Will Big Retail Follow Target And Start Charging Suppliers More For Unsold Inventory?

Too much inventory, not enough buyers.

If one were forced to sum up the issue that is hitting physical retailer after physical retailer in 2016, that would probably be it. The reasons are complex: new players, new shopping habits, winter weather that was just weird, supply chain problems, a quiet consumer recession emerging (more on that in a minute) — but the upshot is the same. Too much inventory unsold and showing no signs of moving, and an increasing host of sellers trying to unload the unwanted old and get on with the new and exciting.

Getting out of the inventory trap is, of course, much harder than falling into it, and if the quarterly earnings (and string of bankruptcies) we’ve been tracking of late are any indication, in some cases approaches near impossibility.

Sales, discounts and other such cost-reducing promotions are a time-honored tradition for clearing out inventory that didn’t quite make it, but when there is this much unsold stuff on hand, that is quite a bitter loss pill for a merchant to take.

And in at least one case, too big and too bitter a pill to take along — hence Target’s decision to pass some of those costs pack to their suppliers in the form of an an extra 3-5 percent of the cost of promotions and price cuts after slow sales so far this year.

Suppliers, reports indicate, are less than thrilled with the new shape of things, though most think compliance is their only realistic option at this point. And, given the current conditions in the consumer economy, it isn’t inconceivable that this will not be the only set of such concessions suppliers will be making in 2016.

Target’s New Supply Chain Policies

That’s not entirely a foreign concept. Suppliers have offers and advertising of their own and, generally speaking, how the costs of promotional budgets will be split is an issue up for negotiation.

But since May it has become pretty clear that Target isn’t so much negotiating with suppliers at this point so much as it is insisting. Those changes to the Target-supplier relationship also included a pretty rigorous and expensive fine system for goods and services that show up less than perfectly shelf ready. As of about two weeks ago, suppliers who miss deadlines or show up with less-than-stellar product information could see fines up to $10,000.

The announcement comes on the heels of what Target CEO John Mulligan described as intensive talks with the company’s supplier partners, during which Target tried to keep the sentiment of the discussion focused on doing what was best for every part of the supply chain.

“We had a very long question-and-answer session,” Mulligan told Reuters. “Obviously, there were concerns, so we listened to those, and we feel very good with where we are going with our vendor partners.”

How good the vendor partners feel — particularly about the announcement that they are now on the hook for more of the costs of marketing and selling slow-moving items across categories — well, that remains to be seen.

Some of the early buzz has been less than ebullient.

“We have budgets to stick to,” one supplier, who did not wish to be identified, told Reuters. “We cannot just keep giving them discounts on (product) volumes they are not able to sell – we have to make money when doing business with Target.”

“Target is not leaving a lot of room for negotiation here,” said another. “They want to get this unsold stock out of their stores in the next three months.”

It isn’t exactly clear how much cost any individual supplier will be asked to take on. Costs vary on a case-by-case basis, according to Target, and are confidential in any case. According to Target’s latest annual report, suppliers gave Target $379 million to fund such marketing costs.

And Target has a whole lot of promoting and discounting in its immediate future. Even Chief Executive Brian Cornell predicted an extended period of promotions ahead for the retailer and rivals.

And, given Target’s status as the second largest retailer in the U.S. behind Walmart, suppliers face themselves in a comply or die situation — even if it strains margins some.

Most suppliers who spoke to Reuters said they will have to comply or at least deliver part of Target’s demands so old stock can make way for new season products. That will strain already thin margins.

Target has offered no direct comment on the situation so far.

The Quiet Recession

Target is so far the only retailer making the headlines for a set of operating procedures with its suppliers that is has codified pretty extensively. But indications are they aren’t exactly alone here. Walmart is having a better year than Target so far and isn’t demanding anything specific from its suppliers so much as just asking to be given lower prices. Walmart has yet to comment on whether that is true and if is working out.

As for the other retailers in the rough this spring — Macy’s, Nordstrom, Gap and Kohl’s for example — when asked if they were considering following Target’s lead, a continuos chorus of “no comment” could be heard.

Burt Flickinger, managing director of consultancy Strategic Resources Group, has noted that is is likely a good possibility – given that it is an easy way out of the over-inventory trap. In his opinion, any retailer looking to recover from a slow start this year “would be considering pushing their suppliers for more discounts, if they haven’t started doing that already.”

There is, of course, the change that spring will turn out to be the great season of retail renewal — when the oversupply of the first half simply melts away like a bad dream — but other recent reports indicate that is probably more of a pipe dream than anything else.

Forbes contributor Walter Loeb pointed out that the truth is in the numbers, and the numbers show consumers increasingly dealing with flat wages and rising costs. Those costs, he notes, are obscured in many categories of goods because of the near-universal prevalence of things being ever on sale, but the fact remains that essential, non-negotiable purchasable items like milk, bread and honey are going up in price.

Moreover, he notes, the fuel costs holiday we’ve all been enjoying is reversing its course gradually. Oil is back up to over $50 a barrel and prices are going up at the pump.

Net-net: consumer spending is taking a hit, sales figures are falling and probably aren’t going to see any big reversal this year.

Which means suppliers could soon start paying the price. So far they are at least chipping in at Target. If it works, expect to see a lot more retailers coming to the table with similar demands.