The More You Stuff You Sell Through Walmart, The Lower Your Gross Profit Margin

According to a new article in Forbes magazine, stock market investors are starting too look not just at Walmart’s effect on things like low prices vs low wages, but at another troubling trend: Suppliers are increasingly dependent on Walmart to sell their goods… and having all your eggs in one big box store isn’t good for investors. And they’re starting to notice. From Forbes:

To measure the “Wal-Mart effect” on profits across different industries, Forbes analyzed information compiled by Revere to compare the percentage of sales that various firms generated through Wal-Mart in fiscal 2006 to the gross margins those firms produced during the same period, as compiled by FactSet . The survey covered 333 companies in six industry sectors–apparel & accessories, consumer games & electronics, household accessories, food & beverage, personal care and leisure goods–that Revere identified as heavy Wal-Mart sellers and their competitors.

We’ve summarized their results inside.

Here’s the basic idea. The more stuff you sell at Walmart the more dependant your company is on their various whims. The result? The most stuff you sell, the smaller your profit margin is. The gross profit margin is “percentage of profit realized before items like fixed costs and interest expense are considered,”
walsqueeze.jpg
Forbes also has a nifty slide show showing the “Walmart Effect” on several companies. Yes, we know this isn’t an economics blog, but we thought it was really interesting! —MEGHANN MARCO

The Wal-Mart Squeeze [Forbes]

In Pictures: The Wal-Mart Squeeze [Forbes]

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  1. philbert says:

    Trying to convince people not to shop at Walmart is like trying to make a human out of George Bush. I had a friend who moved to a small community in Northern California 10 years ago to get away from big city noise, squaller and depersonalization. In that ten years the city has almost quadrupled in size, lost its small town charm and is suffering the urban blight of larger cities. While bemoaning those losses she gleefully shops at the two year old Walmart and refuses to accept that Walmart and the other major chains moving in have contributed to the loss of her small town life. Seems two and two seldom equals four anymore

  2. Jamie Beckland says:

    While I do see the value of Walmart for some of the poorest consumers in the U.S., this is indicative of the larger problems that Walmart causes within the economy.

    It’s also noteworthy that Walmart can’t really get its own stock to move very much…their same store sales are not growing significantly.

    If Walmart is not good for investors (neither its own nor its suppliers’), not good for workers, not good for most of its customers (even if they don’t realize it), who is benefiting?

    This is not a definitive answer, but some ideas that come to mind include:

    -Chinese manufacturers
    -Politicians
    -Baby boomers who have retired and just drive around in their RVs

    I would be interested in other groups that we can identify…

  3. vatechtigger says:

    So walmart has low prices, everything I need in one locations and is open 24 hours a day. Why is that bad for a consumer again? I don’t want to shop at some crap mom and pop store. I don’t need knowledgeable salespeople to sell me a bottle of laundry detergent or a pack of underwear.

  4. itmustbeken says:

    There was a great article about a mower company that went toe-to-toe with WalMart..Found it! It was Snapper mowers and it was covered in Fast Company: http://www.fastcompany.com/magazine/102/open_snapper.html)…

  5. itmustbeken says:
  6. tph says:

    This isn’t really new…check out the story of what Walmart did to Vlasic.

    @vatechtigger: The problem is that you are paying those low prices for crappy stuff, and since the prices are so low, other retailer have trouble staying in business selling non-crap. Short term, it seems good for the consumer. Long term, we lose choice.

  7. cjc says:

    WillScarlet: here’s an academic paper looking at one part of the consumer surplus caused by Walmart’s entry into a particular market, focusing on food costs (Google HTMLization of an MIT econ department PDF):

    http://209.85.165.104/search?q=cache:h0bUOwO8UQwJ:econ-www

    Their conclusion is that food costs are reduced by some 25%, which disproportionately benefits poor people. The paper doesn’t seek to estimate the consumer surplus created by price competition on other goods.

    I can’t find a reference to it right now, but there was a McKinsey study that showed that Walmart accounted for a huge portion of US retail sector productivity growth in the 1990s.

