Many have focused on the narrow question of whether Wal-Mart is breaking contracts. As we said in the first piece:
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.
And then, as we said in the second piece:
The basic distinction between the calls we received after our piece appeared was between those vendors who felt that their contracts were being violated by Wal-Mart and those who said that they had resisted signing Wal-Mart’s proposed contracts and eventually had gotten more acceptable agreements.
Our thoughts are that we can leave the legalities to the lawyers. It is doubtful that Wal-Mart is, in a “legal sense,” breaking contracts. After all, it is the largest buyer in the world, it doesn’t have to break any agreements, it just has to ask vendors to go along and if they ask in the right tone — you know that tone that says you really don’t have a choice in this matter if you want our business next year — most vendors will go along because they are still making money on the Wal-Mart business and want to keep it.
We don’t think it at all likely that Wal-Mart is “breaking” any contracts. They have a lot of lawyers and a lot to lose so we doubt that would make any sense as a corporate strategy.
At the same time, when Wal-Mart made a switch from a policy of treating all vendors alike to a policy of distinguishing between strategic and tactical vendors, it raised the insecurity level in the vendor community substantially.
The magic of the old Wal-Mart DC assignment system was the removal of the human element from the evaluation of existing suppliers. The metrics suppliers were to meet were published and, if those were met, the DC assignment functioned almost like a property right.
This was the great difference between selling most supermarkets and selling Wal-Mart. You could sell millions and millions to a supermarket, but if the buyer retired, changed position or got angry at a vendor, one could go from millions and millions of dollars of business to zero in the blink of an eye.
That wasn’t the way it was supposed to work at Wal-Mart. Wal-Mart became the preferred customer because selling Wal-Mart created equity value for a vendor. Since people felt that they couldn’t lose the Wal-Mart business except due to non-performance, you could build a company around this steady, reliable business. This was quite unlike most supermarkets where people hesitated to invest because your business relied on the whim of a buyer.
Although few buyers of companies wanted to gamble on a retail buyer’s whims, many were prepared to invest based on their own ability to execute to pre-determined metrics. As a result many a company was sold based on the implied value of Wal-Mart DC assignments.
Now the sense is that maintaining the business is not as automatic. As a result, methods like Wal-Mart’s vaunted “open door” policy that give vendors the right to complain up to the CEO or Chairman of the Board are not viable methods of redress for dissatisfied vendors. Theoretically these rights may exist but it is highly doubtful that appealing a buyer’s decision to Lee Scott or Rob Walton will endear a vendor to the people who actually make procurement decisions.
What has happened now is that Wal-Mart’s standard contract no longer requires Wal-Mart to deliver steady business. A few vendors, strong, diversified, etc., have refused to sign and been able to successfully negotiate better terms. Most vendors are too weak and too dependent on Wal-Mart business to risk losing it, so they sign based on verbal assurances that they will get steady business that, due to concerns with “food miles,” the business will be geographically compact, etc.
What our original piece was really about was that these same vendors, although they felt the need to sign, have seen the writing on the wall and are working feverishly to diversify their business away from Wal-Mart.
In other words, we’ve seen a switch from Wal-Mart being the preferred customer to vendors looking to sell ABW — Anyone But Wal-Mart. With Tesco about to challenge Wal-Mart on its home turf, one wonders if any increase in produce gross margin could possibly compensate for the implications of having a vendor base rooting for other retailers to succeed.