Cost Change Scenario – What’s Next

Learn about:

• Talking about increasing retail price with cost
• What to do if your merchant rejects your cost change

This article is part 2 of the discussion around cost increases at Walmart. If you’re looking for Part 1, see our article on negotiating a price increase.

Two follow-up questions often asked when in the negotiation period of a cost increase are “Can we increase the retail price along with this cost increase?” and “What if my merchant doesn’t approve the cost increase?”. Both are great questions that have answers filled with nuances.

How do we talk about changing the retail price to coincide with the cost increase?

One of the major metrics Walmart/Sam’s Club is concerned with is margin – both item markup percent (%IMU) and penny profit (Retail - Cost). So, when considering a cost increase, it seems the easiest way to mitigate margin erosion is also to raise the retail price.

Related Reading: GMROII: Combining Sales, Profitability, and Asset Efficiency

Since pricing is the sole discretion of the retailer, it is crucial to manage these conversations to pose retail increases as merely a suggestion versus telling the merchant the retail price. While this might sound extreme or intense, it is impossible to be too careful when working with the #1 retailer in the world.

To be certain no confusion exists, suppliers should enact the best practice of starting this conversation with something like, “As always, pricing is the sole discretion of the retailer, but we have noticed increasing the retail from ____ to ____ would…”.

Typically, Walmart is against raising retail at all costs. However, we have seen a couple of instances in which it can occur:

1. Walmart/Sam’s Club retails are more than 10-20% below that of major competition nationwide. If the retail price is lower than the threshold for the supplier’s category, the supplier can argue that Walmart is eroding dollars by selling the item for so much less than the competition.
2. An increased retail on the item will maintain the pricing ladder structure in the overall category, and the retailer does not anticipate sales erosion.

Ultimately, when suggesting a retail increase to coincide with a cost increase, suppliers must remember that pricing is the sole discretion of the retailer, and the merchant’s biggest concern is often maintaining margin (penny profit and/or %IMU).

What happens if my merchant doesn’t approve the cost increase?

When it comes to cost increases, we’ve seen time and time again situations where merchants just simply say, “No, I do not accept an increase.” Typically this is an attempt to force the supplier to choose how necessary the increase truly is. Below are some scenarios for how this has played out:

1. The supplier concedes and absorbs the full increase because the potential of losing business at Walmart is too damaging
2. The supplier concedes but negotiates to split the difference of the cost increase
   • Possible communication track: “This cost increase is required for us to remain profitable; however, your partnership and business are extremely valuable to us, and we have been able to secure extra funding from the leadership team to meet in the middle.”
3. The supplier absorbs the cost increase contingent upon receiving something else in return from the merchant to mitigate the increased costs. Potential negotiation paths:
   • Increased distribution on the most profitable item from x PODs to x PODs
   • Increased distribution across the full portfolio from x PODs to x PODs at the next modular reset
   • Swapping Item G with Item H because of economies of scale or faster turning in other areas, etc.
4. The supplier cannot rescind the need for a cost increase due to internal profitability and/or jeopardizing relationships with other retailers that have already accepted. From here, there will likely be a stalemate in which the merchant and the supplier are waiting to see who balks first.
   • Unless the supplier has extreme bargaining power in the category or is one of the top suppliers, this often ends with the supplier eventually conceding the cost increase or having items deleted.
   • While deleting items due to cost increases can damage the merchant relationship, ultimately, it is vital to make the right choice for your business.

Unfortunately, if this situation arises, there’s no silver bullet on exactly how to proceed. With its compass pointing the retailer to “Save Money, Live Better” for consumers, it is understandable Walmart is always driving to maintain Everyday Low Cost (EDLC) to offer Everyday Low Price (EDLP). The best case scenario is to find a mutually beneficial solution where both parties win.

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