    If you zap out the group that benefits most from Walmart in posing your question, you’re playing rhetorical games rather than trying to find the answer.

  8. Skeptic says:

    “So walmart has low prices, everything I need in one locations and is open 24 hours a day. Why is that bad for a consumer again?”

    Walmart is bad for the consumer because Walmart is bad for America in the long run. Walmart is insanely anti-union; they are the largest importer of Chinese goods in the world–more than most con-tries; and they are anti-free market unless they are the market.

  9. westphillybasketball says:

    @Skeptic: You make three points.

    “Wal-mart is bad for America in the long run” – I disagree. Wal-mart forces companies to be more competitive, and as the post says, cuts into companies’ profits. What’s more, poor Americans benefit from Wal-mart’s low prices, as they are able to buy more stuff with their money.

    “Walmart is the largest importer of Chinese goods” – If Chinese companies can produce the same stuff American companies can, but cheaper, and if Wal-mart can deliver lower prices to consumers by buying from Chinese companies, why should it buy from American companies?

    “Wal-mart is insanely anti-union” – If Wal-mart allowed its workers to unionize, the costs would be passed to consumers. The average wage paid to workers would be higher, but Wal-mart would hire less workers. I too wish everyone could make $20 an hour. But we won’t get there by unionizing – if the minimum wage was $20 an hour Wal-mart would hire half as many workers as they do now and expect them to work twice as hard.

  10. mopar_man says:

    @Skeptic:

    Not to mention that they’re trying to create a monopoly. Close down all the stores in a town that are competing and who’s the only choice to go to? I really don’t understand these people that see nothing wrong with shopping at Wal-Mart. I can’t even beat it into my own family’s heads.

  11. dohtem says:

    vatechtigger: Well if you can sleep soundly at night knowing that their employees are treated worse that counterparts at other retail stores, encouraged to go on welfare to subsidize their paychecks, barred from forming unions so that they can fight for better pay and benefits, then by all means shop there.

    I really think the idea of Wal-Mart is great in theory, but corporate greed has ruined the implementation. Target does it a whole lot better.

  12. dohtem says:

    @tph: I read that Vlasic story a while back. Gruesome stuff!

    I also remember reading somewhere that Wal-Mart sells 1 in 5 (or some other absurd number) music CDs sold. And music companies just cannot afford to not have their CDs in Wal-Mart.

  13. matt1978 says:

    @dohtem: I sleep very soundly at night. If getting the cheapest price on an item I want means all the things you mentioned, well, too bad. This is why people should learn a trade.

  14. BuddhaLite says:

    Lets not forget the large number of Wal-Mart employees that have no health care. Low wages cause people not to take their employeers health coverage. So when those people get sick who pays? The taxpayers do.

    http://walmartwatch.com/pages/healthcare

  15. SadSam says:

    Aaah Wal-Mart, I can’t same I’m a fan.

    First, lots of folks, including Wal-Mart, try to win hearts and minds by saying Wal-Mart helps poor and working class people by offering them goods at lower prices. Of course the lower cost goods and foods is true, but helping poor and working class folks is not true. A Wal-Mart in town, especially a rural area, depresses or caps hourly wages and that hurts poor and working class folks (the folks likely to be earning an hourly wage). A Wal-Mart in town is also likely to put a fair number of other business out of business which also hurts those employees who lose their jobs (again working class folks). Wal-Mart, of course, doesn’t offer or offers such high price health insurance that other companies in town who are trying to compete start raising their health insurance premimums, etc. In the long run, Wal-Mart hurts working folks by depressing their wages and benefits.

