Target has been on a roll of late, working to whip its suppliers into shape in order to combat sleepy sales and tighten the supply chain. Now it wants suppliers to take on up to an extra 3-5 percent of the cost of promotions.
Retailers and suppliers typically negotiate how they’ll share promotional budgets, but whatever Target’s suppliers had worked out seems no longer enough.
Suppliers who asked not to be named told Reuters Target has demanded they take on more of the marketing costs to sell those stagnant goods in order to curb the pain inflicted on profit because consumers are spending less. Exactly how much more that would amount to wasn’t disclosed, but last year suppliers put $379 million toward Target’s marketing costs.
In order to comply, suppliers will be forced to scrape even more off of already too-thin margins so Target can make space for new goods. Slow sales have made for inventory pile-ups and Target wants the goods cleared fast. In its annual report for 2015, the retailer said inventories were up to $8.6 billion from $8.28 billion the year prior.
“Target is not leaving a lot of room for negotiation here,” one unnamed supplier told Reuters. “They want us to get this unsold stock out of their stores in the next three months.”
For the first quarter this year, Target reported sales down 5.4% over the previous year to $16.2 billion since the 1.2% comparable sales increase was offset by the sale of its pharmacy and clinic businesses.
At the end of May, Target put stricter supplier rules in place, including tighter delivery deadlines—with bigger fines—and no more no-penalty grace period for late goods. The efforts are part of Target’s plan to clean up the supply chain and restore greater sales and profitability.
Two suppliers told Reuters that if they are fined for late deliveries, they’d think about cutting promotional fund contributions by the same amount.
“We have budgets to stick to,” the supplier told Reuters. “We cannot just keep giving them discounts on (product) volumes they are not able to sell—we have to make money when doing business with Target.”
Brian Cornell, Target’s two-year-in CEO said he was pleased with the company’s first quarter, all things considered, and stands by the strategy shifts.
“We plan to successfully implement our long-term strategy, even in the face of a challenging short-term consumer landscape,” Target chairman and CEO Brian Cornell said.