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Here's How Walmart Is Using Artificial Intelligence to Keep Prices Low

By Daniel B. Kline - Mar 27, 2020 at 10:24AM

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The retailer essentially has more vendors than it can negotiate with.

Major retailers have a lot of power over vendors. A chain like Walmart (WMT 0.96%) can, for example, go to a medium-sized vendor and ask it to cut prices by 2% or lose some of its shelf space.

That's typical and it helps keeps prices low for consumers. It's also challenging to keep track of for a company operating on the scale Walmart does. To help with that, the retail giant has reached a deal to pilot technology from Pactum to help it negotiate contracts with some of its vendors.

A crowded Walmart.

A Walmart before the time of social distancing. Image source: Walmart.

What is Walmart doing?

Essentially, Walmart is acknowledging that it's tough, if not impossible, to negotiate the best possible terms with its hundreds of thousands of vendors. That's a problem it will use Pactum's artificial intelligence-based product to address.

"Inefficient contracting has been estimated to cause firms to lose between 17% to 40% of the value on a given deal, depending on circumstances, according to research by KPMG," Pactum CEO Martin Rand said in a press release.

What does this mean for consumers?

In theory, this technology will help Walmart negotiate the best deals possible with more suppliers. That forces its vendors to lower prices, and some portion of that gets passed on to consumers.

It's not, of course, as simple as it sounds. Walmart gets to decide what its margins are and it's not obligated to share the savings with customers. The chain, however, does operate in a crowded space against rivals that are also doing their best to offer value to shoppers.

That suggests that whatever Walmart can save by using AI should be at least partly passed on to its customers.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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