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Suppliers feel the squeeze as Walmart's earnings drop

Vendors already wary of cost sharing by retail giant brace for more pressure after a shock earnings warning

Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Walmart. Now they are bracing for the pressure to ratchet up even more after an earnings warning from the retailer last week.

The discount store behemoth has always had a reputation for demanding lower prices from vendors, but even by those standards Walmart has been turning up the heat on them this year.

For the vendors, dealing with Walmart has always been tough because of its size. Despite recent earnings troubles, it still generates more than $340 billion of annual sales in the United States. That accounts for more than 10 percent of the U.S. retail market, excluding auto and restaurant sales. Vendors, therefore, are wary of pricing disputes with Walmart that can result in their brand falling from the retailer’s shelves.

On Wednesday, Walmart stunned Wall Street by forecasting that its earnings would decline by as much as 12 percent in its next fiscal year as it struggles to offset rising costs from increases in the wages of its hourly-paid staff, improvements in its stores and online sales investments.

With investments to spruce up stores and boost worker pay, Walmart believes it can grow sales by 3 to 4 percent a year over the next three years, or by as much as $60 billion, offering vendors new opportunities to boost their own revenues.

Following Wednesday's announcement, labor activists argued that further investment in the company's workforce needs to be part of the company's strategy moving forward.

“As a shareholder and an associate working to keep customers happy and sales up, I can tell you that Walmart’s heavy reliance on a part-time workforce and hiring temporary associates is a big part of the problem that we’re seeing contribute to long lines, issues with inventory and many out of stock items,” said Walmart employee Tarcenia Floyd, a member of the protest group OUR Walmart, in a Wednesday statement.

OUR Walmart is pressing for a $15 base wage at the company. Left-leaning groups such as the National Employment Law Project argue that raising wages reduces turnover and improves jobs performance among service workers. The White House has made a similar case, praising companies like Walmart competitor Costco for paying relatively higher wages.

In April Walmart hiked the minimum pay rate for its workers to $9 an hour, and the company has said it will increase the rate to $10 by February 2016. The first move will cost $1.2 billion this year and the second an additional $1.5 billion next year, including other labor costs, such as placing more department managers in stores.

Chief Executive Doug McMillon, who became CEO 18 months ago, and other executives say they are seeing a payoff in the form of improved customer service.

Greg Foran, CEO of Walmart’s U.S. business, said on Wednesday the company has assessed that two-thirds of its 4,500-plus stores now have a “passing grade” in problem areas: cleanliness, checkout speed and other factors affecting customer satisfaction. That is up from just 16 percent in February.

With its stores in better shape, Walmart now is redoubling its focus on beating competitors on price. Over the next three years, the company said it would spend several billion dollars on keeping prices low.

In June, vendors to Walmart stores got word of sweeping changes to vendor agreements that seek to extend payment terms in some cases and introduce new fees to warehouse goods and place product in new stores.

Walmart has told vendors the new terms are aimed at helping it keep prices down, applying fees more consistently across vendors and bringing its practices in line with industry norms. The charges to store goods in distribution centers and for delivery to new stores are common at other retailers but had not normally been the case at Walmart.

Walmart spokeswoman Deisha Barnett stressed that it sees its relationships with vendors as critical to the company's success. “We will work with every supplier to ensure that terms and agreements are mutually agreed upon,” she said.

Walmart's success in boosting profits could hinge in large part on the willingness of vendors to sign on to its new terms and agree to its price demands. Despite signs of resistance, one consumer goods supplier reckons that most will eventually give in to Walmart’s market power, though not without a fight.

Al Jazeera and Reuters

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