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Fees irk Walmart's suppliers in Canada

by Serenah McKay | August 6, 2020 at 2:00 a.m.

Walmart Inc. plans to spend $3.5 billion over the next five years to upgrade its operations in Canada. However, some suppliers say they are being asked to help foot the bill.

Walmart Canada said the investment will include building two state-of-the-art distribution centers, adding new technology to create "smart stores" and renovating 150 of its 408 stores.

The upgrades will create hundreds of construction and supply chain jobs across the country, the company said. They will also help form new partnerships with Canadian technology firms.

Walmart Canada, one of the top markets in Bentonville-based Walmart's international division, said in a news release that the investment is intended "to generate significant growth and to make the online and in-store shopping experience simpler, faster and more convenient for Walmart's customers."

Shoppers will see robotic shelf scanners and electronic shelf labels, along with expanded and faster pickup service. Distribution centers will get new technologies such as artificial intelligence software for planning and predicting volume; internet-of-things sensors to track trailers; and machine-learning training software for employees.

Horacio Barbeito, Walmart Canada's president and chief executive officer, said in the release that the upgrades will also position the company for growth. "We are doubling down on our focus on the customer experience -- not just to keep up but to lead and to be the very best in Canada," he said.

But Barbeito and Kieran Shanahan, Walmart Canada's chief merchandising officer, said in a July 24 letter to the company's more than 3,000 suppliers that it will impose new fees to help cover the cost of its investment.

The retailer will charge suppliers 1.25% of the price of products it buys from them as an "infrastructure development fee," the letter stated. This is on top of a 5% fee on the cost of goods sold through Walmart Canada's e-commerce business.

The company will start charging the fees on Sept. 14.

Walmart Canada's letter said the fees would "partially offset the necessary investments ... that will provide mutual benefits and growth opportunities."

Michael Graydon, chief executive officer of the industry group Food and Consumer Products of Canada, takes issue with that statement. In an editorial published Tuesday in the Toronto Star, he said that "neither suppliers nor consumers will see tangible benefits from the fees Walmart extracts."

Graydon said the fees "could exceed typical margins and eat up as much as one-third of suppliers' profits, at a time when many are still struggling with the profound impacts of the pandemic."

And Graydon's initial fears that other retailers would soon follow Walmart's lead are already coming to pass.

United Grocers Inc., a national buying group that negotiates supply deals for one-third of Canada's other large retailers, told suppliers in a July 30 letter that its members will expect "to receive any cost reduction you may decide to offer any competitors."

United Grocers chief executive Michael Forgione said in the letter that "UGI members have been made aware of communication you have received from a competitor, requesting major cost reduction through the introduction of new fees." Forgione didn't specify how the buying network would get cost reductions for suppliers.

Walmart did not immediately respond to a request for comment on the matter.

Ultimately, the upgrades are critical for Walmart in Canada, said Amar Singh, a principal analyst with research firm Kantar Consulting. The covid-19 pandemic has greatly accelerated the growth of e-commerce, which in turn requires the retailer to enhance digitization and other platforms supporting its online business, he said.

"These costs would have come anyway," Singh said. But with the pandemic, he said, e-commerce "has accelerated in a short period of time. It's put pressure on vendors, too, and caught everyone off guard."

Also, Singh said, Canadian shoppers are extremely value-driven, and Walmart is the everyday low-price leader in that country. So Walmart has to first seek to recoup its costs from suppliers, and other retailers will have to follow suit to stay competitive, he said.

A 6.25% cut in profit, along with pandemic-related costs, will be a major pain point for manufacturers, Singh said. For the near term, they'll have to absorb these costs, but over time, they will be able to pass them along to customers.

The supplier community's best recourse at this point, Singh said, is to try meeting with Walmart Canada representatives and negotiating lower fees. A final recourse would be to go to Canada's governing bodies to seek a legislative solution, but that would take much longer, he said.

"I feel the investments that Walmart is making are the right investments," Singh said. "So this is the right way to go, but definitely everyone has to bear the brunt of this. Walmart has to pass the costs along to their suppliers, and ultimately to consumers."

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