Wal-Mart Increases Pressure for Its Suppliers to Cut Prices

Wed. April 1st, 2015 - by Melissa De Leon Chavez

BENTONVILLE, AR - Wal-Mart has been increasing the pressure on its suppliers in an effort to cut the costs of its products. The retailer seeks to regain its position as the leader in low-prices and turn around its poorer-than-average U.S. sales.

The Wall Street Journal reports that Wal-Mart has been telling suppliers to forgo investments in joint marketing with the retailer and sell at lower prices instead. Suppliers of all kinds typically set aside a substantial portion of their budgets for in-store displays and online advertisements with Wal-Mart.

Wal-Mart has previously had a reputation for pressuring suppliers to cut costs to help lower prices, but the retailer’s new leadership has been especially vigorous with this practice. According to The Wall Street Journal, Wal-Mart’s price advantage against its competitors has been eroding, and the company has been losing market share in the U.S. since the recession ended. Rivals like Kroger and Costco have been gaining share, according to data from the consultancy group Kantar Retail.

While lowering prices by lowering marketing costs may help Wal-Mart draw more customers, it gives suppliers less control over how products are displayed or promoted, and less ability to differentiate themselves amongst rivals. 

Chief Executive Doug McMillon and U.S. Head Greg Foran have implemented this strategy to turn around Wal-Mart’s core domestic business, which booked $288 billion in sales in the year ended Jan. 31, 60% of the company’s total, according to The Wall Street Journal. While U.S. sales were up 3% last year, the growth was a scant 0.5% excluding newly opened stores, and the division’s profit fell.

Foran and McMillon laid out the pricing message during a private meeting with suppliers in February. They want suppliers to operate with the same everyday low-cost model that Wal-Mart employs from top to bottom, The Wall Street Journal reports.

Doug McMillon, Chief Executive, Wal-Mart“We want to get back to a point where we are playing offense with price because of the way we go to market,” McMillon said, according to a transcript. “Our pricing strategy is aimed at one objective, and that is building trust.” 

Deisha Barnett, Spokeswoman, Wal-MartThe effort to get suppliers to reallocate the marketing investments reinforces the company’s long-standing business strategy to keep costs low, said Deisha Barnett, a Wal-Mart spokeswoman. “It’s a proven business model that works,” she said. “We think the smart investment is to put the dollars into price.”

Wal-Mart’s U.S. division is in the process of a turnaround, having just posted two straight quarters of positive same-store sales after a long slowdown. Executives at the retailer have attributed part of the increase to falling gasoline prices, which have led some shoppers to spend more and to make the longer drive to the stores.