America’s biggest retailer has a new message for its suppliers: We’re not going to pay higher prices anymore.

Walmart Inc. Chief Executive Doug McMillon delivered the warning in person last month in an appearance before companies that produce products sold by the company’s Sam’s Club chain. Inside a hotel auditorium, he said Walmart would be pushing back against suppliers’ efforts to raise prices, according to people familiar with the situation. Innovative products will spur more purchases, he added, according to these people.

Walmart, long known for its ability to lower prices by squeezing vendors, is once again showing its muscle as a slowing economy and an inventory glut upend a power dynamic between retailers and suppliers that took hold during the pandemic, when demand surged for everything from paper towels to patio furniture.

Its rivals—from Target Corp. decrease; to Inc.—are adopting a similar posture. Large retailers are canceling orders, resisting price increases and in some cases asking suppliers to provide discounts. This puts pressure on product makers that are struggling to adapt to shifting consumer demand. It could also contribute to a slowing of inflation.

“It is the fastest boomerang in giving power back to retailers that I’ve ever seen,” said Archie Black, chief executive of SPS Commerce, which acts as intermediary between retailers and their manufacturers.

The pullback from retailers is spreading across numerous companies that make products sold in stores around the country. Earlier this month, Estée Lauder Cos. said beauty-product sales would drop further than it expected this fiscal year due, in part, to tighter inventory management by some U.S. retailers. Jim Hagedorn, CEO of Scotts Miracle-Gro Co., has said that the company cut hundreds of jobs, slashed production and sales forecasts earlier this year after retailers pulled back on orders. Mohawk Industries Inc., which sells flooring, carpet and other items at retailers such as Home Depot Inc., said on a recent earnings conference call that sales of many of its products are down as retailers work to shrink their inventories.

The swift reversal of fortune is particularly acute for sellers of general merchandise such as Newell Brands Inc., which provides products such as Yankee Candles, Rubbermaid containers and Coleman camping gear to retailers. Unlike food, which has to be regularly restocked, general merchandise can tie up space on shelves for months. Goods that aren’t selling cause more than just warehouse headaches: They also tie up cash that could be invested elsewhere in the business.

Last year, Newell’s Yankee Candle factory raced to build inventory ahead of the holiday shopping season. The plant, in Whately, Mass., was so short-staffed that the company employed temps and enlisted office workers—from senior executives to office assistants—to work line jobs from positioning wicks to boxing candles.

But then in the spring, retailers began to flash warning signs about their elevated inventory levels. Months later, Walmart and Target buyers told Newell and other suppliers that they wouldn’t be placing more orders for many items this year, a change from previous plans, according to people familiar with the situation. The retailers also told Newell that the company would have to fund a higher percentage of the discounts offered to shoppers, cutting into Newell profits, one of the people said. Walmart buyers are asking many suppliers that sell nonfood items for similar concessions, according to people familiar with those conversations.

In August, Newell leaders had a meeting at the company’s Atlanta headquarters where top sales executives reviewed evidence that orders were down and retailers were pushing back on price increases, said Ravi Saligram, Newell’s CEO, in an interview. Newell cut its sales and profit outlook in September and then again last month. Around 15% of Newell’s sales come from Walmart and around 13% through Amazon, according to company financial filings.

“The world has turned,” said Mr. Saligram. He added that Newell’s relationship with Walmart remains positive and that teams from both companies have worked together on new product features and promotions that offer deals without cutting into the margins of either company.

Spokesmen for Walmart and Target declined to comment. The companies are slated to issue quarterly financial reports on Tuesday and Wednesday, respectively.

Walmart, with its outsize buying power, isn’t new to tough supplier negotiations. The Bentonville, Ark.-based company helped shift the balance of power away from large makers of consumer goods to retailers on its path to becoming the country’s largest retailer, with roughly 4,700 U.S. stores and $572.8 billion in annual revenue.

“There is a difference between being tough and being obnoxious. But every buyer has to be tough. That’s the job.” said Claude Harris, Walmart’s first buyer, in “Made in America,” the 1992 autobiography of Walmart founder Sam Walton.

