Suppliers Demand Better Terms, As Wal-Mart Charges New Fees To Make Up For Low Margins

This year is turning out to be a rather forgettable one for Wal-Mart (NYSE:WMT). Despite healthy revenue growth, the company hasn’t been able to realize higher profits. During the recent earnings release in August, the company attributed the lower-than-expected earnings to lower margins in its pharmacy business. Furthermore, the hike in wages for store workers earlier this year and increased investments in technology has further aggravated the situation for Wal-Mart.

As a result, the company has had to look elsewhere to squeeze out higher margins. Earlier in June, the company began charging vendors a fee for stocking items in new stores and for warehousing inventory, which would affect about 10,000 U.S. suppliers ^[1]. While vendors will likely yield the benefits of Wal-Mart’s technology investments and supply chain improvements in the long term, some of them (smaller vendors, in particular) will find the additional fees burdonsome.

Suppliers, who are relatively larger in size, are now fighting back to save their own margins and some have even refused to accept the new terms ^[2]. It will be interesting to see if Wal-Mart continues to hold its aggressive stance towards suppliers in the face of protests.

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ObamaCare And PBMs Are Leading To Lower Pharmacy Margins

Pharmacy benefit managers, or PBMs, act as intermediaries between the payor and the consumer in the healthcare system and use their scale to negotiate with drug manufacturers. While uninsured people pay the full price for drugs, those with coverage are able to get a lower price because of the PBMs. Therefore, pharmacies have traditionally been able to make higher gross margins off uninsured customers. However, with Obamacare, more people are coming under insurance coverage, which has led to fewer uninsured customers and, hence, lower overall gross margins on prescription drugs.

PBMs use their scale to bargain not only with drug manufacturers, but also in negotiating better contracts with pharmacies. In recent times, the consolidation among PBMs has resulted in a high concentration of market share among the top firms. Currently, the top three PBM companies, by market share, control about 75% of the market ^[3]. This has led to a further shift of power towards the PBMs, leading to low reimbursements and therefore lower gross margins for pharmacies.

Willing To Renegotiate Terms

In the most recent quarter, Wal-Mart made revenues of $120 billion globally. The number speaks a lot about how large the company’s scale is and how small its dependence on a single vendor would be. Just like the PBMs, using their size, exercise power over Wal-Mart, the latter is doing the same to its vendors.

Carol Spieckerman, a consultant who works with several Wal-Mart vendors, says,  “Any established supplier doing business with Wal-Mart is already offering by all means the lowest price possible.” The company had already upped the ante over suppliers earlier this year, when it asked its vendors to forgo their joint marketing investments and instead use the savings to lower prices. Given the kind of pressure suppliers have been under, a fight back was imminent and the extra fees gave vendors all the reason. Some vendors are even hiring lawyers in hopes of renegotiating some of the new agreement terms.

While Wal-Mart spokeswoman Deisha Barnett said that the company is willing to negotiate terms after the consideration of several factors, she also made it clear that vendors that don’t agree to the new terms may find their business affected.

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1. Reuters [↩]
2. Wal-Mart’s Suppliers Are Finally Fighting Back, Bloomberg [↩]
3. Trefis [↩]