The real message behind Walmart's supplier pricing memo

As any Walmart supplier knows, there's no such thing as an innocuous memo from Bentonville

walmart shelf label

Walmart has sent a memo to its suppliers reminding them that they need to comply with labeling laws, "emphasizing that the amount inside a package matches what is printed on the outside," according to a Wall Street Journal story about the July 20 memo. At a glance, the memo — which also reminded suppliers that any price-violation fines that Walmart or Sam's Club sustained would generate a bill to the responsible suppliers — seems perfunctory. But as any Walmart supplier knows, there's no such thing as an innocuous memo from Bentonville.

There are two critical pieces of background to this memo. The first is a point made in the Journal piece: "Earlier this year, Wal-Mart’s new U.S. leadership called on suppliers to cut back on marketing spending and plow those savings into lower prices." The second is a long-used tactic by Walmart and the warehouse clubs (its own Sam's Club plus competitors Costco and BJ's) to thwart mobile price-comparison tools by forcing suppliers to create differently sized packages.

With the exception of a handful of the largest suppliers (Procter & Gamble, Nestle, Unilever, Pepsi, Kraft, Kimberly-Clark, etc.), most Walmart suppliers are just a few margin points away from losing money in their deals. They need the massive Walmart volume — and the other deals that happen because they are also distributed by Walmart — to avoid financial disaster. Walmart's buyers are legendarily good at paying as little as possible.

Couple that with those differently sized — and often uniquely sized — packages, and the temptation to cut back on product delivered is understandable.

But this is usually not a direct case of saying that a package contains 20 ounces of product when it only has 19 ounces. That is simply far too easy to catch and to prove is the supplier's fault. (If a manufacturer packs a few million toothpaste tubes, each a half-ounce shy, it's hard to deny that when it's caught.) It's also not typically a case where Walmart itself is deliberately mis-weighing a product, as happened to Whole Foods. (By the way, a quick suggestion to Whole Foods. When you issue a YouTube video from your co-CEOs to try and explain why you're not deliberately ripping off your customers, it's probably a bad idea to make every close-up angled so that the executive isn't looking at the audience directly. It's as though they went out of their way to make their execs appear to be avoiding looking the customer in the eye. If they were reaching for that shifty look, they nailed it. Just a thought.)

No, the problem more often involves slack rules, which the Journal also articulated well. That's where the labeling is accurate, but the amount of product drops even though the packaging is identical. For shoppers who are used to buying the same product every week or two, the lack of a visually different package and any heads up to a change means they will typically have no reason to re-read the label. It's an effective and sneaky price increase method — and one that Walmart has, thus far, not had an official problem with. An "official" Walmart problem is one the world's largest retailer chooses to actively enforce.

Where does this leave Walmart suppliers? Let's look again at Walmart's suggestion to suppliers that they should cut back on marketing spending. How very generous of Walmart. Given that almost all suppliers sell at tons of outlets beyond Walmart, that marketing helps revenue far beyond Walmart. Indeed, for smaller suppliers, a lack of marketing would accomplish little beyond making those suppliers even more indebted to — and under the influence of — Walmart, which those suppliers would rely on for whatever marketing and store signage they wanted to offer.

Walmart's memos tell suppliers "don't cheat." Walmart's pricing tells suppliers they have to — or they can cut costs to the point where Walmart becomes close to a loss-leader.

It's like the old, not-so-funny supplier joke: "Good and bad news, Phil. The good news: Walmart just called and said that they're willing to carry our product line. The bad news: We agreed."

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