Mhlnews 11228 Walmart Inside Store

Walmart Adjusts to Tariffs Through a Price-Changing Tool for Suppliers

June 17, 2019
The move shows how the world’s largest retailer, which sells billions of dollars of goods made in China annually, is incorporating the reality of tariffs into its day-to-day operations.

Walmart Inc. has updated the information network used daily by its suppliers to let them submit cost increases that are directly attributable to higher U.S. tariffs on Chinese goods.

The retailer introduced the tool, dubbed “Cost Change Scenario,” a year ago and has been rolling it out across product categories, according to internal memos and emails obtained by Bloomberg. The online application, whose existence hasn’t previously been reported, replaces Excel-based forms that vendors had to fill out manually. The new process is quicker and lets vendors choose a reason for the cost hike from a menu that includes tariffs, labor, transportation and raw materials.

The move shows how the world’s largest retailer, which sells billions of dollars of goods made in China annually, is incorporating the reality of tariffs into its day-to-day operations. Walmart emerged relatively unscathed from the first rounds of tariffs on imports from America’s largest trading partner. But that’s changed, with the U.S. bumping levies to 25% on $200 billion of goods including handbags and furniture, then initiating a separate process to tax another $300 billion, including clothing, shoes and electronics.

A Walmart spokesman declined to comment.

The tool’s name reflects the fact that while suppliers set the cost of particular items, Walmart controls the final price on the shelf. When suppliers raise the cost of a product, retailers have to decide whether to absorb some or all of that increase, taking a hit to profit, or simply pass it along to consumers, which could hurt sales if they choose to shop elsewhere for the product.

Walmart’s previous cost-change forms varied by product category and didn’t let suppliers choose tariffs as the impetus for changes, according to documents obtained by Bloomberg. It’s unclear how often suppliers are currently citing tariffs as a reason for cost hikes, compared with other issues.

Pulling Levers

Walmart said last month that it will do everything it can to maintain the low prices it’s famous for, such as negotiating with suppliers and finding new sources of manufacturing outside of China. “We’re going to do the best we can to manage through this in a way that our customers don’t feel it, pulling all the levers that we’ve got,” Chief Executive Officer Doug McMillon said in a presentation to analysts last week.

But Walmart has warned that higher prices on some items, such as bicycles, are inevitable. “Increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a May 16 interview.

The updated cost-changing process is housed inside Walmart’s Retail Link system, which it developed in the 1990s to provide vendors with up-to-date information on sales and inventory levels as its business rapidly expanded. The system has evolved over the years, and today includes data-mining capabilities that let suppliers predict what items will be in high demand. Around Walmart’s headquarters in Bentonville, Arkansas, self-proclaimed “Retail Link specialists” help suppliers interpret the data.

The uncertainty surrounding Chinese tariffs has made their job tougher as Walmart gears up to battle rivals Inc. and Target Corp. during the back-to-school and holiday selling seasons. Greg Melich, an analyst at Evercore ISI, estimates that the latest tranche of 25% tariffs, if instituted, would prompt across-the-board price increases and “wipe out” profit growth among big U.S. retailers.

“I hope that this gets sorted,” McMillon said last week, “but we obviously don’t control that.”

By Matthew Boyle

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