    Second, even if you don’t shop at Wal-Mart your choices end up being ruled by Wal-Mart. From that Snapper article: “Wier doesn’t really think that a $99 lawn mower from Wal-Mart and Snapper’s lawn mowers are the same product any more than a cup of 50-cent vending-machine coffee is the same as a Starbucks nonfat venti latte. “We’re not obsessed with volume,” says Wier. “We’re obsessed with having differentiated, high-end, quality products.” Wier wants them sold–he thinks they must be sold–at a store where the staff is eager to explain the virtues of various models, where they understand the equipment, can teach customers how to use a mower, can service it when something goes wrong. Wier wants customers who want that kind of help–customers who are unlikely to be happy buying a lawn mower at Wal-Mart, and who might connect a bum experience doing so not with Wal-Mart but with Snapper.” So, if you prefer not to buy the crap sold at Wal-Mart and would rather buy a high quality product from a high quality manufacturer or a high quality store with folks who can provide guidance, education, or repairs Wal-Mart is making that more and more difficult because it has such power over so many manufacturers. Wal-Mart is crapping-down the consumer choices and I don’t like crap.

  16. vatechtigger says:

    ah yes, I forgot that most mom and pop stores offer their employees health care and union membership. If your company doesn’t offer the things you want, get another job.

  17. charmaniac says:

    Sometimes, Wal-Mart is unfairly maligned. They are not a perfect company by any means, but you have to acknowledge that they are # 1 on the Fortune 500 list and employ more people than any other corporation on the planet. Even if you despise Wal-Mart, it is clear that they cannot be written off or ignored.

  18. 0x12is18 says:

    @mopar_man: They don’t close down stores. It’s what happens in a free market. When a business can offer lower prices, more people shop there. Kmart used to be in the same situation, and Walmart used to be a mom and pop store (Sams Five and Dime). Walmart would get people in by offering an unbeatable price on one item and people would make other purchases there. Read Sam Walton’s biography…it is a great story and hard work and success.

    @dohtem: How can you make a blanket statement that their employees are treated poorly? I was an hourly associate for four years. I was always treated with dignity and respect. I may have started at minimium wage, but so do most unskilled laborers. In markets where wages are competative, you’ll find that Walmart is competitive also. You also comment on encouragement to go on welfare. On what do you base this? One manager out of tens of thousands? As far as unions, they are for-profit organizations. Walmart has an open-door policy. You can talk to a manager at any time about anything, including negotiating a wage (as I have done when I felt I deserved an additional raise).

    @Bevill: While working at Walmart, I had the best benefits I have ever had from an employer. All full-time employees get medical after 3 months and part time after a year. While working there I had a daughter whose birth cost $10,000. I didn’t pay a single dime.

    @vatechtigger: Very good point. I currently work at a small business that cannot afford to provide health care for its employees, and it also cannot afford to pay its employees over minimum wage. Does this make them evil?

  19. Kornkob says:

    I used to work for a light manufacturing outfit and, while not in the sourcing end, pretty much everyone was aware of the fact that WalMart brought in a lot of money for us…but it came with a price, especially once they made us one of their SKU leaders.

    Among the multitude of things WalMart does they insist that any manufacturer who wants to sell product in their stores give them a deep discount. Every year that discount deepens further. This means a company has to find some way to trim costs more every year— or lose the WalMart purchasing power (as well as any capital invested in the increased production capacity to fill the orders in the first place).

  20. tazewell78 says:

    Wow. I haven’t seen this much stupid in one place for a long time. Walmart’s evil? Great. Come up with something better and compete them out of the market. “But, like, dude, they’re evil and they won’t let me in the market.” Then your concept isn’t better.

  21. mopar_man says:

    Read Sam Walton’s biography…it is a great story and hard work and success.

    The current Wal-Mart is nothing like the one Sam built. I would have no problem shopping there if it was anything like it was when he was alive. Like it was mentioned in another Wal-Mart post, if a generator could be hooked up to ol’ Sam in his grave, I’m sure his spinning could power a small town.

  22. NoneMoreBlack says:

    From a microeconomic theory perspective, this article is nothing revelationary. Firms who sell heavily through Walmart are giving away monopsony power in the wholesale market for their goods. Thus, they will receive a lower price for their output. Really, this is not something Walmart is doing at all; the firm selling to Walmart is the one making the decision to allow them to have a disproportionate share of their output.

    Unions are about 99% defunct and in fact increase inefficiencies in the market. Increased unionization is definitely not always a good thing, and more often that not it isn’t.

