Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
  - Oct. 27, 2015 -  

Supply Chain News: Here We Go Again - Walmart Once Again Moves to Reduce SKUs Counts in Stores


Vendors are Nervous over Impact to Shelf Space – and Whether Walmart will Ask them to Take on Additional Supply Chain Costs

  by SCDigest Editorial Staff  

Haven't we seen this supply chain movie before?

In 2009, with the effects of the Great Recession still being felt, Walmart began a plan to reduce the number of SKUs it carried in its stores by as much as 20%, depending on the store format.

SCDigest Says:

Walmart is also said to be using advanced analytics to decide which SKUs to keep and which to cut, and when inventory "clutter" in the stores is good for sales and when it isn't.

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It was part of similar SKU reduction moves by a number of other retailers at the time, such as Target and Walgreens. But the strategy didn't last too long.

In the face of sluggish same store sales growth, in 2011 Walmart announced it was partly reversing that earlier decision, returning some 8500 SKUs to store shelves that had been trimmed in 2009. The program even involved "It's Back" flags on the items being returned to the shelves. (See Walmart to Reverse SKU Count Reductions, Bring Back 8500 Items to Shelves.)

The move to regrow SKU counts was said to have catalyzed in part when then CEO Lee Scott arrived unannounced at a company meeting holding two bags of groceries his wife had purchased at a competitor because she couldn't find the items at Walmart.

Well, it déjà vu all over again. Again in the face of challenging financial numbers. A few weeks ago, Walmart surprised investors by predicting that profits would drop as much as 12% next year in the face of expensive hikes to store associates and big spending on ecommerce. After the announcement, Walmart's stock fell 10% in a single day and is on pace for its worst year since 1973.

So, one answer of course it to cut costs. Walmart already announced it will open just 135-155 new US stores next year, well down from most years. But it also now has its sights on reducing inventory levels and complexity.

The retail giant has already has cut back the number of in-store displays it manages by about 15% over the past year, and number of SKUs in the average Walmart supercenter is also down about 2500 to around 120,000, with much additional pruning to come.

The Wall Street Journal reported this week that one of its writers took a tour of a Washington DC area Walmart store with Greg Foran, CEO of Walmart US. During the walkthrough, Foran pointed towards six bottles of ranch dressing on a shelf."

"It's the same brand, exactly the same item, but it just comes in six different sizes," Foran told the Journal reporter, taking a quick a picture of the shelf space to send to the company's merchandisers. "I look at that and I say to our team, ‘Do you really need six?' The answer is we probably don't."

The fact is that Walmart's revenue increases have been trending consistently down since 2012, to basically flat levels in 2015, though there was some improvement last quarter. In 2013 and part of 2014, Walmart inventory levels were falling about a couple of percentage points less than the rate of revenue decline, increasing its inventory to sales ratio until the company began taking a real whack at inventories starting in the second half of last year.

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"It's the objective of every retailer to grow their inventory slower than sales," Foran told the Journal. "We just carry too much inventory. And we carry too much inventory across most parts of the box. And so we do have lots of work under way to get that sorted."


Walmart's Stock Price has Fallen Sharply in 2015



Walmart Suppliers are Nervous

Of course, when mighty Walmart gets a cold, thousands of consumer goods manufacturers catch pneumonia.

First, some manufacturers may find some or all of their products lose their position on Walmart store shelves, which happened to many brands and individual items in 2009 when Walmart reduced the number of vendors it used in many product categories.

In addition, suppliers are concerned Walmart will find other ways to have them take on more of Walmart's costs.

This past summer, for example, Walmart asked vendors to pay a fee for passing products through its distribution centers – a sort of handling fee - and accept longer payment windows. (See Walmart Greatly Extending Payment Terms, Asking Some Vendors to Pay DC Handling Fee.)

The Wall Street Journal reports that several large vendors have told Walmart flat-out that they cannot agree to these new terms, saying the new contracts will increase the cost of doing business and force them to raise prices.

An executive at another large consumer goods company told the Journal he and other suppliers are worried that there will be "increased pressure on suppliers to fund their [Walmart's] problems."

"Smaller suppliers will tell me if they push this out they will go out of business. We can't afford to give them these allowances" and still sell at low prices, says Boyd Evert, a former consultant to Walmart who now owns Harvest Revenue Group, a firm that represents many suppliers in negotiations with the retailer.

Walmart, under financial and Wall Street pressure, continues to play hardball. In presentations and emails with suppliers, Walmart buyers are reportedly telling vendors their cooperation on these new terms will be considered during "line reviews," meetings that establish how much shelf space each SKU will receive.

Suppliers are also said to be concerned about the impact on their sales from Walmart's pullback in promotional displays, which are bigger drivers of volume for many vendors.

Walmart is also said to be using advanced analytics to decide which SKUs to keep and which to cut, and when inventory "clutter" in the stores is good for sales and when it isn't.

It's all a very high stakes game for both Walmart and its vendors.


What do you think of Walmart's plan to reduce SKU counts? What about asking vendors to take on more supply chain costs? Let us know your thoughts at the Feedback section below - replies will remain anonymous upon request.

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