One example Mr. Harris offered: Walmart’s negotiations with major manufacturer Procter & Gamble Co. in the early days of the retailer. “I’d threaten Procter & Gamble with not carrying their merchandise, and they’d say, ‘Oh, you can’t get by without carrying our merchandise.’ And I’d say, ‘You watch me.’” Lower prices attract customers, he said.

P&G eventually opened an office near Walmart’s Arkansas headquarters and the companies agreed to share sales and inventory data to reduce inefficiencies and offer lower prices to shoppers. It became a model copied by thousands of suppliers interested in selling to Walmart and other retailers that now often account for a significant portion of a manufacturer’s annual sales.

Discussions over prices, on-time product delivery and the availability of the hottest products are common between retailers and suppliers. In negotiations Walmart and Target often ask suppliers to lower prices, but also fund other efforts such as limited-time discounts or marketing for products in high-traffic areas of stores or on their websites.

These negotiations are expected to become particularly heated while the direction of the U.S. economy and inflation remain uncertain. Retailers will want to offer lower prices to attract cash-strapped shoppers, and product makers will want price increases to cover rising costs.

“We need our operating profit and margin, they need their operating profit and margin as well,” Mike Hsu, CEO of Kimberly-Clark Corp., maker of household staples from Huggies diapers to Cottonelle toilet paper, said in an interview, referring to retailers. “They don’t like all of the pricing that’s gone in. These discussions never get easier. They know that we’ve got to recover those margins or we’re not going to be able to invest in the brands in the right way.”

Mr. Hsu said Kimberly-Clark collaborates with Walmart to attract shoppers and grow sales. It is trying to keep products on shelves with pricing intact and now shows off new products to retail buyers a year in advance rather than a few months. “Then they know what we’ll have to offer,” Mr. Hsu said.

Super Impulse USA LLC, a toy manufacturer that sells tiny collectible versions of well-known toys such as Hot Wheels and Mr. Potato Head, is also adjusting to the new behavior from large retailers. It noticed orders from large retailers slowing earlier this fall at a pace that was unusual ahead of the holiday shopping season, said Chief Executive Alan Dorfman.

Large retailers have asked the Bristol, Pa.-based company, which employs 15, to make some changes to help reduce clutter in their stores and warehouses. They want Super Impulse to shrink the size of packs it ships to them and import more goods itself, said Mr. Dorfman. Previously, Super Impulse sent some products to retailers’ port containers in China, and then retailers imported the products to the U.S., he said.

This means Super Impulse will have to spend more. To cut costs, Super Impulse aims to negotiate more favorable prices with its factories and lower travel expenses. The company will hold worker salaries steady, said Mr. Dorfman. It also has been more conservative with its factory orders for 2023, he said. Recent years had “some late curveballs that we couldn’t predict,” he said. “We will spend more and hope the orders come in.”

Supply-chain analysts and executives say the full effects of this year’s pullback by retailers may not be felt until mid or late next year. At Shenzhen Jiaoyang Industrial Co., a factory in southern China that produces plush bears, rabbits and other custom toys, Christmas demand from Europe and the U.S. has dried up this year, said Hong Binbin, a manager with the company. That adds to already-reduced demand after the Trump administration levied hefty tariffs on Chinese products before Covid-19 arrived, nudging some U.S. companies to shift production to Southeast Asia, he said.

To save costs, Shenzhen Jiaoyang stopped hiring long-term employees. “If we receive more orders, we could hire gig workers,” who can be let go easily, said Mr. Hong.

Newell, the maker of Yankee Candles and Rubbermaid containers, said it has roughly $500 million more in inventory than at the end of last year, which the company is working to shrink through production slowdowns. It set a plan to cut inventory over the next few months to avoid selling at discounts where possible and cut some contracts with Chinese manufacturers, he said.

The company is furloughing workers in November and December, and will accelerate a plan to automate some areas of its factories and distribution centers.

For goods produced in China, such as Newell’s Mr. Coffee appliances and Coleman tents, it will take about eight months to adjust supply because those items are ordered far in advance to be imported. At a recent dinner in New York City, Mr. Saligram discussed ways to further cut costs with one of its largest Chinese suppliers, he said.

“You can’t get yourself down and depressed,” Mr. Saligram said of the reversal of fortune. “When everything is going against you, you say, ‘OK let’s do all the things that are in our control.”

Source: November 12, 2022 | By Sarah Nassauer