business news in context, analysis with attitude

MNB took note last week of a Bloomberg report that Walmart wants to “take over U.S. transportation services from suppliers in an effort to reduce the cost of hauling goods.

“The company is contacting all manufacturers that provide products to its more than 4,000 U.S. stores and Sam’s Club membership warehouse clubs ... The goal is to take over deliveries in instances where Wal-Mart can do the same job for less and use those savings to reduce prices in stores ... Under the program, Wal-Mart is increasing the use of contractors, as well as its own private fleet of trucks, to pick up products directly from manufacturers and transport the goods to its distribution centers and stores. The retailer currently moves most goods only from its distribution centers to stores.”

Negotiations won’t be easy. however. According to the story, Walmart is asking for a six percent reduction in the cost of goods based on its calculation of transportation costs, while suppliers apparently calculate the cost of transportation as being closer to three percent.” But Walmart is saying that it expects to resolve any differences in the spirit of collaboration that it brings to all its supplier relationships.

My comment:

Sure. Resolved in Walmart’s favor. Because many, if not most, manufacturers would say that Walmart’s definition of “collaborative” is a little different than other retailers’.

I don’t know nearly enough about trucking and product transportation to be able to comment intelligently on this story. (Not that ignorance generally gets in my way...)

But here is the question I would ask. Is Walmart’s biggest problem right now the cost of goods? Or is it a store environment that somehow is not working for US consumers?

Thank goodness I got email from folks who seem to know more about transportation issues than I do...

One MNB user wrote:

I was under the opinion that most manufacturers have always offered Back Haul Allowances and these allowances were regulated by interstate transportation to be close to actual costs of shipping goods to a customers warehouse facility.  Meaning, a customer that is close to a manufacturing facility would receive a smaller back haul allowance than a customer that is several hundred miles away.  Under this analogy it would be impossible to give a percentage for all pick ups of merchandise at a manufacturing facility.

Another MNB user wrote:

I read this article with interest because I assumed that Wal-Mart were already doing this.  It was a practice that was introduced in Woolworths in Australia in ~2003, and it's aim was to share the savings between Vendor & Retailer.

Of course, true costs on both sides were rarely disclosed, so the regular negotiations took place.  And you'd have to think that not too many Vendors would be paying the same low freight rates as Wal-Mart should be able to achieve.

It makes complete sense - Wal-Mart would be driving past many Vendor warehouses on the way back to their own DC, often with near empty trucks. So even if Wal-Mart charge the freight amount that it costs them, their still in front as they no longer have to pay for the return journey.

I wonder if this is Roger Corbett's influence on the board?

If you think this is interesting, wait until they do Primary Shipping - handling the sea freight at Wal-Mart rates....   Let the cost savings roll....

Another MNB user chimed in:

Depending on the commodities and class of freight, 6% is about twice the rate we regularly get including any fuel surcharge.  Backhauling could make sense but not at that rate for us.

WM has had a pretty good run, clearing the clutter, widening the aisles and the re-models, more electronics have been good for business. I think the recent SKU rationalization just about negated everything good they have been able to accomplish over the last 15 or so months.  Trying to swamp everything with private label I think, has driven many of the up-demographic consumers back to their old stores.  Some of the other full-grocery operations tried to follow the WM lead, but have nearly abandoned the their own SKU rationalization(s).
It takes more than roll-backs to retain new customers.  The very-limited assortments have had a bonanza.  WM vendors on the wrong end of the rationalization are heavy on inventory and turn around and sell to Save-A-Lot and others, who end up with discounted national brand on an in and-out…even the $ Stores, even the pharmacies ...
Something to consider, beyond the 'cost of services' they're calculating.... Many companies contract out their carriers based on volume & lanes.  Depending on what % of your total business Walmart represents, if you suddenly lose a large chunk of your transportation needs, it could end up costing you significantly more to cart the remainder of your products to other accounts...  As various companies ONLY support one customer the new 'cost of doing business' could be substantial.   Just sayin'...

Still another MNB user wrote:

I’m hearing a lot of complaints from the trucking industry, and “truckers” in particular. Between the increased cost of fuel, surcharges and general operation of their rigs, they are averaging less than $6-7.00 an hour for all of their hours on the road. Not enough to live on, for sure, unless they operate them in excess of 60 or more hours a week. Seems unfair that Walmart would take even that away from them, since all they are into is lower prices, which is great, believe me, but not when it comes to a living wage. I foresee a conundrum coming….

MNB user Chris Connolly wrote:

If I understand this story correctly, it implies that Wal-Mart's trucks currently only ship merchandise from the DC to the stores and return empty.      It's absolutely amazing to me that Wal-Mart hadn't already been using backhauls to deliver merchandise to their distribution centers on return trips from their stores. 

Are my assumptions correct?

Lots of grocery chains have been using backhauls to cut their cost of goods sold for years……why would this be new to the "Bentonville Behemoth"? 

And an other MNB user wrote:

I’ll sell what ever part of my  400 trucks I need to before I will let the 800-pound gorilla dictate the rate market. They are the slowest

Pay on top of being the king for short pays.  Enough is enough.

KC's View: