Wal-Mart Stores Inc. Finds a New Way To Increase Income: Its Suppliers

By Markets Fool.com

In its ongoing search for new levers it can pull to boost profit,Wal-Mart Stores seems to have found a new favorite target: suppliers.

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First, it asked vendors earlier this year to cut out the regular contributions they make to promotions, and instead use those savings to lower prices. Now, the world's largest retailer is strengthening its grip on its suppliers, saying it will begin charging fees for stocking and warehousing inventory.

In a letter to the approximately 10,000 suppliers affected, Wal-Mart said the purpose of the change was to bring"consistency to the collection of allowances related to the growth of our business and suppliers' use of the Walmart supply network."

Those costs could be significant: Wal-Mart said it would charge food sellers as much as 10% of the value of inventory shipped to new stores and warehouses and 1% to hold inventory in currently existing warehouses. Other retailers have made this a common practice, but Wal-Mart has generally eschewed such tactics in order to secure the lowest prices possible from its suppliers.

Along with the decision to forgo joint marketing efforts, this move indicates an about-face in the company's supplier strategy. However, the cost savings seem to be necessary as Walmart spends in other areas such as wages and e-commerce. A Wal-Mart spokeswoman defended the decision, saying,"The changes we have outlined will help us ensure that we are operating at everyday low costs that yield everyday low prices." The move makes sense, but it also could signal that Wal-Mart is losing its competitive advantage.

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A lot of weight to throw around
Historically, Wal-Mart has used every trick in the book to keep its prices as low as possible, leaning on virtually every stakeholder group in this campaign. The company has been hounded for years by unions and other interests for underpaying employees; at the same time, it has consistently received poor customer service marks, indicating its value proposition is low prices above all else. Its record with the law hasn't always been stellar, either, as the company has at times used underhanded tactics with governments, such as bribery, that have landed it in legal hot water.

But new CEO Doug McMillon seems to recognize that the Wal-Mart of old won't cut it anymore, as rivals likeAmazon.comandCostco Wholesale take share from the superstore chain and consumer demands change. Wal-Mart has been losing its low-price advantage, leaving it little else to stand on.

Earlier this year, McMillon made the surprise move to lift wages for minimum-wage employees, recognizing the need to deliver better customer service and cut down on turnover. Instead of squeezing employees, as the company long has, McMillon seems to prefer leaning on suppliers to drive profit. There's a good reason for that decision.

Wal-Mart has tremendous economies of scale and purchasing power, but those assets don't yield any advantages when dealing with employees or battling other employers. However, that size gives it a lot of power over suppliers, whose sales through Wal-Mart often make up a significant portion of their business.

Wal-Mart's sales are about four times those of any competitor globally and three times domestically. Therefore, Wal-Mart is the most important partner for many suppliers. Though they might feel like they reached out for a handshake and instead got a slap in the face, rejecting Wal-Mart would simply be too devastating. The retailer knows it has the leverage.

As the stock hovers at 52-week lows while the market is near an all-time high, it's clear that Wal-Mart is struggling. With increased investment in wages and e-commerce and the effects of the strong dollar, profit is expected to fall this year, an ominous sign for a company that was once so dominant.

Wal-Mart is in a regrouping phase, but it seems to be making the right moves to restore its image, improve customer service, and ensure it's not getting beaten on prices. It won't be easy, but the decisions Wal-Mart is making today should eventually pay off for investors.

The article Wal-Mart Stores Inc. Finds a New Way To Increase Income: Its Suppliers originally appeared on Fool.com.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool both recommends and owns shares of Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.