Walmart's New Fees Have Worrisome Sustainability Implications

By Marc de Sousa Shields

Walmart recently announced it will require all suppliers to pay warehousing and shelf-stocking fees. The new policy, the company says, brings consistency to supplier treatment as some vendors had been charged in the past, whereas others had not.

The retail giant claims the changes are aimed at working with suppliers to serve "shared customers" and achieve the low prices "they expect and deserve."

There are at least three worrisome sustainability implications raised by these fees, which are symptomatic of emerging retail and distribution trends not unique to Walmart.

The lines between retail and distribution are blurring

Not so long ago, when we wanted to buy something we either had to go a store or order it from the anxiously awaited Sears catalog. Then along came Amazon et al, and we thought the end of brick-and-mortar retail was nigh.

It wasn’t, and online selling is now just one more way to get the things we want.

Walmart’s move to charge fees, in fact, is simply another salvo in the youthful “omni channel” retailing and distribution era, where everything is available everywhere pretty much instantly. If the deep fryer you found on sale at Walmart while visiting Aunt Tina in Peoria is out of stock, you simply take out your smartphone, pay online and order a pick-up at your local store in Springfield for when you get home.

Simple on the surface, omni channeling is complex, requiring great scale and sophistication to manage. But it has also created new opportunities, particularly for selling spare warehouse space and distribution capacity.

An example: Your sister is in a small store in Portland. She takes a picture of a purse she thinks you might like and sends it to you. You love it, and order it online from the store, which, when it receives your text, sends a note to Amazon that, in turn, locates the purse at a JC Penny in Flagstaff, Arizona, that ships it via Fed Ex to your home in Chicago. At each transaction point a storage and delivery fee is paid.

Walmart’s new fees simply reflect the trends underlying the fast blurring lines between retail and distribution, where in-store shelving, warehouse space, stock management and delivery capacity are not just means to a sale but income-generating assets in their own right.

Of course, not all of this is all that new either.

Shelf space/stocking fees, also known as slotting, has been going on formally and informally for years. While many suppliers complain it gives unfair advantage to larger companies, retailers claim it helps to allocate shelf space for sales maximization. It can also act as a hedge against new product failure (given that over 20,000 new products compete annually with 50,000 established products, this risk is real, especially as 90 percent of new products are withdrawn every year).

How much do stores make selling space? No one knows for certain, but some estimates are as high as $18 billion a year. Indeed, retailers can earn more from carrying some products than from actually selling them.

Three sustainability issues

From a sustainability perspective, there are three worrisome considerations.

First: Are universal slotting and warehousing fees just another way for Walmart to take margin at the expense of suppliers?

It’s hard to say. But if you’ve been a Walmart vendor (as one of my companies nearly was), you know the great and continuous pressure to provide ever lower prices, often with a host of equally challenging delivery conditions.

Many venders have already cut costs to the bone, so it’s not hard to imagine how this new squeeze might tempt suppliers, particularly in lax jurisdictions, to externalize labor, environmental and social costs more than they already might do. A recent Harvard study showed an ironic and demonstrative sustainability impact of pushing costs down the chain when it found suppliers paying for their own social audits had more undisclosed violations than those paid for by retailers.

Meanwhile, other studies have shown slotting, and by inference selling warehouse space, is done at the vendors’ expense, adding only to the retailer’s bottom line with few savings being passed on to “deserving” consumers. 

Second, as noted, slotting is thought to create an unfair barrier to small business, who without the cash to compete with large companies can’t get shelf space. The U.S. Federal Trade Commission is agnostic about this, saying there’s no evidence that slotting results in anti-competitive advantages or unduly affects consumer interests. Still, in some countries such as Poland, slotting fees are illegal and others, such as China see periodic crack-downs on the practice.

Small, nimble firms may have an advantage early on in the emerging omni channel economy, but as systems mature toward greater scale and slimmer margins, larger players will naturally dominate. It is not inconceivable that smaller vendors may soon face the same competitive pressure Walmart was said to have had on local shop owners in the 1990s.

Third and most challenging, if sustainability is truly about consuming less, the world hardly “deserves” low prices on much of the stuff it sells – stuff, not incidentally, all produced by the lowest bidder.

Where to now?

New sales and distribution channels are rapidly evolving, and it’s not entirely clear how small companies and sustainability will be affected over the long term.

In the meantime, downward price pressure on suppliers will have fairly predictable outcomes on supply chain sustainability aspirations and not necessarily to the benefit of consumers.

Image credit: Flickr/Walmart

Marc de Sousa Shields is Managing Director at ES Global a corporate sustainability advisory based in Mexico. Marc has worked in over 40 developed and developing countries, focusing on corporate sustainability strategy, brand, and returns. He is author of the soon to be released Sustainable Century by Design or Disaster and host of the Sustainable Century Podcast Series. See www.thesustainablecentury.net www.csrcounts  or www.esglobal.com