If you want to know why so many American firms are so interested in the unproven concept that Tesco is bringing to America, you need look no further than the unhappiness in the supply community over what they perceive to be dramatic, and negative, changes in the way Wal-Mart treats its suppliers.
We’ve covered some of the more formal changes in Wal-Mart’s buying practices in Wal-Mart Continues To Change Its Buying Practices and in Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization, among other articles.
There has been trouble and transition that suppliers have been concerned about for some time, some of which was crystallized when Bob DiPiazza announced his resignation from Sam’s Club. Yet, there is the sense in the supplier community that since Bruce Peterson resigned from Wal-Mart, there has been a palpable change in the way vendors are being treated. Today we received a letter from a respected player on the sell-side of the business:
The purchasing policies of Wal-Mart seem to be moving from ‘fair’ to its produce suppliers, to ruthless.
I have spoken with 3 large Wal-Mart suppliers in the fruit business that have as part of their ‘strategic business plan’ to move away from, or restrict, their dependence on their Wal-Mart business.
It seems that Wal-Mart increasingly demands lower prices in their contract pricing. However, more importantly, it has become common practice, I am told, for Wal-Mart to honor the contract only so long as it meets or is below current market price.
If the market price goes up, they insist on fulfillment of the contract, but if the market price goes down, they commonly cancel or ‘postpone’ orders while buying at lower prices in the free market, essentially, not honoring their agreement.
In a weird twist, by ‘postponing’ their purchases, if the market stays well below the contract price for a period of time, the supplier is then blamed for not meeting its volume agreement.
Of course, the contracted supplier can ‘lower’ its contract price to hang on to its business, but then Wal-Mart will not pay ‘above’ the contract price either when there are unusual swings in the marketplace.
What used to work for Wal-Mart and its suppliers was ‘honoring’ not only their contracts, but the spirit of their agreements, up and down. It gave suppliers a ‘known value’ for its product commitment to Wal-Mart around which it could then market the balance of their production at open market prices.
It seems there are some significant chinks in their contract commitments, and increasingly some major suppliers are deciding that selling Wal-Mart is ‘not that good of a deal’. The trust is beginning to leak out the bottom of Wal-Mart’s name as a fair trader.
It is less and less about relationships and more about “I grab you today, and you grab me tomorrow’. That, I suspect, will not be sustainable. Many do not want to sustain it.
This letter expresses the frustration that many vendors are expressing to us here at the Pundit. It should be noted that Wal-Mart would deny breaking any contracts and, in fact, to our knowledge, no fresh produce vendor has ever sued them on such a matter. Contract terms are often the subject of varying interpretations and it may well be that vendors, most of whom are not lawyers, are overstating the case to say that Wal-Mart has broken contracts.
Legalities aside, however, it is clear that many vendors are thinking that the rules of the game have changed and that the table now tilts against them.
We think this is an accurate assessment of the situation, and its development is a function of many different developments.
The Pundit is old enough to remember the very early years of the Wal-Mart produce operation and if you want to understand how and why Bruce Peterson organized things as he did, you have to understand that Bruce, in a discussion shortly after he was hired by Sam Walton, told the Pundit that he was both inspired and troubled as Sam had told Bruce that Wal-Mart would be the largest supermarket chain in the world in ten years.
Wal-Mart had six supercenters at the time!
How would Bruce manage this growth?
Bruce basically became a student of the Wal-Mart way, looking to find a path to meld the best of Wal-Mart’s general merchandise procurement process with the particular characteristics of the fresh produce business.
Bruce spent substantial time in those early days studying how Wal-Mart had grown in the general merchandise business. And we remember talking at the time to this produce guy, who cut his eye teeth in the business on the Detroit terminal market, and thinking he sounded like a kid in a candy store as he picked up on all the ways Wal-Mart worked.
Bruce came away with a basic belief: While Wal-Mart buyers were clearly tough negotiators, it was also clear that they believed it was critical for their suppliers to make a profit so they could continue to grow and support Wal-Mart’s growth.
Another thing that Wal-Mart did, which was not typical in produce, was Wal-Mart broke down the procurement process into two pieces: price negotiation and replenishment. In the produce business these two functions often happen at the same time.
What was typical in general merchandise was that the buyer would negotiate price, standards, and shelf location. Once that was established, replenishment, called “re-buy” at the time, would then be responsible for moving the product into the various Wal-Mart DC’s.
