Wal-Mart — Backing Away From China to Source Domestically, or a Shifting SKU Mix?

Without question, Wal-Mart is the poster child for providing North American households with exactly the type of CPG and retail products they've wanted for the past decade -- increasingly cheap (and increasingly disposable) products from China and other low-cost countries. Since Wal-Mart is usually on the vanguard of pursuing new supply markets, it's worth considering their latest move around embracing more local sources of supply, returning to "buy American" roots. In the above-linked article, we hear, for example, how Mike Duke, Wal-Mart's CEO, "shocked an industry gathering recently when he said a majority of the retailer's products are now made in the United States." Still, as the story points out, you've got to dig below the surface of these numbers to understand the magnitude of the shift to local suppliers. Consider that many of the categories in Wal-Mart's aisles (e.g., electronics, clothes, etc.) are declining as a percentage of their total sales. And these are precisely the types of products that come from low-cost regions relative to grocery and fresh food items, which are often sourced domestically or on a near-shore (e.g., Mexico, Canada, Guatemala) basis.

One expert quoted in the article suggests that "If Wal-Mart says it's sourcing more from the United States, it's happening by default," because "A vast majority of [Wal-Mart's] groceries, household goods and health and beauty products are made in the United States," and these are the fastest growing SKUs for the company. Yet at Spend Matters, we don't necessarily such a narrow viewpoint when it comes to Wal-Mart's longer-term sourcing strategies. In fact, we believe based on our own research and discussions with some of Wal-Mart's largest suppliers, that the company is taking a longer-term focus on serving local markets with local products to keep costs low. Given that labor arbitrage will nearly completely disappear from the sourcing equation in the coming decade owing to both automation and rising wage costs in China and other markets, Wal-Mart is looking to identify sources of supply and facilities closer to each regional market.

But don't think this will necessarily mean a rise in unskilled manufacturing jobs in the US. We hear from our sources that Wal-Mart is looking at Mexico and other Latin American countries as potential sources of supply for products previously manufactured in China if there is any material labor component as a percentage of total product costs. New US supplier facilities are likely to become integral in cases where there is significant automation and/or the benefits and costs of less expensive transportation and reduced inventory levels outweigh higher wage rates.

Our research suggests that we shouldn't belittle what Wal-Mart is in the process of doing. Yes, a changing SKU mix may be driving greater local content today, but the big box giant is also in the early stages of remaking their supply chain for the coming decades by looking closer to home in each of the global regions they have operations in. And for the North American market, you can be sure that both Latin America and domestic sources of supply will factor in this equation as the China price continues to rise.

Jason Busch

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