Blood from a stone? Vendors are accusing Wal-Mart of using them to pay for its employees' increased pay.
Torquemada had nothing on Wal-Mart (WMT 2.15%). If there is one thing the retail giant is known for is its ability to wring the last bit of savings on price out of its vendors, discounts it then passes along to consumers.
And the vendors willingly submitted to being put onto the rack. What they give up in profits they're often able to offset with volume because being on the shelves in Wal-Mart's 11,500 stores globally means they'll be exposed to 260 million potential customers weekly.
Yet even the Spanish Inquisition was only able to go so far before the era's leaders rebelled and it was abolished. Wal-Mart, too, is facing a rebellion by its vendors as it attempts to impose new fees in an effort the suppliers contend is meant to offset the higher employee wages the retailer implemented earlier this year.
Pay up or else
According to BloombergBusiness, Wal-Mart sent letters to thousands of it suppliers asking them to support the cost of the retailer warehousing their inventory. It previously avoided imposing such surcharges, but as Wal-Mart struggles to inject new life into its U.S. business, it's calling on the vendors to shoulder more costs. It says by lowering their expenses they'll be able to lower their prices for customers.
Earlier this year, Wal-Mart told vendors they should minimize marketing and promotional activity and pass along the savings.
While Wal-Mart notified all of its 10,000 or so vendors of the new fees, the burden of paying the costs may fall on the smallest. Large suppliers and those that have had a long relationship with the retailer may be able to reduce the fees or avoid them altogether, but smaller outfits would have to choose between paying more for the opportunity of being a Wal-Mart partner or forego the sales the retailer brings.
That could put it at odds with the commitment made earlier this year to purchase an additional $250 billion in goods from American companies by 2023, companies that by and large would almost have to be smaller businesses.
Starting to fight back
Some vendors have reportedly hired lawyers to fight the surcharges, and Bloomberg reports one firm that represents a number of suppliers says it marks a turning point for the world's largest retailer in that rather than seeking to eliminate costs, it's adding to them. Another consultant added: "Any established supplier doing business with Wal-Mart is already offering by all means the lowest price possible. So these fees certainly sting."
Although Wal-Mart's U.S. business seems to have regained some of its lost momentum, recording three consecutive quarters of rising same store sales, an important retail metric because it measures growth absent the opening of new stores, it also looks like the turnaround is beginning to stall.
Wal-Mart missed analyst expectations for profits in the second quarter while lowering guidance for the full fiscal year to a level that was also beneath Wall Street's forecasts. Its decision in April to raise raise the pay for all U.S. employees to a minimum of $9 per hour starts this year, followed by further increase to $10 per hour next February and a new layer of expenses for the retailer. Raising the pay of some 500,000 workers will cost Wal-Mart about $1 billion.
Labor pains
While the retail giant says the wage increase isn't behind the move to squeeze its vendors for even more money, it's notable the effort comes as Wal-Mart itself tries to find new avenues for savings. For example, it recently expanded to several hundred the number of stores that were previously opened 24 hours to now close for at least a few hours every night, another move it says is related to the wage increases.
Critics may seek to tie every move it makes to the higher pay, but Wal-Mart may find it needs new strategies for getting blood out of a stone as tightening the thumbscrews on vendors is showing itself to have its limits.
