Wal-Mart weighs wholesale-food division

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Wal-Mart stores may bring its formidable buying clout to the wholesale industry, as the world's largest retailer explores creating a division to sell food products as a third party to supermarket accounts. The move may give package-food marketers, only recently emboldened to stand up to traditional grocery retailers, reason to retrench.

A Wal-Mart spokesman declined to comment on the initiative. But executives of two wholesale grocery distributors said they had heard from customers about overtures made by the $218 billion retail giant. A third independent grocery executive who recently purchased products from Wal-Mart said he was told that within two years Wal-Mart would set up an entity acting as intermediary between food manufacturers and retailers that would specifically reach out to independent grocers.

He welcomed the notion. "I will be able to procure product cheaper" from Wal-Mart than directly from manufacturers, he said, "which underscores the fact that I've been getting hosed all along."

A retail buyer who did not have specific knowledge of Wal-Mart's plans said that many smaller retailers are placing a greater emphasis on buying from alternate sources as a way to gain much-needed margin growth. "We would have a lot more product to buy [from Wal-Mart] at a better deal than from grocery wholesalers," he said.

Wholesale grocery distribution would give the Bentonville, Ark.-based behemoth even more clout, particularly in food, where it commands a smaller share of the marketers' business than it does in home and personal-care products. A full 17% of Procter & Gamble Co.'s global sales are conducted via Wal-Mart, as compared to 10% of Kraft Foods' business, for example.

Wal-Mart's foray into small-format food stores has been slower than expected because, among other things, the company has found the format too expensive, said retail analyst Walter Loeb of Loeb Associates. The chain has 31 Neighborhood Markets in Arkansas, Oklahoma and Texas as of Jan. 31, and recently announced a plan to build 25 of the smaller-format stores in Florida. Convenience stores have also been tapped -Wal-Mart purchased the nation's largest convenience-store distributor, McLane Co., in the early 1990s.

Wal-Mart's interest in wholesaling comes as the industry is under pressure from business lost to Wal-Mart supercenter expansion. Two players-Fleming Cos. and Nash-Finch-face informal Securities and Exchange Commission inquiries over issues involving trade promotion funds.

The potential move comes at a time when manufacturers seem to be increasingly aggressive with retail accounts that formerly caused them to cower. The shift can largely be traced to Wal-Mart's efficiency-notably in procurement-that sparked a huge loss of influence even among the biggest, newly consolidated grocery players.

power shift

In a recent report, Credit Suisse First Boston analyst Dave Nelson referred to the significant velocity of sales through Wal-Mart stores and the ensuing declining store sales of traditional retailers as the reasoning for what appears to be a shift in negotiating power toward food marketers. Evidence of the turn, he suggested, are recent price hikes by Kraft Foods and Kellogg Co. for their Nabisco and Keebler snacks, which retailers most likely will not be able to pass on to consumers. More telling is the trend among food companies to develop pay-for-performance structures for trade spending, as evidenced by Kraft's move to split its new item fees and pay the second half when products reach the shelf (AA, Nov. 18).

An executive close to Kraft said its divisions are considering forgoing slotting fees altogether for some smaller new-product launches.

less daunting

The fear of repercussions-a retailer not taking on a product-is less daunting now that Wal-Mart, its Sam's Club division and other club stores like Costco Wholesale Corp. make up such a large percentage of food marketers' sales. The executive close to Kraft said that if not paying slotting weeds out smaller players, so be it. A Kraft spokeswoman said it "considers all its retailers important partners, and doesn't choose one to the exclusion of others."

That may be wise if Wal-Mart passes on the low prices it manages to secure from manufacturers to independents and regional chains.

"To walk away from traditional retail just to service the largest segment today would be a huge mistake" for marketers, said Gary Stibel, founder of the New England Consulting Group.

One retail executive put it bluntly: "People will be sorry they sold their soul to Wal-Mart when that's the only place to go."

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