by Keith Seiz
Wal-Mart. Have two words ever conjured up more emotion in the baking industry? Whether bakers rant about the stress this Bentonville, Ark.-based company places on them, or praise the mega-retailer's straightforward business nature, almost every baker has a strong opinion aboutWal-Mart.
Surprisingly, these opinions greatly differ for individuals in the same industry with the same issues. The only commonality between these opinions is their secrecy. To field this story, Baking Management interviewed many bakeries, and all wanted their names and companies kept anonymous. So is the dynamic of the baking industry's relationship with Wal-Mart.
Wal-Mart by the numbers
The first Wal-Mart opened in Rogers, Ark., in 1962. Today, the company-operates 1,353 Wal-Mart stores, 1,713 Wal-Mart Supercenters, 551 SAM'S Clubs and 85 Wal-Mart Neighborhood Markets, accounting for $256 billion in sales for the company's fiscal year ended Jan. 31, 2004.
Needless to say, Wal-Mart's effect on the baking industry cannot be understated. However, what separates this retailer from other supermarkets?
"Wal-Mart operates fundamentally different than other supermarket retailers," says Neil Stern, senior partner of McMillan Doolittle, a retail consulting firm. "Wal-Mart operates with a sales mentality. They want to sell the most product, and in order to do that, they want to have the lowest price. In order to have the lowest price, they want the lowest possible cost."
This is commonly called the "squeeze," and is a tactic that Wal-Mart employs to sell products at "everyday low prices." Wal-Mart also differs from traditional retailers in its transparency. According to Stern, what you see is what you get when dealing with Wal-Mart.
"When you deal with a supermarket retailer, they negotiate with you once, then they negotiate with you about 15 times after that," Stern says. "You get your prices, and then there are slotting fees, advertising allowances, display allowances and tickets to the golf tournament."
Wal-Mart, Stern says, imposes no hidden allowances or slotting fees. Instead, the company looks at a product's ability to perform on the shelf.
This business model deemphasizes relationships and focuses on price, which can be good or bad, depending on the bakery and the situation.
"Wal-Mart's pricing is very rigid, and you have to answer for and justify everything in the world that you want to do on pricing," one largewholesale baker says. "They make it very hard for you to raise your prices if you need to."
According to several wholesale bakers interviewed for this story, price increases are a rarity in Wal-Mart's business model. This puts an immense amount of pressure on all manufacturers, especially bakers, due to the volatility of the commodity maket.
As a result of Wal-Mart's rigid pricing model, bakers must gain control of every aspect of their operations. "Wal-Mart is very tough, but they made us a better company because they forced us to do things differently," one Wal-Mart bakery supplier says. "From that standpoint, it was a painful but positive experience."
Painful but positive? Statements similar to this are common when high-volume bakers discuss Wal-Mart.
In this baker's case, selling products to Wal-Mart means evaluating the bakery's logistics and stripping out unnecessary costs. "They force companies like ours to find better ways to ship products, and strip out unnecessary freight costs," the bakery supplier says.
"They have pretty high expectations from a logistics and supply chain technology standpoint," Stern says.
Wal-Mart's focus on supply chain technology allows it to drive costs out of the system, thus lowering prices. The company aggressively is pursuing Radio Frequency Identification (RFID), and many of the retailer's largest suppliers already have implemented this tracking technology. RFID and other supply chain technologies are designed to eliminate the middleman in all distribution transactions. Again, this helps Wal-Mart reduce costs and lower prices.
Partnering with Wal-Mart
In the baking industry, it is common for high-volume bakers to swap horror stories about dealing with Wal-Mart. However, most of these same bakers continue to conduct business with the mega-retailer.
"I'm going to continue to do business with Wal-Mart no matter how hard it is because they're becoming such a big factor," one wholesale baker says. "I just can't afford not to do business with them."
This is the conundrum that many wholesale bakeries deal with every day. For large wholesale bakers, conducting business with Wal-Mart is necessary if the bakery wants to get its products in the hands of consumers throughout the United States. For small and intermediate wholesale bakeries, supplying Wal-Mart boils down to bakers comfort levels.
"As a small business, we have intentionally avoided doing business with Wal-Mart," one baker says. "Our fear is that they would bury us with volume even with one distribution center."
This fear is common among all bakeries. Wal-Mart's rapid growth rate has caused many bakeries to dedicate an uneven amount of business to one customer. "The seduction of having such a huge piece of the business causes many manufacturers to agree to something they can't deliver," Stern says.
Failing to meet the requirements of a Wal-Mart contract is unacceptable to the company, and may result in an abbreviated stay on the retailer's shelves. As a result, bakers must make money on the first shipment to Wal-Mart, and must prepare for varying margins as commodity prices fluctuate.
"Wal-Mart does not believe that every time an ingredient goes up, you raise the price," a Wal-Mart bakery supplier says. "It's not the way they operate, and we understand that."
This understanding has led this bakery to extol Wal-Mart as a business partner. Although the bakery concedes that supplying Wal-Mart is difficult, the bakery strongly states that dealing with the retailer makes it a stronger company. Many bakeries, whether defending or maligning Wal-Mart, come to this same conclusion.
"Despite the horror stories, the demanding nature and the constant pressure on pricing, supplying Wal-Mart is positive because companies that successfully do business with Wal-Mart for more than two years are better off for it," one wholesale baker says. Despite his positive feelings toward the retailer, he still refuses to do business with Wal-Mart.