Walmart is switching to “high gear” with a new global sourcing strategy that could slash up to 15% off supply chain costs, says Chloe Ryan

You'd have thought Walmart had nailed efficiency. With operations in 15 countries and annual sales in excess of Carrefour, Tesco and Schwarz Group put together, Walmart knows a thing or two about global retailing and the economies of scale it can bring.

But the unveiling this week of a new global sourcing strategy (plans for which The Grocer revealed back in June 2008) shows it believes there is still plenty of cost to be squeezed out.

Up to $12bn in fact. Walmart has set up four global merchandising centres and, in partnership with Li & Fung, a Hong Kong-based global sourcing organisation, formed a separate company to act as a buying agent, consolidating its existing sourcing operations.

The thinking is that by cutting out the middlemen mainly third-party procurers in Asia the retailer will be able to slash supply chain costs by between 5% and 15% within five years.

In an email sent to Walmart employees around the world, Eduardo Castro-Wright, head of Walmart in the US, said it was time to "switch to high gear by leveraging our size and global scale to drive greater efficiencies and lower the cost of goods to help accelerate growth".

And what growth. Under Ed Kolodzieski, who will be leading Walmart's global sourcing drive, Walmart is planning to add an extra 15,000,000 sq m of space with new Supercenters in the next five years the equivalent floorspace of the entire Tesco estate in the UK, five times over.

Asda seeking better terms back in 2008
The Grocer reported in August 2008 that Asda had entered into negotiations with the likes of Kellogg's, Procter & Gamble and Unilever to thrash out global supply deals in an effort to secure better terms, which would in turn result in lower retail prices.
The other big upside, and arguably the biggest for Asda, will be an opportunity to reduce prices. "By realigning our resources, leveraging our scale, and restructuring our relationship with suppliers, we will enable our businesses around the world to offer even more competitive pricing on merchandise," says Castro-Wright.

Particularly when it comes to non-food. Rob Gregory, research director of Planet Retail, says Asda is likely to see the benefits mainly in areas such as toys, household goods and clothing. He believes the benefits are less clear for grocery as much of this is still tied up in local and regional deals, although it is understood that fresh produce, where it is common to deal with middlemen instead of direct with growers, could be another area targeted by Walmart.

Asda already stocks some of the same non-food products (Christmas decorations, for instance) that are sold in US Walmarts and has done so since 1999, but generally Asda has not benefited from Walmart's vast scale, says Gregory. "Even though Walmart is bigger than Tesco, a lot of sourcing is still done on a country-by-country level, so Tesco is able to get a better deal than Asda in the UK."

Tesco itself, which sources products such as batteries globally, has been able to cut retail prices of batteries between 10% and 15% since it started sourcing them globally seven years ago. Asda will be looking for similar benefits across its non-food portfolio, while the move could also see more of Asda's successes being rolled out across the Walmart network as the George clothing brand has been in Japan and Canada.

Analysts in the US welcomed the news of the strategy. Goldman Sachs upgraded Wal-Mart's rating last Friday, saying the strategy, combined with a positive sales and profit outlook for the year ahead, could boost its earnings.

As for the implications for future supply arrangements, Gregory believes global deals will remain the exception rather than the rule. "Despite the fears of many branded manufacturers, these moves do not herald a new epoch of global agreements for food and drink brands," he says. "For the foreseeable future, global buying will remain the domain of non-resaleables, certain non-food lines and private labels."