Online Exclusives

Hitting a Wall(mart)

November 9, 2015

Walmart imposes slotting fees and that hurts a lot of Tier 2 and 3 FMCG companies.

For the first time in history, Walmart is charging slotting fees and brands will have to pay to be on their shelves and will also be charged additional fees for products going through the Walmart distribution centers. The move was announced in mid-June and suppliers were given until June 30 to agree to the new terms. Since then, a multitude of suppliers are pushing back in what is sure to be an ongoing battle.

Happi spoke with Mike Musso, managing director at Conway MacKenzie Inc. about Walmart’s move and what it means to marketers in the household and personal products industry.Musso leads a practice focused in consumer packaged goods. He has over 30 years of experience in the consumer packaged goods industry as a senior operations,turnaround and restructuring executive. He has served in various sales and operations leadership positions at Procter & Gamble, Pepsi Cola and Frito-Lay.
 

Happi: Really? Walmart never charged slotting fees? I thought every retailer did!

Musso: Sam Walton was adamantly against ad and slotting fees that have become so common place with retailers today. He always asked, “Does this drive value for our customers?” The idea was that revenue like slotting fees, ad fees and contests do not drive value for the customer, so Walmart did not do them. The policy from Walmart was that everything from a vendor had to go into the cost of goods, and Walmart passed through every cent from the suppliers of each brand. The idea was that suppliers would have confidence that if they brought Walmart any funding, that they would see the direct benefit in a lower cost on their products to the Walmart customer, thus they would expect to see sales increases on their products. 


Happi: What are the new terms?

Musso: In addition to slotting fees, although Walmart is not using that term, there are distribution center fees and an overall change in payment terms allowed. These fees could in some cases be 10% of the value of the inventory warehoused in Walmart’s distribution centers. In some cases Walmart is insisting on 90-day terms but is agreeing to finance the receivable for a low interest rate. They are also insisting on early pay discounts. 


Happi: How are suppliers fighting back? Can you really fight Walmart and win?

Musso: It is hard to “fight back” with the largest retailer in the world. Walmart is not just the largest retailer, it is the largest company in the world selling in three months what Home Depot sells in a year. They are the only platform that has over 5,100 brick and mortar stores and the only thing worse than doing business with Walmart is, quite frankly, not doing business with them.


Happi: What impact will this have on P&G? Clorox? And other top tier marketers?

Musso: If you are a blue chip brand with great consumer acceptance and strong national share leadership you get creative, you cut costs and you apply downward pressures on your own supply chain and figure out a way to innovate or cut prices. With category leadership comes the ability to invest in the ongoing spiral of downward costs. These ultimately can and do include work force reductions and restructurings to maintain their own profits and shareholder value.


Happi: What about smaller players in FMCG categories?

Musso: The complications for smaller brands are significant. Without innovation, which itself is an expensive and ongoing investment, cost reductions to Walmart are demanded every year. Brands with tight margins will end up in the catch 22 of can’t live with them, can’t live without them. The real question is do you jump into the Walmart game at all or figure out how to build your brand through other channels, such as Amazon. 


Happi: What impact will this have on companies trying to find a spot on Walmart’s shelves?

Musso: The demand to get onto Wal-Mart’s shelves is fierce and with the recent changes is not as simple as a “good idea” and a low price. Wal-Mart is not a grower of upstart brands. Wal-Mart has sophisticated systems that require all retailers to participate in and without adequate infrastructure the lure of sales quickly becomes the pain of mounting losses. This new Wal-Mart reality will only make it more difficult for Tier 2 and 3 brands to get access to Wal-Mart. 


Happi: Can companies find a different retailer to work with now? What retailers might benefit from Walmart’s changes?

Musso: There are many great channels for CPG brands to compete in today including direct e-commerce and players like Amazon.com. There are none though with the power of Wal-Mart’s 5,100 plus retail stores. I do believe that in the next decade, Amazon will fill a key gap for upstart brands and for large blue chips alike to get access to millions of consumers. Developing brands through alternate channels though is a marathon, not a sprint, but in the long run can provide a much more profitable scenario.


Happi: Overall, what impact do you think this move will have on the personal care and household care categories? And when will consumers see this impact?

Musso: I think this will have a great impact on the HBA category and have already started to see it as many brands just go away. The cosmetic and personal care category is among the most competitive categories today with over 95% of brand introductions failing within the first few years of introduction. Getting on Walmart’s shelves is a great opportunity to gain presence in a very crowded and fickle market. These fees will add cost pressures on these brands taking away much needed marketing dollars as these brands need to advertise to survive. I think the impact on consumers may not be felt at the shelf but in the household as many companies may be faced with laying off employees to keep costs low at Walmart, certainly an unintended, but real word result of Walmart’s downward pressure on prices. The irony of this fact is that consumers demands for lower prices may in fact ultimately hurt the economy not help it. Without a job, consumers can’t afford to buy any nonessentials, much less discretionary items on the cosmetic aisles.
 


About Mike Musso, managing director at Conway MacKenzie Inc.
Mike Musso is a managing director at Conway MacKenzie Inc.leading a practice focus in consumer packaged goods. He has over 30 years of experience in the consumer packaged goods industry as a senior operations, turnaround and restructuring executive. He has a "blue chip" consumer products foundation having served in various sales and operations leadership positions at Procter & Gamble, Pepsi Cola and Frito-Lay. During the past 15 years he has worked extensively in revitalizing underperforming companies in chief restructuring, financial advisory, crisis management and interim chief executive officer roles. During this time, he has led many assignments in the Personal Care and Cosmetic Industries where his leadership was recognized in 2009 – 2010 for Turnaround of the Year by the Atlanta/Southeast Chapter Turnaround Management Association.