Consolidation Conundrum

Suppliers are reporting that sales to Wal-Mart are placing them between a rock and a hard place. For a variety of reasons — including the prevention of putting a company out of business — the produce buying department at Wal-Mart places a cap on the percentage of a supplier’s business that can be sold to Wal-Mart.

An executive at a major banana shipper lamented the fact that his company had already reached its limit. Wal-Mart won’t buy any more unless this shipper increases the overall size of its business. On the other hand, the shipper — although reporting good experiences with Wal-Mart — was concerned about being too dependent on one customer anyway.

It has been widely reported that consolidation on the retail end of the business will, of necessity, lead to consolidation on the shipping end. But Wal-Mart’s continued growth, combined with the purchase cap, raises an interesting conundrum. If Wal-Mart keeps growing, and the non-Wal-Mart business keeps shrinking, more and more large produce shippers will bump up against the Wal-Mart cap. If the top players in each commodity are already at their Wal-Mart cap, consolidation between them would be far less valuable as combined, they couldn’t sell anymore to Wal-Mart than separately.

The ideal merger would be between a shipper that is capped out at Wal-Mart and a company that doesn’t sell Wal-Mart at all, as the combined volume would serve to increase the Wal-Mart cap.

Of course, there is some question as to how long this cap can survive. It seems as if Wal-Mart general merchandise doesn’t follow the same rule in the purchase of branded products — in other words, the company buys as many Pampers as it can sell without regard to share-of-business.

In the auto business, it has been reported that Detroit will sell economy cars really cheap to increase the that allow vendors to sell more to Wal-Mart.