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Power to the people

Wednesday, May 26, 2010 - 00:00

Wal-Mart’s “take no prisoners” approach in dealing with its suppliers has worked well for the world’s largest retailer. As for its suppliers, not so well.

Wal-Mart’s latest scheme to get the upper hand on its suppliers is to take over transportation services from suppliers. Apparently, Wal-Mart executives think they can haul goods at less cost by using its own fleets of trucks as well as some contractors. Wal-Mart claims it will pass the savings on to its customers. My take is that Wal-Mart will increase its profit margins and gain the ultimate bargaining position of not picking up merchandise from suppliers unless it suits Wal-Mart’s needs. Why else would Wal-Mart want to eliminate a delivery service that has served it well?

As deceitful and nefarious as I think that program is, I mention it only as the set up for a program even more deceitful and nefarious. Enacted a few months back, this program one blew up in Wal-Mart’s smiley face. In their infinite wisdom, Wal-Mart executives decided to try to increase sales of the store grocery brands under the name “Great Value,” no doubt a slogan labored over by Wal-Mart’s crack marketing team.

Because Wal-Mart owns it own store brands, it stands to make higher profits every time a store brand is sold. Consumers, whether they know it or not, are buying the same products except in different packaging. They are sold at less cost, so they win too, as long as they remain oblivious as to how they benefit.
 
So everybody’s happy? Everybody, but the suppliers. The more store brands Wal-Mart sells, the less branded product it sells. The difference in profit goes only in the Wal-Mart vault.

Store brands are now an accepted practice among most retailers, so there’s not much for a supplier to quibble about any more. In fact, Wal-Mart could even take the high ground by saying it was trying to save its customers more money during this awful recession. Oh yeah, big, benevolent Wal-Mart did say that. “Rolling back prices” is all Wal-Mart wants you to know.

But wait, here’s the killer: Wal-Mart created a mudslide from its moral high ground when it tried to strike a death blow to 300 name brand items by eliminating them from the mix. Wal-Mart executives calculated that people would do just about anything to save a buck during this recession. With consumers being more financially desperate than they have been in decades, it was obvious that generic products would win the day with consumers. Wouldn’t they? Shouldn’t they?

Over time, one of the most egregious results of eliminating name brands would be the prices of house brands would climb. In effect, they would take on the value of name brands simply because they can’t be compared to anything else.

Perhaps it’s inevitable that the volatile and shaky relationships that Wal-Mart creates with its suppliers would culminate in a system where suppliers only make store branded products. It certainly is no accident that suppliers wound up as Wal-Mart’s whipping boys.

Thankfully, a funny thing happened on the way to the food aisle. When Wal-Mart put its Great Value program in play, customers who could no longer get the name brand products that they were used to getting at Wal-Mart pushed their shopping carts over to its competitors. When the dust settled, Wal-Mart’s sales from its store brands fell while its competitors’ sales rose.

The lesson, of course, is twofold: 1) in order to run a successful store brand program, you need to protect your name brands and 2) never, ever, take your customers for granted. How many of you would have made the same assumption that Wal-Mart did that people want to save money no matter what? Consumers have the ultimate say, so if you’re planning any kind of marketing swing it would behoove you to ask your customers what they think before you make a switch. That is, if you have respect for them and your suppliers.

Postscript: I hope this discussion spurred the thought of how important collaboration is, no matter which side of the fence you’re sitting on. Although this is a competitive business, a sense of fair play and the building of mutually beneficial relationships will sustain success better than always trying to get the upper hand.

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