    Union dues are almost always in excess of the higher wages and benefits earned as a result of belonging to a union, making the beneficiary of unionization not the worker, but the union. This is why the percentage of the workforce that is unionized has fallen steadily from ~20% in the early 80′s to about 12% last year.

  23. mopar_man says:

    They don’t close down stores. It’s what happens in a free market.

    I forgot to comment on this. They sure as hell do close stores. They strong-arm their suppliers into a lower price that nobody else can have. How is anybody else supposed to compete with that? They can’t. Wal-Mart isn’t out to compete, they’re out to dominate. I can’t believe the amount of ignorant people here that support Wal-Mart based on low prices.

  24. Trick says:

    Boo-Hoo-Hoo… the poor companies that wanted to go down easy street by only selling at Wal*Mart are making less money… Boo-Hoo-Hoo.

    That is what you get when you put all your eggs in one basket.

    Anyone remember the pickle fiasco from a few years ago?

    Companies seem to love the idea of not having to work all that hard about getting their product out when they can just let Wal*Mart buy up everything.

    Then Wal*Mart wants a lower price and since this is a free market, wants to pay less.

    The companies have a choice. Say no, right? Oh wait, they are lazy, cut off all the many other companies that bought their stuff so Wal*Mart could get it over.

    Wal*Mart is evil for making companies lazy!

  25. ngwoo says:

    Hey Consumerist, I was in a Walmart once where the arrangement of the floor tiles made me dizzy.
    How ’bout we bash that next? Huh? Huh?

  26. aaronxgardiner says:

    I wish to comment on the Wal-Mart Gross Profit story.
    I read the Consumerist every day.
    I don’t curse or make personal attacks.

  27. aaronxgardiner says:

    The anti-Wal-Mart meme is a terrible reflection on the state of the Left today. The idea that consumers should pay more for products to help out corporations ? How absurd.
    And Wal-Mart’s treatment of foreign workers? Well, I live in China, and Chinese people don’t seem too upset about making things for export. Most of the people so employed are low skilled women, with a high school education or less. Their options are limited, and for the vast majority, working in a factory where they will not be beaten, sexually assaulted or have their wages stolen is a huge advancement. Making molded plastic plastic shoes beats being a farmer, by a long way. And it pays better.
    Wal-Mart supplies poor women in China and Vietnam with good obs. It supplies working class people in America with cheap goods. It intrigues me that anyone who professes to care about the poor can be opposed to this.

  28. etinterrapax says:

    I cannot believe so many people are so ignorant of the long-term effects of what Wal-Mart does as a matter of course to get those low prices they want so badly. Of course, when the entire system implodes, it’ll somehow be someone else’s fault. It’s always someone else’s fault, someone else’s problem.

    Of course, now I suspect that the company’s sending shills here, because they’re just that sleazy. It’s no longer about providing people with goods and services and being inherently superior, because they aren’t and can’t be. It’s all about the spin, because they’re afraid that the same free market forces that made them will eventually break them. They should be.

  29. Jamie Beckland says:

    @cjc: I was not trying to play rhetorical games; in fact, the first thing I stated was, “…I do see the value of Walmart for some of the poorest consumers in the U.S.”

    Maybe I should have put the category of “poor consumers” on my list at the bottom as well to avoid confusion…

    To be clear: Walmart does help poor consumers in the short and medium term. There is really no serious argument about this point.

    What I find interesting in this comment thread is the polarization of the dialogue. It seems that we all already have our minds made up about Walmart, capitalism, and U.S. foreign policy. But, real change happens at the margins.

  30. Chairman-Meow says:

    I’ll say again here. I think the demise of Walmart with be Target. Everyone I know now shops at Target who used to shop at Walmart. Why? Simple. Walk in a Target and compare it to Walmart. The prices are close enough that i’ll take a clean well-desinged store than the cramped, dirty, bottom-of-the-barrel Walmart look any day.

    Target’s marketing is kick-ass first rate compared to Walmart’s.

