From SKU rationalization to pay-for-growth programs, and from fewer display opportunities to more competition from private labels, the “impact” of Wal-Mart's Project Impact may be hardest on its product suppliers.
The changes under way at the world's largest retailer can be expected to cause disruptions for consumer goods companies and a higher cost of doing business, according to a recent research report from JP Morgan analysts.
However, the analysts said, its effects will not be all negative. The program will tend to reward large companies with leading brands, but only to the extent they are willing to play.
According to JP Morgan, the following four areas are likely to most affect suppliers:
- Assortment Optimization
The fate of all products sold at Wal-Mart rests on where its category falls in Wal-Mart's new Win, Play, Show merchandising strategy, which is expected to result in the elimination of 15% of all SKUs at its stores, with heavy reductions or elimination of products in de-prioritized categories.
Under a slew of new programs designed around its new merchandising strategy, Wal-Mart is looking for product suppliers' marketing funds to mirror the percentage of sales at Wal-Mart. The retailer is also looking for supplier participation in cooperative marketing ventures that would include multiple format advertising.
This Easter, for example, Wal-Mart was able to convince competing candy manufacturers to put their goods in nearly identical themed packages — and bear the cost — as part of an Easter promotion. A similar program is being developed for the Fourth of July, JP Morgan said.
Suppliers may find it difficult to resist these programs. “Failure to participate could have meaningful consequences,” Morgan said, including the possibility that a company's investment level could affect its Win, Play, Show categorization.
- Clean Floors
Renovated stores under Project Impact are clearing displays and pallets from “action alleys” — the primary traffic corridors between departments, Morgan said. “This will bring fewer display opportunities and may create comparison issues for previous benefactors,” Morgan said, although some suppliers may benefit from higher off-shelf sales.
- Private Label
The Great Value private-label relaunch, which began this spring, is likely to get some display and advertising opportunity that might otherwise have gone to branded goods, JP Morgan analysts said. “Branded share losses in some categories are likely,” they said.
JP Morgan said companies facing particular risk include McCormick, which may see its line of branded spices discontinued as a result of Wal-Mart designating the spice category “Show” status. Kellogg and Kraft also face some risk, the report said, with the former looking at likely reductions among its cookie, cracker and fruit snack lines and the latter because it is likely to face additional private-label exposure.