Last month, Walmart gathered some of America’s biggest household brands near its Arkansas headquarters for a tough talk. For years, Walmart had dominated the retail landscape on the back of its “Everyday Low Price” guarantee. But now, Walmart was too often getting beaten on price.
So company executives were there, in part, to reset expectations with Walmart’s suppliers — the consumer brands whose chips, sodas and diapers line the shelves of its Supercenters and its website.
Walmart wants to have the lowest price on 80 percent of its sales, according to a presentation the company made at the summit, which Recode reviewed.
To accomplish that, the brands that sell their goods through Walmart would have to cut their wholesale prices or make other cost adjustments to shave at least 15 percent off. In some cases, vendors say they would lose money on each sale if they met Walmart’s demands.
Brands that agree to play ball with Walmart could expect better distribution and more strategic help from the giant retailer. And to those that didn’t? Walmart said it would limit their distribution and create its own branded products to directly challenge its own suppliers.
“Once every three or four years, Walmart tells you to take the money you’re spending on [marketing] initiatives and invest it in lower prices,” said Jason Goldberg, the head of the commerce practice at SapientRazorfish, a digital agency that works with large brands and retailers. “They sweep all the chips off the table and drill you down on price.”
But this time around, Walmart’s renewed focus on its “Everyday Low Price” promise coincides with Amazon’s increased aggressiveness in its own pricing of the packaged goods that are found on supermarket shelves and are core to Walmart’s success, industry executives and consultants say.
The result in recent months has been a high-stakes race to the bottom between Walmart and Amazon that seems great for shoppers, but has consumer packaged goods brands feeling the pressure.
The pricing crackdown also comes in the wake of Walmart’s $3 billion acquisition of Jet.com and its CEO Marc Lore. Lore now runs Walmart.com and has said one of his mandates is to create new ways for the retailer to beat everyone else on price, including Amazon.
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One piece of the battle, executives say, is an Amazon algorithm that works to match or beat prices from other websites and stores. Former Amazon employees say it finds the lowest price per unit or per ounce for a given product — even if it’s in a huge bulk-size pack at Costco — and applies it across the same type of good on Amazon, even when the pack size is much smaller.
So let’s imagine Costco is selling a pack of 10 bags of Doritos for $10 — or $1 per bag. Amazon’s algorithm notes that one bag is $1 at Costco and, in turn, lowers the price on Amazon of a single bag of Doritos to $1.
That is a great deal for customers — something that is likely driving the decision at Amazon, where an obsession with customer value dominates its strategy.
But now, Amazon is selling individual items at Costco prices while not getting the same wholesale price that Costco enjoys. In short, it’s going to be really hard for Amazon to turn a profit on those goods.
When Walmart sees this, it freaks out on the supplier, industry executives say. And it doesn’t matter to Walmart that Amazon may not be getting the same wholesale price that retailers like Costco or other
membership clubs receive. In other words, even if Amazon isn’t profiting from its extremely low prices, Walmart is still demanding the same bulk-rate discount applied to individual items.
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Unprofitable items are known inside Amazon as CRaP products — the acronym stands for “Can’t Realize a Profit.” And Amazon is not afraid to kick off big and small brands alike.
Case in point: On a Friday afternoon last month, all Pampers diapers sold by Amazon were unavailable on the site. Industry speculation was that Amazon may have kicked Pampers off the site as part of a negotiation over prices.
Neither Amazon nor Pampers parent company Procter & Gamble would comment on whether this was the case. But the bigger point may be that senior industry executives thought such a move was even a legitimate possibility.
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As Amazon Prime becomes a bigger part of Amazon’s business, Amazon ships more orders that consist of just one item. These orders can typically be tougher to make profitable than multi-item orders — a trend that could explain the renewed focus on profitability.
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The longest-term solution, however, is perhaps the most difficult: Reimagining how a product should be designed and packaged from the ground up, specifically for e-commerce sales. That often means cutting the weight of low-price goods since shipping costs tend to eat into a product’s profitability. (Amazon, in fact, is trying to capitalize on this potential shift by asking brands to reformulate their packaging to make it easier to ship — all done via Amazon, of course.)