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As Manolo Reyes Takes Over Ron McCormick’s Role, Wal-Mart Squeezes Vendors To Generate Higher Profits

Much is going on at Wal-Mart — some produce specific and some indicative of broader changes in company philosophy.

The big news is that Manolo Reyes, a Costco veteran, has taken over the functional role of Ron McCormick’s old position as Vice President/DMM of Produce & Floral, though perhaps with a different title.

He will have his hands full as so much of what the domestic Wal-Mart buying program was used to doing is being undermined by the project we detailed that Global Procurement is running on Washington State apples.

In fact there is wild disconnect at all levels of the Wal-Mart organization. It seems that different buyers are interpreting Jack Sinclair’s pronouncements in different ways. So some big volume items are running mostly business-as-usual while, for example, some suppliers for sprouts and certain specialties say their buyer seems to want to make his mark by “going direct” and “driving out costs” in this very tiny category.

Now Wal-Mart has announced its earning and the news reports, such as this one from The Wall Street Journal, are headlined Wal-Mart Profit Rises Despite Slowing Sales.

International sales, the great hope for Wal-Mart’s growth, did grow by 1.6% but profits dropped 5.3%. We understand that back in Bentonville, the international division dropped 60 executives and gave them until Feb 1 to find new places at Wal-Mart.

The most revealing point of the earnings announcement was portrayed in The Wall Street Journal article this way:

…Gross margin rose to 25.2% from 24.6%.

Mr. Castro-Wright attributed the margin expansion to, among other things, lower inventory levels and fuel costs. Another contribution to the margin expansion, he said, was an increase in advertising costs paid for by vendors.

If it was significant enough to mention, Wal-Mart must really be hitting vendors up big time for advertising money.

The more important issue though is this switch: The traditional Wal-Mart way, Sam’s way, was to look at Wal-Mart as “the buying agent for the consumer,” and so if Wal-Mart managed to buy less expensively or to drive costs out of the system, it passed those savings onto its customers.

In this way, Wal-Mart created a virtuous cycle of ever-increasing sales as customers drawn by low prices increased sales per square foot, which kept lowering costs per item, which enabled Wal-Mart to lower prices still more and keep the virtuous cycle going.

Sales were flat this quarter, though, and Wal-Mart wanted to make its profit number so it decided to keep the money in its pocket rather than acting as a buying agent for the consumer. It won’t take many more quarters of doing that before consumers realize they can’t just assume that Wal-Mart is offering a good deal.

If Wal-Mart loses that level of consumer trust, it will have lost something precious indeed.

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