When one of Wal-Mart Stores Inc.’s (NYSE: WMT) 6,500 trucks drops off its load at a company store, it now heads back to the distribution center empty. But Walmart is initiating a program to use its own fleet to pick up merchandise at suppliers and truck it to distribution centers. Big trucking companies, like J.B. Hunt Trucking Services, Inc. (NASDAQ: JBHT), Con-Way, Inc. (NYSE: CNW), and Arkansas Best Corp. (NASDAQ: ABFS), are mostly prepared for the WMT stock move because they have reduced their less-than-truckload pickups at Walmart distribution centers.
Smaller trucking outfits are likely to face some serious pressure. The advantage to Walmart is that it will be able to squeeze the supplier’s cost of transportation out of the product cost.
While that seems like a good deal for both Walmart and its supplier, most of the benefit accrues to the giant retailer. A supplier’s transportation costs are generally based on shipping products to all its customers. And for many Walmart suppliers, Walmart is their largest customer, and the shipping rate they are able to negotiate depends on a large number of miles to and from Walmart stores.
Under Walmart’s new plan, the supplier’s shipping cost per mile to its other customers will surely rise. That will force those retailers to raise their prices to pay for the additional transportation cost.
From Walmart’s point of view, that’s a double benefit. First, its transportation costs fall. Second, retailers selling the same product will either have to sell that product for more or they’ll have to take a lower margin. Walmart has been very successful in the past at wringing cost out of its supply chain at the expense of its competitors, and this looks like another one of those successes.
The cost is significant in the low margin world of retailing. According to a report by Bloomberg, Walmart seeks a 6% reduction in cost for transporting the goods itself. Suppliers have estimated their trucking expenses at about 3% of a product’s cost. Walmart says it easily resolves the difference as soon as the supplier shows its numbers.
With this move, WMT stock leaders continue its push to lower prices for its customers, getting back to what made the retailer such a huge success in the first place. Walmart earnings recently were strong, and Walmart prices have been lowered to attract consumers. This recent trucking change also works toward the company’s sustainability goals. Not a bad move for Walmart, but it will cause some pain in the trucking industry.
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