BENTONVILLE, Ark. — Wal-Mart Stores' proposal to take over vendor deliveries to its distribution centers could reduce its own costs but put pressure on its suppliers, analysts told SN last week.
Wal-Mart has reportedly proposed taking over vendor deliveries utilizing its own truck fleet — reducing its shipping charges and those of vendors and passing those savings on to shoppers. The plan could also enable Wal-Mart to have more power in negotiating fuel prices.
“This idea is a natural evolution for Wal-Mart, and it represents a new frontier in re-engineering costs,” said Gary Giblen, executive vice president, Quint-Miller & Co., New York. “Right now, major vendors are charging all customers in a given delivery area the same price for shipping, based on an average cost. What Wal-Mart is proposing would presumably give it the benefit of a lower cost by eliminating the cost of subsidizing deliveries to other chains.”
Vendors would likely oppose Wal-Mart's offer, he said, “because they will either lose the Wal-Mart shipping volume and efficiencies that come with having them as a delivery customer, or they will have to lower their shipping charges to Wal-Mart and lose the effective subsidy of the cost to ship to smaller retailers by the average costing applicable at present to Wal-Mart — and remember, they have to ship to each region in any event to service the retailers who can't do their own shipping.”
For Giblen, the proposal seems like “a natural, inevitable, logical step for a national company like Wal-Mart to get vendor costs to reflect the actual cost of delivery to those high-volume and receiving-efficient stores. And it would certainly give Wal-Mart certain advantages because no other retailer has the national footprint or unit volumes to do the same thing.”
Even if a regional retailer wanted to try a similar approach, “vendors might not be amenable to the idea because it probably wouldn't be able to fill out full truckloads and pallet loads to the regional operator alone,” Giblen explained.
Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., offered similar comments. “Wal-Mart wants lower prices for itself and by implication higher prices for everyone else, but that would put vendors in an uncomfortable position. This approach would mean vendors would have to raise their prices to deliver to everyone else or reduce their profit margins.
“Wal-Mart would see this as a way to bring down the costs of its own transportation and logistics and potentially raise those costs for everyone else, and vendors will probably fight it,” Wolf said.
“Wal-Mart is the only company with the sales to do this — that's just a fact — so it gives them an advantage based on their scale. But if vendors subtract Wal-Mart's business from the way they amortize their transportation costs, it's obvious it will raise the average cost to deliver to everyone else.
“So even if Wal-Mart and the vendors were able to come up with a perfectly measured reduction in which Wal-Mart would equalize the savings in deliveries to their advantage in a way that was neutral to vendors, it would leave all other customers with higher transportation costs.”
CPG companies contacted by SN about Wal-Mart's proposal either declined to comment or could not be reached for comment.
Grocery Manufacturers Association, Washington, also could not be reached for comment last week.
