Wal-Mart trims inventory in bid to cut costs

updated 4:58 p.m. ET April 12, 2006

NEW YORK - As Wal-Mart Stores Inc. looked across its operations recently to find ways of cutting costs, it found it had a problem that afflicts many businesses: too much inventory.

So the world's biggest retailer is on a campaign to cut the amount of merchandise it buys, a move that's creating some short-term pain for a broad range of suppliers from consumer product makers Procter & Gamble Co. and Spectrum Brands Inc. to cosmetic company Elizabeth Arden Inc.

Wal-Mart declined to offer details of its strategy, which it announced in October and is now implementing. But industry analysts expect it to affect all merchandise categories, from shampoo to toys and jeans. It does carry some risks for Wal-Mart — if it isn't well executed, consumers used to finding their favorite toothbrush or detergent brand may be disappointed.

Wal-Mart's spring cleaning comes as it struggles with slowing sales and disappointing profit growth due in part to higher expenses. Its stock price has fallen 6 percent over the past 12 months.

Leaner inventory will help clear out store clutter and help Wal-Mart focus on specific brands and products that consumers want, company spokeswoman Gail Lavielle said. She described the company as looking at inventory on "a case-by-case basis," but declined to comment further.

Analysts speculated that Wal-Mart will look at ways to eliminate minor brands and not carry as deep a selection of a certain item. For example, it might stock only the most popular brands of batteries, or may not carry as many styles of black jeans. Customers shouldn't see any major changes, though they might notice the selection isn't quite as wide as it was previously.

Wal-Mart is expected to use its savings from reduced inventory to improve store interiors. Less inventory will also help reduce the company's asset base, in turn boosting its return on investment, a key metric that drives stock price, analysts said.

Because many suppliers count Wal-Mart as their largest customer, any change it makes will naturally have the biggest impact.

"It's challenging for everyone," said Michelle Bogan, retail strategist at Kurt Salmon Associates, a global consulting firm. "Whenever Wal-Mart scales back, it is hard for suppliers to be flexible enough to respond quickly. The volumes are big."

That means slower sales for suppliers as they readjust production to meet fewer deliveries to Wal-Mart; it also entails having to rethink their product lines, perhaps focusing on specific packaging sizes that are the most popular.

Whether companies will suffer something more lasting remains to be seen. Most suppliers contacted by The Associated Press declined to comment about the issue.

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