New Year Likely to Bring Mounting Pressures for Suppliers

After a year filled with dismal retail news in 2017, the opening days of 2018 offer at least some encouraging financial results. Target had its best quarter in five years. Costco posted strong numbers in December, while Kohl’s, J.C. Penney and Macy’s also were holiday season winners. January brings the homestretch for many retailers, including Walmart, whose fiscal years close at the end of the month. 

As retailers try to finish strong, each year we see waves of deductions from audit claims in the final days of the fiscal year. In the retailers’ rush to close their books, suppliers are often left without enough time to fully vet and contest the claim. These sudden and seemingly indiscriminate deductions not only hit the bottom line of the supplier, they can affect the sales team that supports the retailer. A few years back, a supplier we were working with at Harvest Revenue Group had a large and poorly documented claim deducted on the last day of the fiscal year. The deduction was later determined to be invalid, but the sales team members lost their bonuses, based on where the deduction fell on the calendar.

Insulating your business from potential claims is a 365-day-a year proposition. What a supplier includes – and excludes – from offers makes a huge difference. Auditors are trained to spot every loophole and hold suppliers accountable to what’s written, regardless of the spirit of a given deal made between the supplier and their buyer.

One of the more recent trends has been a greater emphasis surrounding margin. The dynamic pricing models of e-commerce are cutting into retailer margins as they struggle to remain competitive. Walmart, in particular, has been aggressive in trying to recover margin – especially in light of recent financial results showing their margins have been slipping. Amazon suppliers are asked to sign a “Guaranteed Minimum Margin Agreement.” Similarly, we’ve also seen instances at Walgreens where suppliers are being billed for promotional allowances for items sold at full retail price during a promotional period. Any offer should be crafted to clearly define which party bears responsibility for lost margin and set performance metrics should be established for items sold during an event.

Can Progress Bite Back?

It was interesting to note the news coverage last week that Walmart is expanding its “Scan & Go” program to another 100 stores over 33 states. This allows shoppers to do self-checkout from their smartphone as they place items into their shopping cart. Kroger is also developing this concept and Amazon is pioneering the concept of cashier-less retail stores. Ask most anyone in the retail sector about this and they will love the convenience for the shopper and be concerned about the increased opportunity for shrink.

Shrink and its impact on suppliers is one of my primary concerns with the concept of going cashier-less. We’ve seen leading indicators that some stores in multiple chains cover theft and damages done in-store by claiming the items as defective and billing it back to the supplier. On top of that, a joint study done by the University of Florida and the National Retail Federation (NRF) found retail shrink totals a whopping $48.9 billion a year, averaging 1.44 percent of sales across the industry. Roughly two-thirds of that comes from shoplifting and employee theft. No retailer is immune to its effects and we continue to see retailers’ costs of doing business day-to-day being shifted to suppliers.

As Scan & Go gains traction, I anticipate Walmart will move more suppliers to “Pay From Scan.” This was implemented in select categories at Walmart Canada last year and is already an option defined in Walmart U.S.’s standard Supplier Agreement. It reads: If Pay From Scan “is selected, title and risk of loss will remain with Supplier until Company’s retail sale of the Merchandise. Company’s obligation to pay Supplier for Merchandise will arise only upon retail sale and Supplier will accept returns of unsold merchandise.”

Oh, and to add yet another cost shift into the mix, any cash discount on Pay From Scan merchandise is also factored from the date merchandise is sold, regardless of how long it was on the shelf (or in the back room, DC or fulfillment center). And, since suppliers don’t get paid until merchandise sells, as the Supplier Agreement clearly states, any product losses occurring in-store or within the supply chain also would become the responsibility of the supplier. It doesn’t matter if its stolen, damaged, shop worn or, conceivably, even for store use, Pay From Scan allows Walmart to assess those costs to its suppliers.

All of this is to say that the retail environment is looking for every opportunity to share the pain points and financial responsibilities for issues that are not within the suppliers’ control. When Walmart initially raised its in-store minimum wages a few years ago, we soon saw the changes in Terms & Conditions which shifted costs to the suppliers. With last week’s announcement that wages will again be raised – a $300 million commitment, plus another $400 million in one-time bonuses – it’s reasonable to assume the company will be looking for more concessions from the supplier community to cover at least a portion of those costs.

We strongly recommend suppliers take a proactive approach to fending off claims and cost shifts in the manner in which they negotiate and write their deals and Terms & Conditions documents. A key component of that is expertise in this specific area. If your team seems to be losing ground in the battle against claims or you’re concerned about how retailer claims may affect your company in the future, I’d invite you to give us a call at Harvest Revenue Group.