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PL Makers Should Pause Before Embracing Walmart Co-purchasing, Experts Warn

October 18, 2010
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“The juice may not be worth the squeeze,” for private label goods processors contemplating possible benefits of joining with Walmart to buy raw materials, Jim Hertel, managing partner, Willard Bishop, tells PLBuyer’s eReport.
 
For Walmart, “It may not be that easy to find partners,” continues Hertel. “Materials costs aren’t something suppliers typically share with partners. But there are targets of opportunity that can be identified where it could be a real benefit.”
 
Wal-Mart wants to partner with suppliers to purchase raw materials and thereby cut costs. According to a recent Bloomberg Businessweek story, the world’s largest retailer buys a growing share of raw ingredients together with manufacturers enrolled in its collaborative sourcing program.
 
The idea of Walmart using its scale to impact supplier costs could be seen as evidence of further vertical integration of the grocery supply chain and as a response to rising commodity prices, even as retail sales slumber.  
 
“This is classic Walmart behaviour,” says Natalie Berg, Planet Retail global research director, “stripping out inefficiencies in the supply chain in order to pass additional savings onto consumers while also boosting its bottom line.”
 
However, Berg believes the offer is not likely to find many takers with the large CPG companies. “We’ve already seen a fair degree of consolidation in the CPG sector in a bid to improve buying power both with producer-suppliers but also with retailers such as Walmart. Large CPG companies are unlikely to be willing to share product recipes with retailers, especially as retailers continue to expand their private label offering.”
 
In fact, while the program is open to branded product manufacturers, none has yet participated, the Business Week report says, reportedly because of concerns about sharing pricing data and product formulas. Walmart says it approached Pepsi-Cola about joint sugar purchases but hasn’t yet heard back.
 
The price of sugar, meat and wheat is already on the rise. Products that Walmart is reported to be already purchasing with suppliers include sugar and paper. One big win for the program involves teaming up with a soda maker in Great Britain that saved 14 percent on sugar buys. In Chile, Walmart teams with a paper maker for its own paper and saves 2.5 percent on paper costs. Walmart is also jointly purchasing rice.
 
A lively discussion on Retail Wire regarding the Bloomberg Businessweek story focused on possible conflicts following from co-purchasing, including what it meant for other customers of a private label goods maker sourcing products in partnership with Walmart.
 

Other Walmart programs aimed at slowing expense growth include consolidating suppliers, eliminating distribution middlemen in nations such as Japan, and taking over the U.S. trucking operations from some of its suppliers.

 

 

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