Wal-Mart Drives to Trim Costs by Taking Control of Shipments

This story appears in the July 5 print edition of Transport Topics.

Wal-Mart Stores Inc., the $405 billion retailing giant, is attempting to squeeze suppliers for cost cuts by taking control of millions of shipments into the retailers’ distribution centers, transportation typically arranged by the shippers.

However, Wal-Mart’s plans could run into trouble because truckers are rapidly gaining the ability to command higher rates, experts said.

The world’s biggest retailer, which relies on suppliers such as Procter & Gamble Co., Kimberly-Clark Corp. and Kraft Foods Inc. to arrange up to 3 million truckloads annually to Wal-Mart’s distribution centers, intends to lower expenses by dealing directly with truckers instead of with suppliers for those moves, according to reports.

“We are literally converting the purchasing terms of the products we buy, so that we take control of the product and its shipment at the suppliers’ dock,” said Chris Sultemeier, Wal-Mart’s senior vice president of transportation.

Sultemeier spoke in an interview with the Arkansas Trucking Report in which he outlined Wal-Mart’s new approach to its suppliers’ transportation. Excerpts of the interview are reprinted in Transport Topics.

Suppliers are being asked to lower their prices by more than the cost of trucking their goods today, according to a report from Bloomberg News. Wal-Mart said it wants to use those savings to lower prices in its stores.

Kimberly-Clark and other suppliers contacted by TT declined to comment on Wal-Mart’s action. Wal-Mart’s corporate spokesman declined to elaborate on articles about the program that were published by Bloomberg and Arkansas Trucking Report, the monthly magazine of the Arkansas Trucking Association.

Wal-Mart’s efficiency drive, which includes bid solicitations from carriers and suppliers, began last year as freight rates fell 10% or more and capacity was abundant.

However, some observers said that tightening carrier capacity is changing that picture.

“What is happening to Wal-Mart and other shippers is that they are feeling the squeeze,” Jeff Kauffman, an analyst at Sterne Agee Group Inc., Birmingham, Ala., told TT. “The market shifted faster than some shippers expected, and now demand has outstripped supply.

“Capacity is going to remain tight because there is no armada of new trucks that will come into service and the extra drivers have disappeared,” said Kauffman, who estimated contract rates are climbing by up to 10% now.

For truckers, winning those higher rates may be a challenge, one analyst said.

“As the world’s most resourceful retailer, Wal-Mart will likely have much more negotiating leverage when it deals with freight carriers than the company’s vendors do,” Jason Seidl, a Dahlman Rose analyst, said in a report.

“The thing that I think not just Wal-Mart, but all shippers, have to start to understand is that we are in a very competitive market,” said John Kaburick, owner of Earl L. Henderson Trucking, Salem, Ill.

Fleets have to be careful to remember during negotiations that most freight-hauling contracts don’t have rate escalation clauses, Kaburick said, which will hurt them whenever rates rise.

“I just hope that carriers bid with their knowledge and are really pushing to earn a profit” in negotiations with Wal-Mart and other shippers, he said, urging that fleets adopt benchmarking to know their real costs and not get carried away in the bid process.

“For us to be a strong industry, for us to do what we do best, which is transport goods, we have to have a margin of profit,” he added.

Lana Batts, a managing director at Transport Capital Partners, agreed that rate pressure is mounting.

“They may try to get [lower rates] from a Kimberly-Clark, but their carriers won’t go along with that because capacity is tight,” Batts said. “Truckers have options now that they didn’t have before. Some will say, ‘I won’t haul for Wal-Mart.’ ”

Sultemeier said that “by controlling the whole inbound freight process we can control the costs and therefore lower our selling price to our customers.”

He maintained truckers can benefit from the changes.

“This could be a chance for trucking companies to forge a relationship with us,” he said. “If we can help one of our carriers get a tenth of a mile per gallon improvement through some technologies, then it’s a competitive advantage for that carrier over other carriers.”

One of the few companies that have discussed Wal-Mart’s moves publicly is C.H. Robinson Worldwide Inc.

Vice President Chris O’Brien said Wal-Mart, Robinson’s largest customer, is moving to take control of procuring apples directly from growers instead of from providers such as Robinson.

While that could hurt, O’Brien said Robinson will retain business with Wal-Mart, such as procuring and delivering bell peppers and other farm products.

Meanwhile, he said, Wal-Mart is soliciting bids from suppliers, both with and without a transportation component.

“They’re then obviously going to analyze the two and see which way is better as far as getting the lowest line of cost,” O’Brien said during a June 24 investor conference.

“We do know that our relationship with Wal-Mart is going to change,” he said. “We don’t know if it’s going to be a net positive or a net negative.”

Suppliers may have to give in even if their other transport expenses rise, given Wal-Mart’s size, Vic Gallese, an independent retail consultant, told Bloomberg.

“The vendors might say, ‘My other overhead costs will rise,’ ” said Gallese, who has spent 25 years in the industry. “And Wal-Mart will say, ‘That’s your problem.’ ”