  31. drezdn says:

    The problem with Walmart’s low prices is that it gets them by passing on hidden costs to you. Already mentioned has been Health Care. In addition, Walmart’s work out arrangements with cities so that they don’t have to pay the same taxes as local businesses, or, in many states, they don’t even have to pay income taxes due to things such as the Geoffrey Loophole.

    What happens is, since Walmart pays less into city coffers, when your city needs to find the money for services (say the police to arrest shoplifters at Walmart), they end up increasing property taxes or charging fees (or increasing fees if they already exist) to residents. So, when you get a poorly made t-shirt for a few bucks on day at Walmart, it ends up costing you more in the end.

    In addition, by buying locally you create work for more than just the “uncompetitive” mom and pop shop. When local stores need something done (say they need signs printed up), they tend to get the work done locally, generating more work in the community. Large chains such as Walmart will send the work up to corporate to do. Something that won’t help you unless you live in Bentonville.

    Also, local businesses create more interesting jobs locally. At walmart, you might be an associate, a cashier, a stocker, etc., but to get promoted to anything beyond floor worker would take years. A decent-sized local business is more likely to hire people locally to do marketing, graphic design, buying, etc- ie. positions not open to the average Walmart employee.

    Finally, a locally-owned business needs to be more responsive to local needs, as they need the business much more than a Walmart does.

  32. revmatty says:

    Adding to what FTE says, my wife used to be a huge fan of Wal-Mart, stemming from growing up poor. We are both very budget conscious still, so she continued shopping there much as I tried to convince her not to. Finally there was a Target that was equidistant to our house, and she tried it out. Clean, well organized, better quality merchandise, and a cost differential of less than 3% on average of the top 20 or 30 items she used to buy at Wal-Mart (cosmetics, clothing, home goods, etc) on a regular basis.

    I also pointed out that while you’re paying maybe $7 more for a pair of pants (for example) at Target, my experience is that those pants will last about twice as long.

  33. forgeten says:

    this article is silly , walmart buys alot of stuff form a company and gets a deal. Amazing! I’m sure that products sold at target have a similar lower profit ratio. All this article says is don’t depend on one channel to sell your goods.

  34. costanza007 says:

    First thing:
    WalMart does NOT control the market. YOU, the consumer, do.

    Second thing:
    If you must rely on WalMart to sell your goods, then your product isn’t what the customers are buying… its the convenience and price (and somewhat your product) that they are interested in.

    Lastly:
    People want it both ways… I want low prices and a store that has everything I want, but I don’t want foreign goods or a huge unskilled workforce. Well I also want a really fast car that gets great gas mileage, but I have to choose.

  35. FrankTheTank says:

    Well yeah…

    What Wal-Mart presents is a trade off between “Gross Margin %” and “Total Dollar Profit”.

    They ask for lower gross margins on products so that their prices will be consistently lower, which leads to higher sales and thus higher profits for the supplier/vendor.

    No question, a retailer could raise their gross margin % by reducing Wal-Mart sales, but no retailer provides the dollar profits that Wal-Mart will.

    Remember, gross marign % is only one of the many things a manufacturer must consider.

    I think the bigger story is how high a % of sales Wal-Mart represents for some of these very large companies (P&G, Newell Rubbermaid, etc).

    It’s like they’ve entered into a one-way partnership with the retailer and THAT is worrisome.

  36. hithere says:

    First of all, why would it be “good” if a company had less profitability? I don’t get that one.

    Target and the price clubs have a similar, high discount policy, but they don’t come close to Wal-Mart in size and reach, and therefore influence. Wal-Mart makes demands about product composition and pricing that are much removed from standard business practices for many manufacturers. And companies have given Wal-Mart “manufacturing 101″ lessons in their respective product areas only to have Wal-Mart take over manufacturing replacement products themselves (usually in China).

    It’s hard to argue with a CEO, BOD, or other management if they ask why their products aren’t in America’s largest retailer (particularly if a competitor has already taken the plunge). Hopefully, some think beyond short-term profits and won’t all race to the bottom, but, speaking from experience, it’s tough to walk away from all that (imagined) revenue.

  37. drowned_in_milk says:

    “…stock market investors are starting too look…”

    I think it’s time too pull out the red pen…