Last week, business and industry media was abuzz with reports indicating that retail giants Amazon and Wal-Mart were engaging in an all-out war for both price and online dominance involving offerings of consumer packaged goods (CPG) products.

Needless to state, the stakes surrounding such dynamics are high, and the implications to CPG supply chains rather significant.  Once more, such dynamics are by our Supply Chain Matters lens, rather ill-timed for this industry.

Global business network CNBC posted a recode report indicating that last month, Wal-Mart gathered some of America’s largest household brands at its corporate headquarters for some tough talk negotiations. According to this report, Wal-Mart’s intent was to reset expectations with key suppliers regarding pricing concessions, and in-essence, seeking a 15 percent decrease in prices charged to the global retailer.  This represents a significant pricing concession from branded CPG suppliers, most of whom have already been buffeted by ongoing industry pressures for reduced costs.

As Supply Chain Matters blog has amplified in our numerous CPG focused commentaries, the threat of 3G Capital, under the guise of Kraft-Heinz, along with other activist investor forces that continue to surround the industry and pressure for added near-term profitability and shareholder value results. They have led to a zero-based budgeting wave impacting many brands, and whiplashing respective supply chains. Fortune described the 3G Capital playbook as a “meritocracy” that is on-track to consume the food industry itself.

The compounding and contrasting event stems from Amazon, who has invited similar major CPG brands to visit Seattle headquarters in May to convince them to join to offer more products directly online, in-essence, bypassing major chains such as Wal-Mart, Target, and Costco. According to a published report by Bloomberg, CPG brand attendees will hear from Amazon’s Worldwide Consumer chief Jeff Wilke, a direct report to Jeff Bezos.  Amazon wants to convince CPG brands to re-think their traditional supply chain distribution model, where popular products are designed, packaged, and shipped in the context of a physical retail store as the prime buying outlet. Key products would instead be designed and packaged for online merchandising, packaging, and customer fulfillment for personal consumption, as-needed vs. bulk consumption.

Major CPG are not only caught in the middle of two retail giants battling for supplier loyalty, but also in the middle of two distinct business distribution models that can dramatically impact future business performance. On the one hand, no major CPG brand wants to be on the outs with Wal-Mart, given the amount of unit volumes that are represented. A continuous zeal to feature the lowest prices for all major brands forces razor-thin margins with resultant consequences of taking cost out of all forms of packaging, distribution, and transportation of products to Wal-Mart distribution centers. In the case of this latest push-back, the global retailer reportedly could cause some brands to experience negative margins on specific products. Of course, Wal-Mart has its own strategic efforts to expand its online presence as manifested by the retailer’s recent $3 billion acquisition of Jet.com, whose online model is focused on individual item price competitiveness.

The CPG supply chain community is acutely aware of what drives costs.  That includes multiple SKU’s for major customers, a proliferation of packaging sizes or product offerings customized for individual retailers or order volumes that do not meet business margin requirements for key customers. Many prior cost-reduction initiatives hone-in on these cost-drivers. Yet, the online model of individual consumption could present added margin opportunities if priced appropriately.

Amazon and Wal-Mart are in-essence seeking to influence major brands to each major retailer’s different strategic business model. As Bloomberg points out:

Amazon has been struggling to crack the food and packaged goods market—an $800 billion category still dominated by Wal-Mart and other traditional chains. Persuading brands to design their packaging and operations for the online world would make it easier for Amazon to ship common household goods to urban dwellers in less than an hour, potentially making last-minute dashes to the store obsolete. Amazon must convince brands that even though online purchases represent a small part of their sales, e-commerce is the future.”

Wal-Mart’s strategic business model has the physical store as the prime focus for every-day essentials, whether a Wal-Mart Super Center or neighborhood store, while online will serve as the buying focus for occasional purchases, or for 1-2-hour pickup of food or consumer staple items picked-up in the nearest store.

Both retailers will demand the lowest prices available to any retailer, despite differing strategies, and as Recode observed from cited sources, both have ignited intense wargaming inside the largest CPG companies such as Kimberly Clark, Mondelez, P&G and Unilever. Other brands, large and small, will surely be impacted as-well.

In our 2017 industry-specific prediction, and in our numerous CPG supply chain focused blog commentaries, we have challenged what the end-state really implies, short-term rewards or industry supply chains with the capability to support both new online business and physical store merchandising and fulfillment models supported by continuous product innovation.

The decisions made in the coming weeks and months will be the determinants for not only the business and the supply chain, but for the negotiating and management skills of brand leaders themselves.

Bob Ferrari

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