Inflation and transportation costs are taking a toll on stocks, and the issues may persist. Retail behemoths Walmart (WMT 0.46%) and Amazon (AMZN 0.68%) are leaning on new arrangements with suppliers to share the burden.
The companies have added surcharges to supplier contracts to account for higher gas and shipping costs, and there's not much they can do about it. The charges add an inflation-proof element to the two companies' stocks. Here's what it all means.
Flexing their muscles
Michael Porter's book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, outlined five forces that shape the competitive landscape of industries. One of Porter's five forces is supplier power. This refers to the fact that if the number of suppliers in an industry is high and switching costs are low, those suppliers have little leverage with buyers.
This situation describes the relationship Walmart and Amazon have with their suppliers. And the retail giants are using their leverage over suppliers to ease inflationary pressures now that gas prices are through the roof.
Starting Aug. 1, the company will charge some suppliers a "collect pickup charge." The new charge is in response to higher transportation costs borne by Walmart. The collect pickup charge will be calculated as a percentage of the cost of goods received by Walmart.
Suppliers are understandably frustrated because some of the orders they're filling for Walmart were placed months ahead of delivery. So suppliers may incur the new charge on orders placed before the new charges. Because Walmart is often these suppliers' largest customer, their hands are tied.
Earlier in the year, Amazon imposed a 5% fuel and inflation surcharge on all items shipped using its fulfillment service. The company cited higher-than-expected fuel costs for the surcharge. Suppliers using Amazon's platform might be left holding the bag for Amazon's additional costs because they rely on it to sell their products.
Walmart and Amazon operate from a position of strength with their suppliers, which gives them the power to pass along inflationary costs. The same cannot be said of smaller retailers. Unlike Walmart and Amazon, they might not represent a huge portion of suppliers' business and therefore wield less power.
If smaller retailers try to pass along new inflationary surcharges to suppliers, they risk having those suppliers cancel orders, leaving them scrambling for products. Meanwhile, suppliers leaving Walmart could be quickly replaced by a new supplier looking to bag a gigantic new account.
In addition to the inflation-proof nature of Walmart and Amazon, their stocks have fallen, and valuations have become reasonable. Walmart stock's price-to-earnings (P/E) ratio has been nearly halved since the beginning of the year to 27. Amazon stock's P/E was more than 100 in July 2020. It's now a more attractive 55.
The two companies' ability to weather an inflationary storm should put their stocks on your radar.