VENDOR FINANCING

David Merrefield

The world of efficiency and quick turns that materialized in the supermarket industry a few years ago had many objectives, spoken and unspoken. In the unspoken category was a long-term goal of retailers' logistical quests: To turn product so quickly that it would be in consumers' pantries before retailers received invoices from their vendors. The effect would be to confer on retailers free use of product, or vendor-financed inventory.

And some chains have made strides toward the goal of floating inventory costs, although none, it seems, have achieved the success levels of Wal-Mart Stores.

Here's what Wal-Mart has achieved, and how information about it came to light.

Earlier this month, Wal-Mart issued its third-quarter financial results and, as is customary, made officers of the company available to securities analysts and others to discuss results. SN was a participant in that conference, during which was heard a presentation by Jay Fitzsimmons, Wal-Mart's senior vice president of finance and treasurer.

Much of what he said about vendor-financed inventory received scant publicity, although it did get an airing in The Wall Street Journal. So let's review what Wal-Mart's financial executive had to say about the results of quick turn. And we'll start with that very fact: It's illustrative of the ends Wal-Mart seeks to achieve by its logistical processes that it should have been described by a financial executive.

The ends are these: Wal-Mart now sells 63% of its inventory before it must pay for the goods, up from 55% a year earlier. Wal-Mart expects to turn all its inventory before bills come due in about three years' time, and claims it expects to achieve that goal.

In a way, this represents the logistical end-game Wal-Mart has sought for many years. The game is to push costs of inventory management toward vendors as much as possible, and now to push the capital costs of product possession to vendors as well. This is cunning utilization of an industry tradition, namely the 30-day payment cycle. Such terms worked well enough under the now-challenged multistep distribution process: First product was received at a depot, then put away, then picked, then consolidated, then delivered to stores' back rooms, then put on gondolas for sale. That might take twice the payment-term period, at best. And if forward buying were involved, it would take several times the term-of-payment period for product to finally go through stores' front ends. No doubt more than one manufacturer is now reconsidering the wisdom of sticking with the payment-schedule tradition.

Wal-Mart's whole "virtuous-circle" process -- that of pushing down costs to lower price points to build market share and volume to finance further efficiencies -- is one that will have an end. At some point, all customers who are inclined to shop at Wal-Mart under any circumstances will be doing so, and there will be no more market share to obtain from competitors.

No doubt this helps explain why Wal-Mart has turned its hand to acquiring a presence or two in other nations, especially those where retail margins tend to run to the high side.