Numerous newspaper articles, television news stories, books, and documentaries focus on Wal-Mart over the past few years. Documentaries such as "Wal-Mart: The High Cost of Low Prices" and "Is Wal-Mart Good for America?" serve to reinforce perceptions of Wal-Mart's size and power. In addition, a barrage of news and information partially based on anecdotal evidence has fueled public perceptions of Wal-Mart's power over suppliers. Without a doubt, Wal-Mart is a dominant retailer. Analysts expect Wal-Mart's growth and high profile to continue well into the future (Evans, 2005).
Given Wal-Mart's financial success, strong growth, and dominance in retailing, academics and business practitioners alike will benefit from understanding the broader impact of Wal-Mart's business strategies. This paper critically evaluates the issue that Wal-mart has in managing relationship with suppliers, depict Wal-Mart extracting the lowest possible price from suppliers and refusing to accept a supplier price increase. Indeed, Bloom and Perry (2001) find that manufacturers with Wal-Mart as a major customer from 1988 to 1994 had lower overall profit margins than firms who did not have Wal-Mart as a major customer; this was particularly true for smaller suppliers.
As Wal-Mart's CEO and President, David Glass has presided over much of Wal-Mart's phenomenal growth and has been credited with making Wal-Mart one of America's most admired corporations. He plays a central role in encouraging innovation, both in the company's operations and its dealings with its suppliers.
Theoretical backing
Firms in most industries more and more focus on their core competencies and outsource products and activities that were previously considered integral to the firm. Several studies have reported that the materials purchased from suppliers account for up to 60% or even 70% of the budget (Chapman et al., 1997). As a result, in order to identify and realize significant cost savings or added customer value, firms have to work through suppliers and can no longer limit such efforts to their firm boundaries. They increasingly rely on their suppliers' contributions to accomplish strategic ends and create competitive advantage.
The relative market power that exists between retailers and suppliers defines the nature of their relationship. A retailer or supplier with comparably high market power is able to extract financial benefits from the other party. As Bloom and Perry (2001) note, the financial benefits extracted are based on two types of relationships: (1) a dependency relationship or (2) a partner relationship. The dependency model argues that when suppliers become dependent upon a more powerful retailer, the suppliers will give financial concessions to maintain their position. The partner relationship model argues that long-term relationships lead to better financial performance for both the supplier and the retailer .(Bloom and Perry's 2001) findings support the dependency relationship. They find that Wal-Mart suppliers with a small market share have financial impacts and display lower profits as compared to Wal-Mart suppliers with a large market share. Their findings are based on supplier data from 1988 to 1994 and identify firms as Wal-Mart suppliers when Wal-Mart appears in the primary customer field in Compustat. However, they do not quantify the magnitude of sales to Wal-Mart and, instead, code firms as Wal-Mart supplier or not.
(Gosman and Kohlbeck 2006) investigate the dependency relationship between Wal-Mart and 150 suppliers during the period of 1993 to 2004 based on Compustat and market value data. Financial performance in (Gosman and Kohlbeck 2006) is measured using gross margin, cash cycle (including inventory, accounts receivable, and accounts payable turnover), and return on assets (ROA). They find that "financial performance is negatively impacted as sales to Wal-Mart
Increase," (Gosman and Kohlbeck, 2006; p. 21). Specifically, they find that, while gross margins increase as sales to Wal-Mart increase, increases in other expenses more than offset the gross margin increases.
In situations when firms must upgrade the delivery performance or quality of goods or services (for brevity, hereafter I use the term "product" to refer to both goods as well as services) that a supplier provides in order to regain or sustain competitiveness on the market, they can principally follow one of three avenues. The first option is to switch the supplier, that is, to search for alternative sources of supply and source the product from a more capable supplier (Demski et al., 1987; Sambandam and Lord, 1995). This option, however, might not be viable if
Alternative suppliers are not available or if switching costs are excessively high. Second, through vertical integration the firm can bring the needed product in-house by acquiring the supplier
or setting up capacities to turn out the product internally (Langlois and Robertson, 1989; Monteverde and Teece, 1982). Vertical integration might require substantial investments and be
in contradiction to the firms' intention to focus on their core competencies and outsource non-core activities. The third option is to assist the deficient supplier so that the supplier's performance or the supplier's capabilities are upgraded to the desired level.
