Wal-Mart, the world’s largest retailer held its annual meeting at the beginning of this month, and business and general media has provided lots of subsequent news coverage.
During the annual investor meeting held on June 2nd that included upwards of 14,000 attendees, Wal-Mart CEO Doug McMillon urged employees and investors to reimagine the future of the retail landscape. He further added that the retailer is picking up the pace of change, and from the overall supply chain lens, winds of significant change remain evident for many months to come. Such a change will place added burdens on suppliers to insure that Wal-Mart maintains both its global leadership role but also its needs to added profitability.
Many published reports related to Wal-Mart over these past two weeks point to the retailer as being at an important crossroads in terms of its long-held dominance in pricing and convenience. We call particular reader attention to a published Economist article: Walmart- Thinking Outside the box, (Paid subscription required) which provides an in-depth perspective on strategies and business needs.
From an online perspective, Amazon continues as the dominant online retail platform, providing online shoppers with both competitive price and convenience. With further expansion in household consumables, grocery and other foods, Amazon will increasingly encroach on the Wal-Mart customer. Wal-Mart itself has invested a reported $10.5 billion within new information technology to enhance its online web presence and fulfillment capabilities. In January, both existing IT groups were also merged together into one singular group. Yet, industry media reports that online sales slowed to a 7 percent growth pace during the first quarter, below company and investor expectations.
CEO McMillon observes that his team has paid very close attention to current retail industry trends including the growth of online, and that his firm will dominate by executing a strategy that leverages the combination of online as well as physical distribution and retail store presence. Stores will serve both as a retail destination as well as an extension of online in customer pick-up and returns.
Within physical stores, the retailer has invested $2.7 billion in higher wages and employee training, but at the same time, consolidated its physical retail footprint by closing 269 stores. Efforts are once again underway to spruce-up stores, clean-up aisle clutter and include more fresh produce offerings. The retailer further announced that over the coming months, Wal-Mart will return to an aggressive pricing strategy, promising to once again reduce prices on a number of offered items.
This leads to the supply chain challenge that is currently underway, namely, to compensate for all of the added investments in operations and online capability, suppliers will have to divvy-up additional cost and price savings. In a sense, this is nothing new for Wal-Mart’s suppliers; however it appears as though it is taking on more aggressive dimensions. We initially highlighted stepped-up supplier pressures in April of last year, and consequent supplier push-back attempts in September.
One of the largest and most loyal suppliers to Wal-Mart has been global consumer packaged goods producer Procter& Gamble. The business relationship has extended for decades and today, P&G garners in excess of $10 billion in revenues from Wal-Mart alone.
Today’s edition of the Wall Street Journal features a front-page article: Wal-Mart and P&G: A $10 Billion Marriage Under Strain (Paid subscription required) that provides added insights into supplier relationships with the retailer. Over year ago, Supply Chain Matters highlighted a similar WSJ report on the intense competitive pressures of both firms, when the retailer elected to offer Persil, a European branded laundry detergent alongside P&G’s Tide branded detergent across Wal-Mart’s retail stores.
This latest report indicates that both firms: “are increasingly butting heads as both try to wring more revenue out of their slow-growing businesses.” The retailer in-essence is pressuring for reductions in prices for best-selling goods as it furthers efforts to invest in new capabilities, while P&G is attempting to protect both volume and profitability of its largest brands.
One other revelation brought out was that unlike all other suppliers, P&G does not have a contract that governs supplier agreements. Rather, both parties rely on in-person relationships, emails and handshakes to address supply programs and other particulars.
Returning to the broader Wal-Mart supplier community, the retailer’s new U.S. chief executive is reportedly spoke directly with suppliers in February and delivered a stern message concerning needs to work more on inefficiencies. The WSJ cites indicates that several people that attended indicated that the retailer expects “healthy tensions” will suppliers and will be “maniacal about managing costs.” The U.S. CEO is further pushing his procurement team to fight more aggressively in negotiations with suppliers and all buyers are now required to attend a workshop conducted by a U.K. based negotiations consultancy.
We suspect that some of our readers who reside in supplier organizations doing business with Wal-Mart may have already encountered the effects of this renewed supplier management efforts.
Thus is the evolving strategy of Wal-Mart, evolve quickly in the new era of retail by leveraging all existing assets, fight for every consumer in price and convenience, invest aggressively in needed new capabilities and garner any and all compensating cost reductions and efficiencies from existing suppliers to meet required financial bottom-line outcomes.
In some sense, the more things change, the more an organization can revert back to prior methods. In the end, we continue to question whether pounding suppliers is counter-productive, since process, cost and product innovation comes from all tiers of any supply chain in joint collaboration efforts.