BENTONVILLE, Ark. -- Sam's Club here is reportedly demanding up-front cash payments from suppliers in exchange for the suppliers' rights to continue distributing products to the Pace Membership Warehouse units it acquired last November.
The payments, which some suppliers have likened to slotting allowances, are being assessed on a per-stockkeeping-unit, per-store basis, observers said, and apply to 85 of the 91 acquired Pace stores, or all those that were open at the time of the sale. The locations closed Dec. 24 and are expected to reopen as Sam's Clubs at the close of this month. Even Pace suppliers that are Sam's suppliers are being charged to stay, observers told SN. Sam's, a division of Wal-Mart Stores, declined comment.
The demands are said to be substantial, with Sam's asking for as much as $600 per SKU, per
store, for both food and nonfood product, said observers, some of whom expressed surprise that the club operator had adopted such tactics. "This is a huge departure from what used to be called net pricing," said one observer, referring to the standard club practice of factoring marketing dollars into the cost of goods to arrive at the lowest net price. "Unfortunately, the precedent has been set in retail grocery."
The observer said it was the first time Sam's had demanded such payments, adding that the club operator didn't ask for any funds when it acquired 14 Pace units last spring. "You have to pay to stay," added another observer. "It's like a slotting allowance."
The observer added that Sam's asked one large supplier to come up with in excess of $750,000, or well over $500 per SKU, per store, to retain the Pace business. The supplier balked and was eventually able to get the price under $200 per SKU, "but that still was a lot of money.
"You're talking about suppliers that have already paid introductory allowances to Pace," he said. "They are looking at the profitability of each item and getting the asking price down. Still, most vendors are going along with it."
Observers speculated that Sam's would be able to defray a significant portion of the Pace deal with the supplier payments. Terms of the sale were not announced, but Kmart said it expected to realize net proceeds equal to Pace's net tangible book value of about $300 million in cash.
More important, observers suggested, was that Sam's demand for payments appears to signify the rules of the warehouse club game have changed forever, now that two companies, Sam's and Price/Costco, account for about 95% of total industry sales.
"This sort of thing becomes common knowledge," said one observer. "What happens when Price/Costco hears about it?"