Walmart Seeks to Cut Costs Through Joint Manufacturer Purchasing Agreements

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October 12, 2010

If Walmart has its way, it will successfully woo private label and national consumer packaged goods manufacturers to jointly purchase raw ingredients -- such as sugar, rice, corn and wheat -- to cut costs and boost profits, for both parties.

Hernan Muntaner, Walmart’s vice-president for international purchase leverage, hopes to team with the likes of PepsiCo to buy potatoes -- for Walmart’s store brand chips and for sale in its produce departments -- for prices lower than either company could achieve single handedly, although PepsiCo has turned down the offer, according to a Business Week report.

So far, the world’s largest retailer has only been able to convince some of its private label manufacturers to buy into its consolidated buying program, according to the report. National CPG companies -- which typically hold pricing data and product formulas close to the vest -- are reluctant to accept Walmart’s joint-purchasing plan.

But in the face of rising commodities prices such as sugar, corn, rice, wheat and meat, Walmart is trying to further leverage its supply chain power to minimize the impact of cyclical price increases. The retailer already is flexing its purchasing muscle and jointly buying ingredients and materials –– such as sugar, rice and paper –– jointly with manufacturers.

Sugar purchased with its store brand manufacturer is used in Walmart’s private label soda as well as sold in five-pound bags on store shelves. Paper jointly purchased is used for the retailer’s back-office printers, according to the report.

"Around the world, we found we were buying the same raw materials" that Wal-Mart suppliers buy, Muntaner, told Business Week. "When you put the volume together of what we bought and what [suppliers] bought, and buy from just one supplier, you can reduce the cost."

In many cases, large CPG companies “are more sophisticated” and buy raw materials for less than Walmart does, according to Muntaner. For example, in the U.K., a soda manufacturer was purchasing sugar for 14 percent less than Walmart. By jointly purchasing sugar, the retailer reduced the retail price of its store brand sugar, Muntaner said, though he did not disclose by how much retail prices were reduced. In Chile, Walmart cut paper costs by 2.5 percent at its 259 stores due to collaborative buying with its paper supplier.

Eventually, in its inimitable way, Walmart will likely convince myriad makers of household products and foods to jointly purchase ingredients and raw materials to better control costs, retails and profit, winning them over one at a time.

SBD Views: It’s tough to argue with the concept of sourcing innovations that reduce retail prices for consumers, but this initiative raises some questions related to Walmart’s effort to make the supply chain more “transparent.” How will cost savings be shared by suppliers, Walmart and consumers? Will suppliers embrace “transparency” when it involves sharing intimate details of their cost structure and supplier base with a very large customer? How will Walmart use the depth of information that they will secure as an end result of this process? How will other retailers respond? This will be an interesting initiative to follow.-- John Failla for Store Brands Decisions

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