To achieve competitive advantage, the firm must create positive value which equals or exceeds that of competitors. A firm has latitude in deciding which competitive strategy to choose, with equal levels of consumer surplus at equilibrium. Competitive advantage can be obtained by offering superior value to the customer through either unique benefits that offset a higher price or lower prices than competitors for equivalent benefits. As such, both differentiation strategies and cost leadership strategies can lead to sustained competitive advantage, which in turn leads to superior financial performance (Day and Wensley, 1988; Hambrick, 1983; Porter, 1980). The firm's suppliers can contribute to both, a differentiation as well as a cost leadership strategy.
Conclusion
Whether retailers have become more powerful than manufacturers in recent years continues to be a burning question in the trade press and academic literature. Our research adds fresh fuel to the fire by looking at whether Wal-Mart, the largest retailer in the United States, has exerted power over its suppliers and squeezed them financially. Previous academic research on retailer power has looked largely at food stores, but we extend this perspective into nonfoods by using Compustat data as a source. Our analysis of these data indicates that the answer may be more complex than a simple yes or no. We find that Wal-Mart suppliers holding a small share of their respective markets do not perform relatively as well financially when they have Wal-Mart as one of their primary customers. However, large-share suppliers to Wal-Mart perform better than their large-share counterparts reporting retailers other than Wal-Mart as their primary customers. This indicates that suppliers who seek Wal-Mart's wide market reach may derive benefits from using this association if it can be used to strengthen their market positions. Those that fail in this goal, however, may find their profits squeezed and do better by shifting their retail channel focus elsewhere.
Wal-Mart strives to conduct its business in a manner that reflects these three basic beliefs and
expects its suppliers to adhere to these beliefs in their contracting, subcontracting, and other business relationships. Additionally, because the conduct of Wal-Mart's suppliers can be attributed to Wal-Mart and its reputation, Wal-Mart requires its suppliers, and their contractors, to meet the following standards, and reserves the right to make periodic, unannounced inspections of suppliers' facilities and the facilities of suppliers' contractors to ensure suppliers' compliance with these standards:
Compliance with applicable laws and practices: Suppliers shall comply with all local and national laws and regulations of the jurisdictions in which the suppliers are doing business as well as the practices of their industry. Should the legal requirements and practices of the industry conflict, suppliers must, at a minimum, be in compliance with the legal requirements of the Jurisdiction in which they are operating. If, however, the industry practices exceed the country's legal requirements, Wal-Mart will favor suppliers who meet such industry practices."
REQUIREMENTS AND PROCESSES:
The Supplier Agreement (All Suppliers)
Retail Link® (Product Suppliers)
Electronic Data Interchange (EDI) (Product Suppliers)
Lead-Time Requirements (Product Suppliers)
Timely Shipping
Quality Assurance Through Testing
Equal Opportunity Practices
Security Source Tagging
Wal-Mart influence on its suppliers can be felt in the cheap products it sells and the jobs it drives overseas. To keep prices low, Wal-Mart must source goods from areas of the world where employment standards are severely lacking. In fact, over 80% of Wal-Mart's suppliers are from China. According to Duke University Professor Gary Gerreffi, "Wal-Mart and China are a joint venture." Quintessential American businesses like Huffy, Mr. Coffee, and Master Lock have suffered under the weight of Wal-Mart's pressure. With increased sourcing from India, local suppliers will increasingly have to meet unrealistic prices and quotas to satisfy their demands.
