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Supply Chain News: When In Doubt, Beat Up on Suppliers, as Walmart, Sainsbury's Both Demand Big Savings from Vendors


Walmart Asks Vendors to Reduce Pricing to Establish Price Leadership, While Sainsbury's Attacking Rising Costs

May 9, 2017
SCDigest Editorial Staff

For slightly different reasons, giant grocery retailers on both sides of the Atlantic are looking for savings from their supply bases.

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That will involve working with its suppliers to help them become more efficient - and naturally Sainsbury's will expect lower prices from those vendors as a result.

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First, in late March, Reuters reported that Walmart held a summit near its headquarters in Arkansas with many of its vendors, including Johnson & Johnson, Unilever and Kraft Heinz, to demand they reduce the costs they charge the retailer by as much as 15%.

Vendors which attended the summit told Reuters that during its presentation, Walmart said it expected suppliers to help the company beat rivals on head-to-head pricing 80% of the time.

To meet the demands, vendors said they would have to cut their wholesale prices or make other cost adjustments to shave the required 15% off the net price.

When asked about the claims, Walmart's communications department said it was "investing in price" - which basically means it is willing to accept some short term hit to margins to re-establish marketshare and price leadership.

The strategy comes after Walmart commissioned a study to find the right price point against Germany-based discount grocery chain Aldi and domestic rival Kroger, according to Fortune.

Despite its low cost image, Walmart prices have been as much as 20% higher than Aldi's on many grocery staplesl, analysis by Wolfe Research found - but more recent spot check by Reuters, after Walmart started dropping prices, found Walmart consistently offered lower prices than Aldi.

A supplier of consumer goods to Walmart told Fortune that the retailer had cut prices on some his company's products by as much as 30% in some stores over the past few months.

"It helped them figure out the sweet spot that drives traffic," he said - but obviously at some cost to margin for the vendor and maybe Walmart as well.

"Once every three or four years, Walmart tells you to take the money you're spending on marketing initiatives and invest it in lower prices," said Jason Goldberg, the head of commerce practice at marketing firm SapientRazorFish. "They sweep all the chips off the table and drill you down on price."

Vendors also said Walmart has told them it intends to maintain margins on average and lose money on some goods as part of its pricing plan. Walmart told vendors it will absorb some of the losses initially so suppliers can adjust to the new pricing demand.

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Meanwhile, in the UK grocery giant Sainsbury's is embarking what in the end is likely a similar strategy, but in its case the initiative is being driven by falling profits.

Q1 profits at Sainsbury's fell 8.2%, which the company largely attributed to rising costs.

"After more than two years of deflation, food and fuel prices started to rise towards the end of our financial year, driven by the devaluation of sterling and commodity price increases," the retailer said.

The devaluation of the pound and higher oil prices had started to impact the price of food, merchandise, clothing and more, the company said.

As a result, company CEO Mike Coupe said Sainsbury would work with suppliers to "mitigate costs within our supply chain," adding the Sainsbury's would "reduce the impact of cost price increases on our customers by making sure that we limit the impact on the retail prices that we sell."

Part of that will involve working with its suppliers to help them become more efficient - and naturally Sainsbury's will expect lower prices from those vendors as a result.

What do you think of these efforts to get retail suppliers to reduce prices? Will it work? Let us know your thoughts at the Feedback section below.


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