In March, the CFO from Walmart BB #:143789 participated in a discussion at the Raymond James Institutional Investors Conference. In an article recapping the event, the CFO was quoted as saying “in five years Walmart will make more money from services and selling ads on its app than from selling products.”
I had to read it again. Let that sink in for just a moment.
The CFO of the world’s largest retailer (as measured by revenue) says it will make more money from services and selling ads than on the products it sells. That’s STAGGERING when you think about it.
Let me put this in perspective: when I left Walmart in 2007, we were already selling two container ships of bananas per week.
While I obviously don’t have the numbers today, I don’t think it would be unreasonable to think that Walmart is selling more than four ships of bananas per week. Think about the profit on just the volume of bananas.
Now, try to get your head around the profit to be made on over 100,000 items in a single Supercenter. Then think about 4,000-plus Supercenters, which adds up to a lot of profit.
So in five years, MORE profit will come from services and selling ads. I’ve been in the retail business over 50 years and this just blew me away. I’m not saying it isn’t true or even a bad thing. But it did get me to thinking about its implications for the produce industry.
How many of you are familiar with slotting or ad allowances, business development funds, or any number of other ‘financial enhancements’ retailers charge suppliers?
Or ‘penalties’ for this and that? Ever wonder how they came about? When retailers began to lose the ability to grow profits on just the buying and selling of products, they turned to creative ways to increase profitability.
On a one-time deal, that’s not killer for a supplier. But when such allowances become a line item on a buyer’s profit and loss statement, it’s necessary to continually enhance them—so now even more creative ways to generate profits come into play.
Back when I was at Walmart, we were a ‘net-net’ buying organization, which is why we could always be so tough on pricing.
We stripped away the extraneous costs conventional retailers were charging and got down to the best price suppliers could give us while still allowing them to make a decent profit. To coin a phrase, we were ‘win-win’ negotiators.
So if I’m a supplier, I need to start thinking about the implications of these ‘allowances’ on my company’s bottom line, as my buyer continues to grow them creatively.
The conference recap also pointed out it’s not just Walmart moving in this direction—mentioning two other retails—Amazon and Kroger.
A final thought: consider how much produce is sold online. Now think about what happens when big retailers are looking to enhance ad revenue to create better visibility for products.
How will a produce supplier compete for exposure on these websites when they’re going up against marketing dollars from CPG companies? Think Pepsi, Coca Cola, Frito-Lay, etc.
So when Walmart’s CFO comments about services and ad revenue creating more profit than on the products the company sells, where is all this money going to come from?
It’s a safe bet it’s not coming from an okra grower in Texas.
Retailing has continued to evolve over the years, and it’s fascinating to watch it happen. I just wonder how this new evolution is going to look down the road.
This is the Retail Reflections column from the May/June 2023 issue of Produce Blueprints Magazine. Click here to read the whole issue.
