Wal-Mart Stores Inc is seeking price cuts from suppliers that produce goods in China, saying the retailer should share in the savings generated by China’s devaluation of the yuan, people with knowledge of the matter said.
Wal-Mart managers in recent weeks have contacted more than 10,000 suppliers in various countries, all of which have manufacturing facilities in China, seeking cost cuts of 2 percent to 6 percent on mainly general merchandise including home furnishings, apparel, health and beauty products, appliances, electronics and toys, according to a consultant who advised Wal-Mart on the move and spoke on condition of anonymity to protect his relationship with the retailer.
The company is telling suppliers that they should pass on the savings arising from the yuan devaluation so Wal-Mart can achieve EDLC, or “everyday low cost,” its term for the tight cost controls needed to keep prices low for consumers, according to executives at two vendors of durable goods, who also requested anonymity. Both were asked for cuts in the lower half of the 2 percent to 6 percent range. Both said they planned to negotiate a reduction in the proposed cuts.
Wal-Mart spokeswoman Deisha Barnett declined to comment on whether the company was seeking price cuts in China-made goods. With almost $500 billion in annual sales and a globally diversified supply chain, Wal-Mart holds tremendous sway over its vendors, which could risk their business with the retailer by pushing back too hard on its requests to lower costs
The move by the world’s largest retailer follows efforts by other retailers to benefit from a cheaper yuan. A senior Toys R Us official told Reuters last month that the company was “engaging” with suppliers about improving terms. Home Depot Inc Chief Financial Officer Carol Tome said they had identified potential cost savings from the currency’s decline and would pursue them.
Last month, China devalued its tightly controlled currency in a bid to boost growth and help flagging exports. The nearly 2 percent cut on Aug. 11 was the most significant downward adjustment to the yuan since 1994. The currency is down 2.9 percent versus the dollar so far this year, making exports from the country less expensive when purchased with dollars, the currency most often used in supplier contracts.
Wal-Mart’s latest overture to suppliers comes as it seeks to push through broader changes designed to lower its costs through changes to vendor agreements. In June, Wal-Mart began asking all suppliers to pay fees to store inventory in Wal-Mart warehouses and in some cases has sought to extend the time Wal-Mart takes to pay its vendors.
Wal-Mart has been struggling to shore up its profit margins, which have been weighed down by a $1 billion investment announced earlier this year to increase wages for half a million store-level workers and other cost pressures. The company’s stock is down 26 percent so far this year.
Barnett said the new vendor agreements are aimed at making its terms more consistent across suppliers, and were part of its efforts to keep prices low at the store.
“It’s change at the end of the day and that’s not always easy, but we think what is best for our business and ultimately best for our customers,” Barnett said.
Several vendors told Reuters they have pushed back, arguing the new terms would increase costs and make it difficult to supply products at the low prices Wal-Mart demands.
Wal-Mart likely will face resistance to the request related to the cheaper yuan as well, suppliers and consultants said.
Burt Flickinger, managing director of retail consultancy Strategic Resource Group, said he expected retailers in general to seek discounts for goods from China because of the yuan devaluation and excess of production capacity in the country.
In Wal-Mart’s case, Flickinger said, the move reflects an effort to get help from suppliers to “fund lower prices” as the retailer grapples with the costs of an increase to a $9-per-hour starting wage and new investments in its ecommerce platform.