business news in context, analysis with attitude

by Kevin Coupe
Advertising Age reported this week that Wal-Mart is exploring the possibility of creating a wholesale division that would compete directly with companies such as Supervalu and Fleming and sell grocery products to the very independent retailers the existence of which it threatens with every new store opening.

One unnamed independent retailer told Ad Age that he actually had purchased grocery products from Wal-Mart and that he welcomed the company’s entry into the food wholesaling business because he would be able to “procure product cheaper” this way. In addition, he told the paper that this “underscores the fact that I’ve been getting hosed all along.”

The consensus seems to be that many manufacturers would welcome Wal-Mart’s entry into the wholesaling business since the company already represents such a significant portion of their business -- 17 percent of Procter & Gamble’s global sales, for example, and 10 percent of Kraft Foods’. Because Wal-Mart traditionally has believed in making money on selling product in its stores, as opposed to generating margins through the use of promotion allowances such as slotting and failure fees, manufacturers might find the Arkansas company to be a welcome addition to the wholesaling business.

For that matter, Wal-Mart has owned McLane Corp., the largest c-store distributor in the US, for more than a decade.

The implications of this possible move by Wal-Mart are enormous, and apply to a number of industry segments.

On the one hand, we can’t imagine why an independent retailer would want to buy its groceries from Wal-Mart, a company that has cut through the US retailing market like a carnivorous shark that can’t slow down and won’t stop devouring its prey. The number of emails we get from independent operators in which they complain about the impact of Wal-Mart on their businesses is non-stop; the irony of these same people buying groceries from Wal-Mart is delicious. (If you like irony, that is.)

One can only imagine the clout that Wal-Mart would have in a marketplace where not only is it the most dominant retailing presence, but also is a critical supplier to the companies it competes with. And since it certainly is possible that Wal-Mart’s entry into this category could weed out the already thin ranks of wholesalers in this country. There are trade associations out there that have been dining out for years by being anti-Wal-Mart; now, the company conceivably could become an important element in trade shows catering to the small, independent operator. (That gets an “8” on the irony scale.)

Of course, the other way to look at this issue is to take quite seriously the comment made by the unnamed independent retailer who says he has been getting “hosed” by his wholesaler. Companies that supply product to independent retailers will have to examine their operations very carefully, asking themselves if they are successful because of the way they serve their retail customers, or in spite of it. They will be forced to drive down prices, cut their own margins, and find new and imaginative ways to serve their independent retail customer base, knowing that these customers could defect to Wal-Mart if things aren’t working and prices aren’t where they believe they should be.

A problem, of course, can be found in the other part of what the independent retailer told Ad Age, about being able to procure product “cheaper” if it goes by way -- at least metaphorically -- of Bentonville.

Is it possible that independent operators would move their business to a Wal-Mart wholesaling company just because they might be able to get Oreos for a nickel cheaper? In the broad scheme of things, is this a good enough reason to move one’s business to a new wholesaler? Especially if this wholesaler could be in the amazing position of being able to control a broad range of retail prices, not just those established at its own discount stores, supercenters, and Neighborhood Markets.

Like the bluesman Robert Johnson, who stood at a crossroads prepared to make a deal with the devil so that he could play the guitar with all the joy and sorrow that he felt for his music, independent retailers may well stand at a similar crossroads, deciding if they will make that deal with the entity they have long thought of as the devil incarnate. Wholesalers may find themselves at a crossroads as well, as Wal-Mart challenges many of the ways they have gone to market and served their customers. And manufacturers need to decide how enthusiastically to embrace the notion of even greater portions of their volume being controlled by a single company.

The only business entity not at a crossroads in all this is Wal-Mart, which rather is in the role of an enormous locomotive, rushing headlong toward the crossroads, prepared to crush anyone and anything that is not prepared to ride in its direction, at its pace, and according to its rules.
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