Source: http://worldcityweb.com/home/MIA/publications/magazine/17/596/

To Wal-Mart or not to Wal-Mart

by Brian Neff

Recent articles, TV shows, and news broadcasts have drawn attention to the behemoth that is Wal-Mart. Wal-Mart is many things in today’s global economy; it is the largest buyer and seller of goods globally; it is the largest company in the world that should reach $1 billion/day in sales at some point in the next two years; it is probably more responsible for the free flow of goods across the globe than any other entity; and it is loved and reviled by so many for its unswerving focus on lower costs.

Wal-Mart has become the 800 pound gorilla in manufacturing. Any manufacturing company anywhere in the world can have a nice business making and selling to established customers, but when Wal-Mart knocks on their door, that company faces a moment of truth. Wal-Mart can help a company go where it never thought possible. Wal-Mart has the power to change a company’s life, fortune, and direction overnight.

But companies tap into the Wal-Mart supply chain at a cost. Volume is sure to increase to such a level where Wal-Mart becomes the dominant customer sometimes to the exclusion of other customers. It’s always a dangerous consideration to have so much of your business tied up by one customer. You are at the mercy of that customer, and Wal-Mart isn’t afraid to use its power to squeeze concessions month in, and month out. Wal-Mart focuses so fervently on extracting the lowest possible price that profit margins are one of the first casualties for manufacturers that go the Wal-Mart route. I’ve heard a number of companies complain that Wal-Mart will drop them as supplier for less than a portion of a penny differential in costs.

So when I recently asked a number of local manufacturing executives their opinion of Wal-Mart, I expected a fair number to grumble and complain and curse the day they ever signed their first contract with Wal-Mart. After all, most of the media reports indicated that suppliers to Wal-Mart admire the company publicly, but privately think of them quite differently. I was wrong.

Manufacturers who sell to Wal-Mart have tremendous advantages that often aren’t talked about. First off, they face certainty. Wal-Mart is a demanding customer, but if you meet those demands then you will know that you will continue to have an outlet for your products and services. If a company can operate with certainty, it makes it much easier to make planning and strategic decisions. Those kinds of decisions can help companies get leaner and more efficient which can lead to healthier profit levels in the short term.

Additionally, Wal-Mart offers manufacturers something that is hard to come by in today’s world guaranteed growth. Wal-Mart is growing globally at an unbelievable clip, and they are gaining market share in almost every corner of the world. There is almost no better supply chain to tap into when it comes to growth. The combination of certainty and growth means that when a company invests in new technology, they can rationally plan for an expected return. Not every manufacturer has that degree of certainty. Wal-Mart can also help a small-time local manufacturer become a global supplier and international player within their market niche.

But Wal-Mart is also a symbol of how power has shifted between manufacturers and retailers. As recently as a dozen years ago, manufacturers had clout and power to pass along price increases, amend contracts, or force retailers to charge set amounts for their products. Today, Wal-Mart rules, and manufacturers respond. You can be the largest manufacturer in your product market and still not have any additional pricing control or authority as the company who sells a product on the next aisle.

For many companies, getting into Wal-Mart is the goal. They want to join local manufacturers like Pylon Manufacturing (Deerfield Beach), NBTY (Boca Raton), Uniweld (Ft. Lauderdale), and Magnivision (Miramar). They may or may not fully comprehend the risks, but they are attracted to the idea of reaching a global customer base overnight.

Other companies aren’t willing to surrender their manufacturing control to what they view as retail’s lowest common denominator. They don’t like to have their products considered low cost (many feel that’s part of Wal-Mart’s reputation). It’s a common business strategy to offer superior quality and service, and to charge a premium for that. Doing business with Wal-Mart will send your company down a different path.

The omnipotent presence of Wal-Mart forces companies to better understand their place in their market. It may not be true, but Wal-Mart seems to be the leading seller of just about every retail product category made today. When faced with the prospect of selling to Wal-Mart, a company has to have a pretty good idea of what it is it plans to be in the future. In other words, companies have to be far more strategic in their thinking then ever before.