Wal-Mart (NYSE: WMT) is known as a tough retail competitor, and it's recognized as ruthless when it comes to squeezing its suppliers to deliver the best possible prices. When consumers are exceptionally price sensitive, wringing every penny out of a product is essential to growing sales.
Scrounging for pennies
That truism was borne out when Wal-Mart switched from an "Always Low Prices" motto to "Save Money. Live Better." Instead of delivering the best value proposition, the company focused on reducing clutter from its aisles to help drive cost savings on popular products. But when customers couldn't always find what they wanted on its shelves, they pushed their shopping carts to the dollar-store chains like Dollar Tree (Nasdaq: DLTR) and Family Dollar (NYSE: FDO), which have expanded their offerings to attract consumers.
International rival Carrefour, the world's second-largest retailer behind Wal-Mart, ought to take note as it summoned 20 of its largest suppliers -- global companies such as Procter & Gamble (NYSE: PG) and Diageo (NYSE: DEO) -- which account for nearly half its sales, to cull items from its shelves. Reducing assortment could result in reduced sales, as Wal-Mart found out.
Paint it black
Wal-Mart is increasingly pushing to use global suppliers as the company itself becomes more global. That focus on and preference for global suppliers has typically separated the Bentonville behemoth from other rivals. Most recently that has resulted in the retailer dumping domestic paint maker Sherwin-Williams (NYSE: SHW) in favor of Dutch coatings manufacturer Akzo Nobel, the maker of Glidden paints, which are also found at Home Depot.
Sherwin-Williams, the maker of Dutch Boy paints and Wal-Mart's own Color Place brand, only derives 16% of its revenue from outside the U.S. In contrast, Akzo generates 80% of sales internationally. That kind of global reach undoubtedly enables Akzo to deliver paint at an even lower price while meshing more neatly with Wal-Mart's discount image. It was actually a bit surprising that Sherwin-Williams was a supplier to begin with, since it has a premium persona in line with that of paint maven Benjamin Moore.
Don't worry about Sherwin-Williams, though. Wal-Mart sales contribute about $250 million annually, so that's only around 3% of the paint maker's $7.3 billion in trailing revenue. In fact, it might be good news. Beverage maker and former Wal-Mart supplier Cott (NYSE: COT) actually saw its shares soar after the retailer severed their 10-year exclusive supplier contract and its margins expanded last year. Wal-Mart's ability to hurt suppliers is well-known.
But Wal-Mart's negotiating power can also work to a supplier's benefit, such as its move toward RFID tags for merchandise, where it's using its buying power to help its own suppliers buy the tags at reduced cost.
In a cutthroat business like retail where a penny saved can mean a dollar earned, Wal-Mart's laser-like focus on expenses has global implications.
