The directive is a Catch-22, given that Wal-Mart's growing market share is quickly pushing U.S. suppliers who lack significant global presence toward or beyond the danger zone of getting 30% of their business from the giant retailer and its affiliates. But that's a level that a Wal-Mart spokeswoman said "makes us nervous," because, "we don't want to be the sole source of survival for a company."
Although this is clearly an issue concerning top Wal-Mart executives, the company will not confirm or deny any new policy initiative or offer details of how it might wean dependent vendors. Even the percentage of concern appears somewhat fluid. The spokeswoman originally cited 30%, but later a third. Some supplier executives peg the danger zone as low as 25%. More details may emerge when Wal-Mart meets with top executives of its biggest vendors in January.
Wal-Mart has long warned suppliers against becoming too dependent. In at least some cases, the retailer asks them to sign contracts specifying they won't exceed a certain percentage of business from the retailer, according to supplier executives. Those limits have sometimes been ignored.
But in the wake of recent articles in such publications as Business Week, Fast Company and Advertising Age about Wal-Mart's growing clout over its suppliers, the company is raising the priority of the dependency issue, according to some supplier executives. One said Wal-Mart is developing a five-year-plan to address the issue.
Details of the plan, however, don't appear to have been discussed yet with many vendors. Executives of some of the most Wal-Mart-reliant publicly held suppliers, such as Clorox Co. and Dial Corp., where Wal-Mart accounts for 25% and 28% of business respectively, said they had no knowledge of any policy shift. But in an interview last year, Dial Chairman-CEO Herb Baum said he was aware of Wal-Mart's desire to limit dependency.
"I'm not aware at all of any restriction Wal-Mart has" in place around having more than a certain percentage of business with Wal-Mart, said Larry Peiros, group VP at Clorox. "In fact, I suspect there are an awful lot of companies that are at 25% or more, particularly if you look at non-public companies."
Another supplier executive saw Wal-Mart's concern as a potential plus for larger suppliers if it means weeding out or scaling back some smaller, less-global competitors.
In an unrelated move that may alleviate some dependency, Wal-Mart in recent months has stopped seeking lengthy exclusivity deals on certain brands or products, according to supplier executives. Wal-Mart still wants to get new products on shelf weeks or months before rivals, they said, but no longer wants deals that extend beyond a few months. The reason, said one supplier, is too many exclusives make it harder for consumers to tell if Wal-Mart really has lower prices.
"We do not usually push to get a lot of exclusives," a Wal-Mart spokeswoman said, "but it can be a component of the programs we put together."
Analysts who follow supplier companies are skeptical about how serious Wal-Mart can be about a policy that flies in the face of its growing dominance. Even if they wanted to, Wal-Mart package-goods suppliers may have trouble keeping the chain's share of their business from growing annually, as it has at most suppliers in recent years, said Deutsche Bank analyst Andrew Shore. Suppliers also don't want to limit Wal-Mart exposure, he added, because it's usually their most profitable account.
acquisition as solution
For smaller suppliers, being scooped up by a larger company could be a solution. Warren Buffett's Berkshire Hathaway, for example, acquired Garan, maker of Garanimals children's apparel, and bankrupt apparel marketer Fruit of the Loom. Garan derives 85% of sales from Wal-Mart, and Fruit of the Loom, though it hasn't disclosed the precise percentage, is believed to do more than 40% of its business there. But overall Berkshire gets less than 10% of its business from Wal-Mart.
Earlier this year, Berkshire also bought Wal-Mart's McLane convenience store distributing business. The deal came a few months after Wal-Mart was widely rebuffed by supermarket operators about expanding its wholesale operation to them.
Asked if Berkshire is seeking acquisitions that can help Wal-Mart out of its supplier-dependency problem, a spokeswoman for Chairman-CEO Mr. Buffett said, "We have no policy regarding that."