That process was also evolving. When Bruce joined the company, Vendor Managed Replenishment or VMR, was just getting a foothold, Retail Link was in its early stages, and the responsibility of the supplier to be much more integrated into a total supply chain focus was being refined.
Retail Link Users Groups were being set up and regional Retail Link Users Groups meetings were first being held. This process continued to evolve into ECFR efforts, which focused on Efficient Collaboration, Forecasting and Replenishment and ultimately into the RFID work being done today.
The key point is this: Bruce perceived that the entire effort was centered around strategic, proactive relationships. Although in produce everyone at the time was focused just on price, at Wal-Mart price negotiation on the cost of goods was only a part of the total supply chain model that would deliver a final cost of goods to the stores.
Bruce took this model and tried to find a way to apply it to produce. In truth, as Bruce and the Pundit discussed over many late night conversations back 15 years ago, Bruce was always less worried about overpaying a dime on the fruit than he was worried about securing supplies. This beast was growing and Bruce’s job was to feed the beast.
No perishable operation had ever grown as large as Wal-Mart would as fast as Wal-Mart did and Bruce always pointed out that getting a good deal but running out of produce wasn’t a good deal at all.
Bruce also wanted more than just some product. As Bruce would repeat in hundreds of interviews over a 15 year span, Wal-Mart was a general merchandise company that was now selling food. Wal-Mart was a very different beast from players such as Meijer that had their roots in food.
So Bruce developed the Distribution Center or DC assignment system because he needed — because he knew Wal-Mart needed — vendors to help manage the supply chain. Wal-Mart didn’t have the people or the expertise. It was critical to have suppliers that were able to help manage their entire supply chain process by linking the supplier to a given DC and by demanding more than product and a truck from each vendor.
Bruce was an old produce hand and he knew the supplier community would be skeptical of retailers proposing contracts. All of the experience of the produce vending community was that retailers should be sold to on the spot market because they would take advantage of any contract.
Put another way, when the contract price was below market price, retailers would beg, plead and demand product and when the contract price was above the market, retailers would plead poverty and either not buy or demand lower prices.
The Pundit learned this in one of his earliest days in produce. Working out of his family’s produce company, the Pundit had been sent to Puerto Rico to work under the tutelage of his Uncle, Sydney Prevor. We imported produce and mostly wholesaled it out by the pallet or less. One big buyer of potatoes could take a whole van every week, so he wanted a guaranteed price. The Pundit was green but it didn’t take many weeks to realize that this was a sucker’s contract. If the potatoes arrived and the market was hot and above the contract price, the customer rushed to pick them up and begged for more at his contract price. If the market had fallen, he never came to get them until we agreed to adjust the price.
So Bruce, knowing he didn’t have the infrastructure to buy all this product every day and knowing he needed committed suppliers — in fact much of the MIS data that you need to run a produce department was going to be supplied by vendors because the Wal-Mart general merchandise system wasn’t set up for it — knew he had to set up a system where he could contract and live with it.
Bruce thought hard about how to do this knowing that his blather about “proactive, strategic relationships” wouldn’t break through if he couldn’t get the fundamentals of the business relationship correct.
In the end, Bruce had an epiphany. It wasn’t that hard, a contract required two basic things:
1. An agreement to a price
2. An agreement to a minimum quantity
Bruce recognized that this was the only way a grower could gain an advantage in a soft market to make up for opportunities he had foregone in a tight market.
With this simple kind of commitment, Bruce set up a system in which the goal was to contract about 80% of what Wal-Mart’s weekly replenishment needs would be.
Now if the market got tight, Wal-Mart would raise retails to the point where 80% of its volume would be sufficient. In other words, through price, Wal-Mart would attempt to control demand so that Wal-Mart did not have to go out and pay crazy prices for product.
If the market got long, Wal-Mart had the opportunity to buy additional product on the free market at a better price, average it in with existing inventory, lower the retail, and pass the savings onto the consumer. But the key was always to buy the agreed quantity at the agreed price.
And it was a simple deal. Wal-Mart didn’t want slotting fees or rebates or ad allowances. Wal-Mart didn’t put produce items on ad so there was no need for “ad-lids” or any of the hundred other things that other retailers would ask for.
What happened based on Bruce’s vision was extraordinary. It was something never seen before and which we may never see again.
