Walmart Vendor Cut Likely to Hit Small Players

Project Impact Could Mean Supplier Pairings or More 'Orphan' Brands

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BATAVIA, Ohio ( -- For decades, Walmart championed small suppliers by giving them a shot at national distribution without crippling slotting fees. But its new drive to reduce the vendors it works with is almost sure to shift the supply landscape and force smaller package-goods players to consolidate or else.

RACE FOR SHELF SPACE: According to a Sanford Bernstein analyst, more retailers are seeking to work with fewer suppliers.
RACE FOR SHELF SPACE: According to a Sanford Bernstein analyst, more retailers are seeking to work with fewer suppliers. Credit: Joe Raedle
The impact of Walmart's so-called Project Impact could be felt far beyond Bentonville. Not only could it spark midsize package-goods brands to pair up in an effort to create might, it could also have the opposite effect, leading marketers to put to pasture "orphan" brands rather than risk private-equity funds snubbing them in the belief that even a collection of smaller brands will not be enough to earn space on Walmart shelves.

It's not just Walmart, of course; other major retailers have been pressing for streamlined assortments that put smaller marketers at a disadvantage. "More and more retailers want to work with fewer suppliers who have more scale," said Sanford C. Bernstein analyst Ali Dibadj. "The question is whether the pressure from the retailers is a sustainable pressure." If it is, he said, "even for medium-size [suppliers], having scale is going to be enormously important."

Undoubtedly the 800-pound gorilla of retail can bring a lot of pressure to bear. Under its new program, Walmart aims to reap more marketing funds from suppliers, is demanding that all in-store marketing displays be customized for the chain and will require marketers to disclose the environmental impact of their products through a yet-undetermined standard and auditing system. All those mandates seem certain to favor large suppliers or seem disproportionately costly for smaller ones to implement.

There is already some evidence that small players are losing out in the equation. According to an analysis by Sanford C. Bernstein of Walmart's "win-play-show" category reshuffling -- in which higher-priority categories are getting more space and placement and lower-priority ones less -- the low-priority "show" categories are disproportionately populated by smaller industry players.

Such was the case for Oil Dri Corp., maker of Jonny Cat and Cat's Pride cat litter, whose stock plunged more than 20% in a day in June when it announced it had lost its largest customer, Walmart. Oil Dri lost out to bigger, though by no means giant, competitors Clorox Co. (Fresh Step) and Church & Dwight Co. (Arm & Hammer).

The pressure to compete could be enough to overcome tight financial markets that have kept merger-and-acquisition activity relatively light of late, Mr. Dibadj said. The sector it could hurt is another M&A mainstay of the past two decades: the disposal of orphan brands from big marketers to private-equity-funded rollups. Private equity has already dried up for such highly leveraged deals since the fall financial crisis. But Walmart's stance on vendor reduction could make owning orphan brands unappealing even without leverage, since they now face a much tougher fight for survival at Walmart and elsewhere.

That increases the likelihood that underperforming brands will be discontinued without a serious attempt to divest them, which could also eliminate a source of cash for bigger marketers, such as Procter & Gamble Co., which is pulling the plug on Max Factor cosmetics in the U.S. rather than seeking a buyer.

Of course, pundits have been predicting for a couple of decades that the rise of big retailers would squeeze out smaller players. The reality has been that smaller or midsize players, ranging from Orange Glo, marketer of OxiClean (later sold to Church & Dwight) to Chattem to Alberto-Culver and Reckitt Benckiser, frequently outperform industry behemoths such as P&G on the top line.

At least some of the success of smaller to midsize players in the face of all that punditry, though, stemmed from the way Walmart used to do business. It didn't charge the upfront slotting fees that made doing business with supermarkets particularly tough for startups. Instead, it based merchandising decisions on pricing, sales potential and local appeal of products rather than payments from marketers. And it encouraged new vendors, particularly because it relied on a steady stream of new products and variety.

Much of that has changed, however, under Walmart's Project Impact. It's likely never to charge slotting fees, but it has opened numerous opportunities for marketers to buy in-store and out-of-store advertising vehicles and coordinate merchandising with those buys. And it's taking a much tougher look at new vendors.

'M.B.A. meetings'
"It pushes [Walmart] to the larger suppliers only, which is taking off their edge as well, but I guess they feel that helps them make better partnering decisions, rather than buying something they could truly own with the smaller suppliers who don't have the wherewithal to move that product along," said one industry consultant.

He said the complexity of doing deals has risen substantially too, noting that category and pricing analysts now sit in on most meetings with buyers to understand the full impact on inventory and total Walmart costs. "We call them M.B.A. meetings," he said, "because you have to have an M.B.A. to really understand."

Walmart is no longer looking to be an everyday-low-price player in all categories, and in some cases, suppliers and their representatives say Walmart has been willing to turn down lower prices even for vendors who couldn't initially supply the whole country. Walmart is, however, making exceptions for minority-owned vendors, who are much more likely to get a hearing and a trial in a small number of stores, they say.

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