Wal-Mart's $6.5 Billion Inventory Reduction Squeezes Marketers

P&G, Others Take Hit as Retailer Strives for 'Zero-Inventory' State

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CINCINNATI (AdAge.com) -- Wal-mart is stripping $6.5 billion in inventory from its shelves and warehouses, causing pain at package-goods players from Procter & Gamble Co. to the marketer of Remington and Rayovac.
The vendor squeeze is part of a broader push toward a theoretical 'zero inventory' state in which Wal-Mart won't pay for products until they're purchased by consumers.
The vendor squeeze is part of a broader push toward a theoretical 'zero inventory' state in which Wal-Mart won't pay for products until they're purchased by consumers.

Gross margin ROI
Though not fingering Wal-Mart by name, P&G and Spectrum Brands cited "retailer inventory reduction" for earnings misses or narrowing of sales growth forecasts. It's all part of a program to focus on "gross margin return on investment" from Eduardo Castro-Wright, the newly elevated exec VP-chief operating officer of Wal-Mart Stores USA.

According to an internal presentation for Wal-Mart's January Supplier Summit meeting in Kansas City, Mo., Mr. Castro-Wright's goal is to reduce excess inventory by $6.5 billion.

He told suppliers that Wal-Mart's old 2-to-1 sales to inventory ratio "is history" and that the company will reap ROI by two means: reducing inventory and taking measures to eke more spending out of upscale consumers already visiting Wal-Mart stores with higher-ticket, higher-margin items.

Vendor squeeze
The vendor squeeze is part of a broader push toward a theoretical "zero inventory" state in which Wal-Mart won't pay for products until they're purchased by consumers. But marketers have always counted products as sold as soon as they are received by Wal-Mart and other retailers.

Wal-Mart declined to comment.

Even for a $330 billion behemoth like Wal-Mart, eliminating $6.5 billion of inventory through its so-called "Remix" program could mean huge financial gains. But in the short-term, the brunt of the push will be borne by non-food package-goods marketers forced to alter their production cycles and foot the cost of more frequent deliveries of fewer products to Wal-Mart.

People familiar with the matter said that Wal-Mart is consolidating distribution centers for supercenters with those for its traditional discount stores. By putting non-food marketers on the same terms as food marketers, it effectively reduces the inventory of their products within Wal-Mart's supply chain from an average of five weeks down to three. The efficiency push, though, could ultimately go much further. Some food vendors have less than a week's worth of inventory in Wal-Mart's system at any time.

Reluctant to name names
For non-food package-goods marketers, which generally get about 30% of their U.S. sales from Wal-Mart, eliminating just two weeks of inventory amounts to a 1% hit to sales on an annual basis or a 4% hit if concentrated in one quarter.

Though marketers have been reluctant to single out Wal-Mart by name, P&G last month blamed "retailer inventory de-stocking" for a minor disappointment as it narrowed its forecast for sales growth in its fiscal third quarter to the mid-range of prior forecasts. Spectrum, marketer of Rayovac, Remington and Spectracide, similarly blamed retail inventory issues.

A spokesman for P&G declined to comment on specifics, but did say the "retailer de-stocking" the company referred to was primarily at Wal-Mart and that now "we would expect shipments at normal consumption levels ongoing." Wal-Mart accounts for about 16% of P&G's business globally.

Quarterly earnings miss
In an April 6 conference call explaining Spectrum Brands' second consecutive quarterly earnings miss, Chairman-CEO David A. Jones blamed "significant retailer inventory reduction" by several large retailers for part of the company's problems, without singling out Wal-Mart.

Some package-goods executives pointed out that ongoing inventory squeezes are a fact of life in the business. "This is not a new phenomenon," said Ian Cook, president-chief operating officer of Colgate-Palmolive Co. in an investor presentation last month. "It is something that we work closely with, with all retailers and bring into the everyday flow of our business."
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