times to count, the commitment to “everyday low prices” means passing rising labor costs on to customers simply isn’t a viable option. But someone has to pay the bill, and that means either i) hours will need to be cut and employees higher up in the food chain will need to be fired, ii) suppliers will have to absorb the cost, or iii) both. The assault on the supply chain began with a push to force vendors to plow dollars they would have spent on marketing into savings. Next, Wal-Mart moved to implement new storage fees and finally, the retailer implored its suppliers to make sure and pass along any savings from yuan devaluation. At a certain level, this is just econ 101. Massive, sweeping wage hikes don’t occur in a vacuum and as we put it when we first reported that cuts were likely in Bentonville, “one thing that should have been abundantly clear from the start is that if ever there were an employer that could ill-afford a $1 billion across-the-board pay raise without immediately making up the difference by either firing some employees, cutting hours, or squeezing the supply chain it’s Wal-Mart.” Still, some of this seems to have caught the market and the media off guard, which is fine with us because we now get to watch everyone play catch-up which means more coverage, more quotes from suppliers, and more evidence that Wal-Mart may have signed its own death certificate with the wage hike. Here’s WSJ with the latest: At the U.S. chief’s direction, the retail behemoth has already removed about 15% of store displays over the past year, and the average Wal-Mart supercenter—home to around 120,000 products—has about 2,500 fewer items than a year ago. Some of the changes have put Wal-Mart at loggerheads with vendors who worry they will result in tens of millions of dollars in lost sales. But fixing U.S. stores is becoming ever more crucial. Earlier this month, Wal-Mart Stores Inc. surprised investors by predicting that profits would drop as much as 12% next year as it spends heavily to raise wages, boost online sales and overhaul inventory systems. In the wake of the announcement, the retailer’s stock fell 10% in a single day and is on pace for its worst year since 1973. Through fiscal 2017, Wal-Mart will spend $2.7 billion to boost pay for store employees and another $2 billion on e-commerce investments as it attempts to shift from a slow-growing behemoth losing market share to Amazon.comInc. and others into an online powerhouse. Vendors hope Wal-Mart’s big investment in stores and online sales can make the company stronger in the long term. But news of next year’s lower profits sent shudders through the supplier community, where there are concerns that there will be “increased pressure on suppliers to fund their problems,” said one Arkansas-based executive at a large consumer-goods company. Such fears aren’t without basis. In June, for instance, Wal-Mart asked vendors to pay a fee for passing products through Wal-Mart’s warehouses and accept longer payment windows. Several large suppliers have told Wal-Mart flat-out that they can’t agree to the terms—saying the new contracts will increase the cost of doing business and force them to raise prices, according to email correspondence between suppliers and Wal-Mart viewed by The Wall Street Journal. “All of the changes we are asking suppliers to make are to be true to our business model and everyday low prices,” says Deisha Barnett, a spokeswoman for Wal-Mart. “Change isn’t always easy.” A big part of the retread, set by Mr. Foran and Mr. McMillon, involves culling inventory from backrooms, and dropping some products altogether. In a key move that will change the look of the chain’s stores, Mr. Foran is more than doubling the width of aisles—to 10 feet from 4 feet, making it more navigable for multiple carts. According to suppliers and consultants, Wal-Mart has aggressively pruned the stores’ promotional-sales space—the bins, cardboard pallets and stands that sit alongside regular shelves and have long been believed to compel impulse purchases like cookies, soda or a new beauty product. Remaining bins are becoming lower, smaller and more uniform, say Wal-Mart executives. “It’s a lot of pressure on my business because a lot of inventory has come off the floor,” says an executive at a large food company. To make up for lost sales from promotional areas, the company is trying to stock more profitable package types and foods selling well in the refrigerated section of the store, says this executive. Wal-Mart is experimenting with lowering shelves near checkout areas by about one foot to make it easier for shoppers to see around the store. The seemingly subtle change, if rolled out across Wal-Mart’s 4,600 U.S. locations, would wipe out hundreds of millions of dollars in annual sales of gum, candy and magazines, say people familiar with Wal-Mart’s sales models. The store changes may be particularly hard to absorb for companies that sell in a single area of the store. Popcorn Indiana, a privately held company, counts on display space for at least 50% of its Wal-Mart sales, say people familiar with the matter. Over the last year the company has become more dependent on shoppers walking down the regular snack aisle to find its red, tractor adorned bags. The company’s sales will likely fall 15% to $96 million this year, after growing each year since 2009, according to an estimate from Euromonitor International. Behind the scenes, Wal-Mart is also aggressively pressuring suppliers to spend more money to earn a spot on shelves. In June the retailer started mailing out around 10,000 contract renegotiation letters to suppliers asking many to pay additional fees to store their products in warehouses, as well as give the retailer more time to pay for the goods, according to letters reviewed by the Journal. “Smaller suppliers will tell me if they push this out we will go out of business. We can’t afford to give them these allowances” and sell at low prices, says Boyd Evert, a former consultant to Wal-Mart who now owns Harvest Revenue Group, a firm that represents many suppliers in negotiations with Wal-Mart. So essentially, Wal-Mart is set to push some of its vendors over the edge with the relentless pursuit of savings. Who could have seen this coming, you ask? Here's what we said in April: The irony is that while WMT (or MCD or GAP or Target) boosts the living standards of its employees by the smallest of fractions, it cripples the cost and wage structure of the entire ecosystem of vendors that feed into it, and what takes place is a veritable avalanche effect where a few cent increase for the lowest paid megacorp employees results in a tidal wave of layoffs for said megacorp's vendors. Now that each of WalMart's suppliers is forced by WMT management to cut their costs and to be "price competitive", they will either reduce wages of its own workers or, comparably, force their own suppliers to reduce pricing, and so on, until ultimatly the entire economy is gripped in wage deflation. And while that dynamic is almost certainly playing out across the supply chain, we might have been too optimistic. That is, besides putting pressure on vendors to layoff employees or otherwise cut costs, Wal-Mart is actually in the process of driving some of its suppliers out of business altogether. Make no mistake, Wal-Mart may be teetering on the precipice of a terminal decline. As CEO Doug McMillon put it earlier this month, "this is an important time in our history—requiring all of us to think critically about our business." And while it's far too early to write the obituary, we would note that when we peered into our crystal ball, we saw this... 
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================================================= The key here is that without the Chinese yuan, WalMart would not exist.
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Top • Page Up • Full Thread • Page Down • Bottom/LatestNext, Wal-Mart moved to implement new storage fees and finally, the retailer implored its suppliers to make sure and pass along any savings from yuan devaluation.
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