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WARNING SUPPLIERS ABOUT THEIR HONEYMOON WITH WAL-MART

Who should be most concerned about Wal-Mart's relentless growth march: food retailers or food suppliers?So far, the answer is easy: food retailers. They are pressed to the wall by competition with the Arkansas giant. Last week, the steady stream of news about Wal-Mart's expansion continued. The retailer was making moves to finally enter Chicago after operating stores on that city's outskirts. Wal-Mart

Who should be most concerned about Wal-Mart's relentless growth march: food retailers or food suppliers?

So far, the answer is easy: food retailers. They are pressed to the wall by competition with the Arkansas giant. Last week, the steady stream of news about Wal-Mart's expansion continued. The retailer was making moves to finally enter Chicago after operating stores on that city's outskirts. Wal-Mart is seeking a permit to demolish an empty shampoo factory and replace it with a store that would span a full block on Chicago's west side. Wal-Mart's growth hasn't been as threatening to the supplier community. Indeed, many manufacturers have long embraced the retailer's transparent business practices and enjoy partnerships based around technology, logistics and yearly acceleration of sales growth with this company. In last year's Power Ranking study by Cannondale Associates, Wal-Mart was far and away the top pick of suppliers asked to choose their best retail business partner.

But a recent report from Morgan Stanley Equity Research analysts David J. Adelman and Robyn Sparks warns that the congenial relationship between Wal-Mart and many of its suppliers won't necessarily last forever.

The analysts, who cover food and food service, convey how beneficial the Wal-Mart relationship has been for suppliers. Wal-Mart accounts for about 11% to 20% of U.S. and total sales for the major U.S. packaged food manufacturers, the report states. Aggregate sales to Wal-Mart of the leading suppliers rose an astonishing 20.4% during the most recent fiscal year in a period when total underlying revenue growth for top manufacturers covered by these analysts grew only about 0.6%.

Not to ruin the party, but these analysts warn the day could come when the relationship between Wal-Mart and its suppliers changes. "If its [Wal-Mart's] U.S. sales were to significantly slow, the relationship could become more adversarial," including possibly "a shift in emphasis to private label [and] demand for higher promotional spending," the report states. Even without that scenario, Wal-Mart's market share growth "could have negative, very long-term implications for packaged food valuations," the report adds.

I contacted Adelman for more details on what all of this could mean for suppliers. He pointed out that consumer packaged goods manufacturers are challenged because "there isn't a second strong retailer to keep the leading company [Wal-Mart] honest and enable suppliers to play one off against the other."

What can branded suppliers do now to protect themselves against their business becoming overly exposed to Wal-Mart? One answer, Adelman said, is to help other retailers, such as traditional supermarkets, compete more effectively against Wal-Mart through differentiation strategies (a move that also may discourage such retailers from going the private-label route). Another solution is to consider diversifying through food-service and international initiatives, he added.

Adelman's points are well taken. Even if manufacturers do nothing differently in the short term, they should recognize the potential risk in devoting too large a share of business to one company. That is worthy of consideration before the time when there is nothing left to consider.

TAGS: Walmart