A Captive Call Option: Walmart Makes a One-Sided Sourcing Deal with Li & Fung

You've got to admire Walmart for its procurement chutzpah. Or, (staying with the Yiddish theme for a minute), perhaps Walmart's been more of a chazar in its approach. A colleague introduced me to this phrase, which is loosely translated as "a pig … a guy who wins the lottery and asks the government to pay for the taxi ride to pick up the check is a chazar." Walmart's latest sourcing partnership with Li & Fung to "consolidate some of its existing sourcing business with a new unit of L&F, which [will act] as a middle man between factories in China and around the world and European and US retailers and brands," represents such a request. But where, specifically, does this type of chazar behavior come in?

Walmart has essentially a call option in its contract with Li & Fung "to take control of the unit in 2016, as it shifts towards more direct relationships with manufacturers -- in effect subcontracting to L&F the creation of what will become part of its own global sourcing operation." Just as Walmart often does in sourcing stateside, it's taking advantage of its sheer buying power to negotiate an agreement with a supplier that no sane vendor would agree to under normal circumstances (e.g., making suppliers pay Walmart for lost revenue if shipments are delayed, even for circumstances outside of their direct control).

With this deal, Walmart, in essence, gets to learn through L&F how to directly manage a private-label buying model, and then has the option to show its partner the door. If you're curious as to why this is so important for the retail giant, "Walmart spends about $100bn on buying private-label products such as its Faded Glory and George branded clothing and its Great Value food and home products [today]. But it acquires less than a fifth of these goods directly from the manufacturers, instead using third party agents such as L&F."

Walmart claims it is going the direct route, working with L&F to save money, perhaps as high as 5-15% on these categories based on company estimates. Spend Matters believes that there's another motive behind this move, and that's to gain greater control over private-label merchandise quality. In recent years, low-cost Chinese exports -- from toys to food to jewelry -- have been rocked by product-quality accusations and recalls. Walmart has been caught up in the middle of these scandals on more than one occasion. Perhaps having true feet on the street in the region will put the fear of Walmart more directly into its Chinese private-label supply base.

Jason Busch

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