Wal-Mart ponders quota concerns

NEW YORK – Wal-Mart shared its outlook on quota elimination, price deflation and the future of RFID during the annual Lehman Brothers Retail Seminar here last week.

Despite industry concerns regarding quota imbalances this year — primarily the fact there will be no quota carry-forward to pad excess orders — the retailer is not anticipating shortages, according to Jay Fitzsimmons, senior vice president, finance, and treasurer.

Addressing the apparel segment specifically, he added, "I can't find any of our buyers who think that's a problem."

If quotas are reinstated in 2005, he said, the company believes it will be on a minor level, particularly as the presidential election will be over at that time.

The larger problem related to imports has been balancing deflation with productivity, he indicated.

Fitzsimmons noted that apparel deflation last year ranged from 14 percent to 16 percent. Like many other retailers, he said, Wal-Mart chased dollars rather than monitoring unit volumes — ultimately buying more goods than necessary and reducing prices too sharply.

The company expects overall deflation to slow this year, with the advantages of sourcing better leveraged by building more quality into existing price points, he said.

"My guess is we're a much smarter industry this year," he said.

He added that the retail industry may accommodate "some pent-up inflation" later in the year, a situation he deemed positive.

"Inflation would be good for the industry. A little inflation would put back some of the dollars (lost to deflation)," he said.

Even Wal-Mart walked away from more sales dollars than it should have last year, he said. Fitzsimmons noted that the company generally likes to hang on to about 50 percent of the margin on directly sourced goods, and gave up more than that in 2003 in the form of price cuts to its shoppers.

Wal-Mart has focused on growing its margin by changing the mix in the basket and reducing costs through global sourcing. Although the company will continue to pursue its "rollback" price reduction regimen, the pace will decelerate.

"Will Wal-Mart make prices go down a little slower than last year? Probably," he said.

Although Wal-Mart sees signs that the economic recovery has begun trickling down to moderate-income households, those in the bottom third economically are still lagging, he said. The company is paying particular attention to gasoline prices, which Fitzsimmons characterized as "a very effective tax on the lower half of the demographic." He put the impact for those households at about $5 per week.

The company continues to pursue efficiencies through new technology. Wal-Mart remains on track to begin its test of RFID tags on pallets and cartons in 2005, an effort that will probably launch with 125 suppliers, Fitzsimmons said. However, RFID tagging on individual items is still another five to six years away, owing to the cost of the chips.

"The chip right now costs about 6 cents. It needs to be 2 to 3 cents," he said.

Wal-Mart is also planning to pursue "velocity distribution," the next refinement of its logistics operation. The initiative will create dedicated distribution points for fast-turning goods that can roll immediately out onto the floor the moment they arrive at the store. Such goods will arrive in floor-ready fixturing. Although the fixturing cost is slightly higher, Wal-Mart believes the boost from improved in-stocking will sufficiently improve productivity to absorb it, Fitzsimmons said.