Wal-Mart definitely has the business strategy of Low Cost Leadership. They do nothing to really differentiate themselves from competitors and provide no-frills self-service stores that always provide the lowest prices. Wal-Mart has built enough clout with suppliers that they can dictate the prices and go in and change suppliers manufacturing processes in order to wring out more and more savings for the consumer. Everything that Wal-Mart does from calling suppliers collect to having execs double up in hotel rooms, is to save the customer money. While they do try to provide good customer service on top of low prices, Wal-Mart's strength is low-prices. No one has such a supplier and distribution network like Wal-Mart that allows such low prices
One aspect of Wal-Mart that sets them apart from other corporations is how they manage their relationship with their suppliers. We have determined that Wal-Mart is such a dominant force and has become such an important account for their suppliers that they have managed to eliminate Supplier Power. By eliminating Supplier Power, Wal-Mart can pursue achieving their goals and concentrate purely on their Cost Leadership Strategy, which serves the consumer with "Everyday low prices." However, the fact that Wal-Mart is able to disregard Supplier Power begs the question of where exactly does Wal-Mart derive its power? Additionally, if Wal-Mart has nearly eliminated Supplier Power, then what kind of relationship do they have with their suppliers?
Wal-Mart's power is derived from their size and the influence that comes with it. A quick look at Wal-Mart's numbers is the proof of Wal-Mart's size and power. Some of Wal-Mart's numbers include 23% of Clorox's sales and 20% of Revlon and RJR Tobacco's sales.[2] If these companies choose to walk away from their supplier relationship with Wal-Mart, then they would lose out on nearly a quarter of their revenue. The fact of the matter is that this same concept extends to all of Wal-Mart's other suppliers like Kraft, Proctor & Gamble, Gillette, Campbell's Soup, and many more.[3] The reality that these suppliers live in is one where they know that their Wal-Mart account is one that they cannot afford to lose. In fact, suppliers are also faced to look at the predictions that, in an estimated five years, Wal-Mart will double in size, which mean Wal-Mart's account with only continue to grow.
Since Wal-Mart has effectively eliminated Supplier Power, it is also important to consider the state of their relationship with suppliers. In many ways, Wal-Mart has changed the dynamic of the supplier and buyer relationship. Joe Galli, Newell CEO, was quoted as saying, "The days of price increase are over."[4] Often times, Wal-Mart will tell their suppliers upfront what they will and will not pay for a good.[5] However, despite the fact that Wal-Mart has removed the possibility for supplier price increase, their suppliers generally feel one of two ways about Wal-Mart. The first supplier sentiment is serving a client like Wal-Mart forces a company to become more efficient.[6] Many suppliers feel that doing business with Wal-Mart is the equivalent of entering a corporate basic training exercise. Robin Prever, who was CEO of Saratoga Beverage Group, was quoted as saying that this relationship with Wal-Mart, "… wakes everybody up. And all our customers benefited. We changed our whole approach to doing business."[7] The second sentiment of suppliers is that Wal-Mart is the big brother who likes to push them around. In some instances when suppliers have attempted to raise prices, Wal-Mart has either denied their request or they also been known to pay the same previous amount to their supplier with no questions asked.[8] An example of this situation is Wal-Mart's relationship with Vlasic, who was "forced" by Wal-Mart to sell pickles in gallon containers for under $3.00 a jar. Making only pennies a jar and watching their supply of pickles dwindle, Vlasic attempted to negotiate a price increase for their product with Wal-Mart and was denied causing a loss of millions of dollars for Vlasic.[9]
In this regard, if their suppliers feel cheated, does it really affect Wal-Mart in the end since suppliers cannot afford to lose their business? The answer is yes because, "suppliers can affect manufacturing time, product quality, and inventory levels." All of these aspects of supply can shape Wal-Mart's ability to effectively restock their shelves for their inventory turnover.[10] In addition, if Wal-Mart pursued avenues that would seriously undercut their suppliers, then they face a variety of possible repercussions. For instance, if suppliers became unable to take care of their workforces, then Wal-Mart could see significant drops in their product inventories. Therefore, even though suppliers do not have power in regards to their relationship with Wal-Mart, it is still important for Wal-Mart to maintain relations with their 21,000 suppliers because suppliers are the key to Wal-Mart achieving its goals and strategy.
Ref.
J PROD INNOV MANAG 23l
1991 ;8:231-239
A Retailer's View of Industrial Innovation: An Interview with
David Glass, President and CEO of Wal-Mart Stores Inc.
Gerald G. Udell and Linda S. Pettijohn
