Wal-Mart Announces
Product Removal Fee

Not too long ago, we received a letter from a QA executive at an important retailer:

I’m a loyal reader and am in Quality Assurance for H-E-B, a retailer located in Texas and Mexico.

I’ve been working on our recall system and on improving it. I’ve heard but been unable to confirm that some of the other retailers (Wal-Mart, Kroger, Albertsons) charge suppliers for recalls. This is a charge in addition to the value of the products removed and not in lieu of discharging any liability.

Do you have any information on this? How much do they charge? Could you have other readers weigh in on this issue?

— Richard Parker
H-E-B Quality Assurance Analytical Services
San Antonio, Texas

It seemed like a reasonable question, and with the cantaloupe situation certainly top of mind, so we called around a bit to ask about policies. On the foodservice side, it was a pretty easy question. Virtually all foodservice distributors seem to charge suppliers for conducting a recall. These are charges that are in excess of actual costs for product loss, transportation, etc. Essentially, the foodservice distributors are imposing a penalty for the hassle.

We couldn’t determine any rhyme or reason as to how the fee was set — for a small recall from a midsize distributor, we were quoted fees from $5,000 to $15,000.

Retail seemed more difficult. Although most retailers claimed that their contracts or policies allow them to impose such charges, many report not having done so in the past.

This seems like a timely issue, as Wal-Mart’s legal department has recently sent out a piece called the “Product Withdrawal Letter” and it packs quite a punch:

March 4, 2008

Dear Wal-Mart Supplier,

As you may have heard, at last week’s Supplier Summit we presented to our supplier partners a new policy on product removals (including recalls and withdrawals). As we described at the Summit, the current version of the standard Suppler Agreement allows for Wal-Mart to recover all costs, including lost sales, associated with a recall of merchandise for any reason, and Wal-Mart intends to begin recouping some of our costs associated with a recall that is the result of a supplier issue.

Our hope is that there is never the occasion to actually collect such withdrawal costs and that we don’t have any product removals. But the reality is that when there is a removal due to issues within a supplier’s control such as labeling errors, quality, contamination, or government requirements Wal-Mart incurs significant labor and store-related administrative costs for executing the withdrawal. Our costs increase substantially if the product being withdrawn must be managed as hazardous waste.

Accordingly, effective March 1, 2008, Wal-Mart will assess a minimum charge of $20 per store for all product removals to recover store labor costs associated with a withdrawal. In addition, if the supplier requests Wal-Mart dispose of the removed item at store level, Wal-Mart will assess a minimum disposal charge of $50 per store. Removals of chemicals or other items that must be managed as hazardous waste in our stores will result in a minimum disposal charge of $200 per store to offset the higher cost of proper hazardous waste disposal in addition to the store labor costs. Product removals that are to be sent to the return centers for consolidation will incur the $20 per store assessment (as described above), plus handling fees as outlined in the supplier agreement. We will not assess any charges for items that are subject to a “pull and hold,” unless that “pull and hold” ultimately results in a removal of the item. For your convenience, I have attached the current version of our Withdrawal Processing Fee Guide.

Wal-Mart also reserves the right to seek any other remedies or relief as may be appropriate in the event of a product withdrawal, including recovery of lost profits. Such determinations as to whether to seek recovery of profits will be made on a case by case basis by Wal-Mart. Wal-Mart also reserves the right to seek any other remedies or relief as may be appropriate in the event of a product withdrawal.

We greatly value our partnership with our suppliers, and look forward to providing our customers with the quality products they deserve so that they can save money and live better. Should you have any questions about this new process, please feel free to contact me or Steve Wyckoff at (Phone number and e-mail address redacted by the Pundit).

Sincerely,

John Peter Suarez

To help explain the process, Wal-Mart, sent along with the letter a handy Wal-Mart Stores Product Removal Processing Fee Guide:

Wal-Mart Stores
Product Removal Processing Fee Guide

The following product removal processing fees apply to the withdrawal, removal, or recall of any product from Wal-Mart stores and distribution centers that is the result of quality concerns, labeling errors, possible contamination or threat of illness, packaging errors, regulatory requirements, adulteration, purported infringement or other legal claim or concern, or any other reason that is the result of a supplier-controlled product issue. These fees will not apply if the product removal is the result of Wal-Mart’s improper handling of the item.

$20 minimum per store per item number/UPC withdrawn — Every item (each item number or UPC) removed from sale will be subject to this assessment to offset store labor and associated administrative expenses incurred as a result of the removal. An additional assessment may apply for increased costs in unusual situations.

Item disposal fees — Wal-Mart prefers that all non-hazardous/non-chemical items be returned to the Supplier for proper management or disposal. Any item disposed of at store level would be subject to the following additional minimum charges:

$50 Minimum per store for non-hazardous/non-chemical items disposed of at store level in compactors.

$200 Minimum charge per store for any item that must be disposed of through our hazardous/chemical waste management process. Depending upon the volume and weight of the item(s), this charge may vary and alternative methods of managing proper disposal may be required.