By the simple act of keeping to the word and the spirit of these contracts, suppliers were motivated to invest fortunes to grow with Wal-Mart, investing both in product and process.
Now it looks easy but during most of this enormous growth rate, Wal-Mart maintained an out-of-stock rate less than most conventional supermarkets that were stagnant, shrinking or growing far more slowly.
To walk in a Wal-Mart supercenter is to be in the midst of a miracle of human achievement that rivals the building of the pyramids. That so much product could be gathered from the four corners of the globe and made available so inexpensively to the common man and on a scale where it really could make a difference in the sum total of human happiness — this is a monument to the ingenuity of man.
So why the letter from our reader, why is the system breaking down? We would say there are five key factors at work:
- Motivation
Remember that Bruce was driven by the enormous task he perceived to lie ahead — how could Wal-Mart get enough produce to support the rapid expansion that Sam Walton had promised?Although Wal-Mart continues to grow, it is now off of such a large base that, percentage wise, the prospect of keeping supplied no longer seems as daunting.
So, as is typical in retailing, executives start to think the suppliers need them and don’t worry about being short of product. This shift in motivation explains a great deal.
- Structure
Wal-Mart has other interests now. It has a Global Procurement apparatus, an “Opportunity Buy” team of buyers and initiatives for Organic and Locally Grown. All these things have their virtues — for example Wal-Mart thinks it is strategically very important for it to directly be a big buyer in developing countries so it can use the influence this brings to get store locations approved and on other issues.Each of these things, though, creates a reason to go around or minimize the role of a contracted vendor.
- Distance
As the company has grown, the top executives at Wal-Mart are further and further from produce. When Bruce started he reported to the Executive Vice President of Supercenters who reported to the CEO. In other words he was two steps away from the CEO. Today at Wal-Mart the path looks something like this:VP/DMM Produce /Floral reports to
SR VP/GMM — Fresh Merchandising reports to
EVP/Grocery, who reports to
Chief Merchandising Officer, who reports to
President of Wal-Mart Stores, who reports to
CEO/Vice Chairman of US Operations, who reports to
President/CEO of Wal-Mart Inc.So Ron McCormick who runs produce is six people away from the CEO. That is a long game of telephone to play. Even if he has concerns about vendors looking to reduce their dependence on Wal-Mart, it is not clear that those concerns would get through to the CEO.
- New Focus
Much new staff has been brought in with the notion that things at Wal-Mart must be fixed. New leadership began attempting to dictate what the merchandising managers throughout the company were going to do.There was a shift with a new focus on delivering a higher gross margin and virtually no focus on net profit. This may not matter much in packaged goods but in produce where we’ve done decades of Direct Product Profitability studies and where shrink and manpower needed for different products vary so much, it can be crucial.
- Staffing
People make a difference.Bruce was really unique. His history — hired by Sam Walton himself, builder of the department from almost nothing to the largest produce retailer in the world — all this gave him an outsized impact at Wal-Mart.
He also cared enough to fight. Most executives at big companies get along by going along. It takes an exceptional combination of someone who knows the subject, cares enough to resist and is in a position to be influential. You also have to be willing to lose your job.
With Bruce gone, nobody else has that combination
***
When Bruce first arrived in Bentonville he tried to find some common denominators in how Wal-Mart approached General Merchandise and how Wal-Mart should approach produce.
Bruce had to modify certain things to adapt to the special circumstances that the produce industry deals with. Mostly, he had to adapt to the fact that produce, far more than General Merchandise, is about people and relationships. This is why, so many years ago, Bruce confided with the Pundit that he told Wal-Mart he wouldn’t take the job if they wouldn’t let him get Wal-Mart very involved in the produce associations. He didn’t think that Wal-Mart could succeed without using these bodies to build industry consensus.
In fact, the current leadership at Wal-Mart is ignoring something simple and basic:
The produce industry is now, has been, and always will be a people business, a relationship business. If you want to be a success, you have to be willing to make yourself available to listen, talk to, coach, be criticized, and otherwise immerse yourself in the supplier base.
There is a dirty little secret that Wal-Mart’s top executives may learn at their peril: Wal-Mart needs its produce suppliers more than those suppliers need Wal-Mart. What our letter-writer is telling us is that top executives at Wal-Mart seem primed to learn that lesson the hard way.
Wal-Mart seem primed to learn that lesson the hard way.
