Walmarts buy American plan tackles suppliers long-term problems

Walmart's 'buy American' plan tackles suppliers' long-term problems

The mathematics of Walmart's 'Buy American' plan are a lot less impressive than the company's announcement makes it sound. But in the small print there lies an important lesson for retailers who really want to help their domestic manufacturers, writes Mike Flanagan.

Walmart last week announced that the company will increase its buy of US-made goods by $50bn over the next ten years. While this sounds a huge number, its mathematics are scarcely overwhelming.

Walmart's US sales in 2011 (including Sam's Club) were about $320bn, and at an average margin of 24.5%, Walmart would have spent about $240bn buying them. Of that $240bn, about $160bn was spent with US suppliers on goods made in the US (most of its sales are grocery, which almost inevitably will be mainly produced domestically).

Assuming the Walmart announcement means the company is now targeting US buying of $210bn by 2022, that's an average annual growth of just 2.8% in US procurement: roughly the same as historical annual average inflation. 

In fairness to Walmart, though, this is more than the purchases for its US operations have grown over the past five years, inflation's low by historical standards, and we have to assume some good faith on the retailer's part.

Walmart claims two-thirds of what it sells in the US is made in the US - but in the mid-1990s about 94% of what it sold was made locally. So at the very least, Walmart is committing itself in public to stop reducing its US procurement.

What's probably most important is how it's planning to do it. The real problem, especially in garments and textiles, is that there's next to no production capacity in rich countries any more. Potential suppliers need cash to invest in new equipment - and they need trained staff.

After the last three decades of constant decline, manufacturers find it difficult to raise money and recruit staff. Banks and investors have seen the industry collapse (often after a number of "it's all going to come back" false dawns) - and staff are often reluctant to take jobs, however tough the economic climate, in businesses they suspect may collapse before they've been trained enough to start receiving bonuses for production.

Longer-term outlook
And that's where Walmart's plan gets real teeth. Typically, products are bought on short-term contracts: a Walmart supplier is usually only as good as his current best price.

The new 'buy American' programme will offer longer-term contracts, which in theory allow a supplier not just to plan ahead, but to demonstrate to sceptical lenders, investors and recruits that there's a commitment to stay around from both the supplier and his customers.

It remains to be seen what Walmart's definition of a long term contract is, and how watertight it will be if the economy, or Walmart, hits a rocky patch.

And a few hundred two- or three- year contracts aren't going to redress several decades of the havoc caused to Western manufacturers by the move offshore. But those contracts, as Jonathan Simon of 1888 Mills points out, can really help manufacturers supply real volumes.

In the volume market, domestic sourcing offers small benefits for some parts of a retailer's range over buying from the nearest low-cost source.

And unlike the original near-overnight boom in England when textile manufacture was first industrialised, or the booms we've seen in places like China and Bangladesh over the past few decades, any rebirth of domestic sourcing going to be slow, and often easily snuffed out.

Small-scale experiments to re-educate buyers and sellers have their place. But public commitments from major buyers are vital to keep the move on the boil.

And commitments that really deal with domestic manufacturers' problems - like Walmart's - are more important than worrying too much whether the plan means local buying will grow twice as fast as sales, or half as fast.

The point is, Walmart deserves some congratulation for developing a plan that hits suppliers' long-term problems. Us sceptics have enough other things to bash them with if too much congratulation makes us queasy.