Additional charges for any unusual processing or burdens may be assessed.

Suppliers are responsible for all shipping costs.

Shipments to and consolidations by the Return Center will include a handling fee as provided for in the Supplier Agreement.

Items that are subject to a “Pull and Hold” will not incur any fees unless and until the “Pull and Hold” results in an actual removal of the item.

Additional costs related to any special handling requirement or burdens will be addressed as circumstances warrant. To be clear, the fees as provided in this guide are the minimum fees, and do not limit Wal-Mart’s right to recover any costs (whether at store, DC or Return Center) of a product removal greater than the guideline amounts.

The following are examples of how Wal-Mart will assess Product Removal Processing Fees.

Example 1 — A supplier has three items in 1,100 stores that are removed from sale and returned to the supplier for management and disposal.

Example 2 — Same scenario as first example, except the Supplier opts to have the non-hazardous items disposed of at the stores.

Note that, in any case, the Supplier will be obligated to bear any shipping costs and any Return Center handling fees.

We suppose there is some rationality to the idea of imposing fees on vendors. There are expenses. Presumably the vendor could have prevented them — and, anyway, they might be covered by insurance. Although in the spinach crisis of 2006, there never was an actual recall and the insurance situation was dicey.

Yet we also sense an argument beyond this. Maybe we hear the voice of the Poppa Pundit teaching us that you don’t kick a guy when he is down.

After all, the letter mentions the “partnership” Wal-Mart has with its vendors. A partnership presumes good faith dealing, so Wal-Mart knows that its “partners” did all they could. Nobody is questioning charging the vendors for the cost of product, transportation, dumping costs, etc. Is it really necessary to heap insult upon injury and ask one’s “partner” to compensate for employees in the stores anyway who throw some produce in a box or fill out some paperwork?

It is also notable that Wal-Mart is not going to actually prove before a neutral party that it cost them anything at all — they are just going to take the money from unpaid invoices.

Maybe this is thinking too far out of the box for Wal-Mart or other buyers to contemplate, but here is a theory: We will have better food safety in the industry if buyers suffer when there is a recall.

One of the basic food safety issues for the industry is how to encourage a culture of food safety. When Costco had a recall on carrots, we were a little shocked to find a premier player such as Costco buying from anyone other than the premier name in the business.

It was indicative of an industry-wide cultural problem in which buyers buy to spec but have no incentive to go beyond spec. This can make sense in terms of product quality: If Wal-Mart’s snack bar has a market for a cheap hot dog but the hot dog buyer is offered an all beef, kosher hot dog at a much higher price, it makes no sense to buy it, even if the higher price is a “bargain”.

Yet food safety is more problematic. Because there is no absolute food safety, we can only judge based on procedures. Yet if Vendor A significantly exceeds the retailer’s requirements on food safety, the retail buyer has no incentive to pay more for this product.

In other words, regardless of the CEO and the VP issuing pronouncements about food safety being the top priority — it is never the top priority in any individual procurement transactions.

Imagine the sea change in culture it would cause if instead of issuing the memos we reprinted above, Wal-Mart issued this memo to its own buyers:

Food safety is the Number One priority here at Wal-Mart. There is nothing more important to us than ensuring the health and safety of our customers.

QA has done a great job of pre-qualifying vendors, but as the buyer, you are the closest to the field. We are happy to pay more for product that exceeds our food safety standards.

We view our vendors as partners. As such, though we will continue to charge for actual losses such as product and transportation in the event of a recall, we are going to eat the cost of our own staff time in the event of a recall.

Partly this is because our vendors are our partners, and we are not going to kick a partner when he is down.

Also, though, this is because we want you, as our associate, to realize that we consider food safety a shared responsibility. Sometimes by pushing prices down too far, we can put pressure on vendors not to follow the optimum food safety procedures.

Occasionally we recognize that there is a superior vendor who follows better food safety policies, but we buy somewhere else for price. Sometimes we demand continuity of supply when no available area meets the highest standards.

Once in awhile, we use subterfuge to get around our own systems, so we may require QA to sign off on a vendor, but then we ask a vendor to act as a broker and buy some product for us from someone not fully vetted.

Perhaps we waive our food safety standards to accomplish other goals such as locally grown programs.

In all these cases and more, we are to blame for a food safety outbreak as much as the actual producer of the product.

We hope the knowledge that we are going to charge the fees that we would have charged the vendors to the specific department that has the recall will serve as a powerful reminder of your role in executing Wal-Mart’s responsibilities toward food safety.

A memo like this would change a lot of attitudes toward food safety and the notion of partnering with vendors. Unfortunately, we wouldn’t hold our breath waiting to receive it.

As for Richard from HEB, we really appreciate the letter and certainly invite the industry, as per Richard’s request, to weigh in on the matter.

We’ve done our best to present what others are doing, but we would caution that just doing what others do is the path to mediocrity. Maybe HEB can rise above the short term maximization of profit and set a policy that strives for a true partnership with vendors.