Big box bullies: Discount pricing squeezes small suppliers: Dianne Buckner

Is Target Canada behaving like a bully, in telling suppliers it wants a two per cent discount on the prices they charge the struggling chain?

Selling to big chains like Target, Wal-Mart a mixed blessing when they demand a discount

Shoppers look for bargains at a Target store. Target Canada refused to confirm it had asked suppliers for two per cent discount. (Jeff Chui/Associated Press)

Is Target Canada behaving like a bully, in telling suppliers it wants a two per cent discount on the prices they charge the struggling chain?

The company isn't saying much about the report this week that suppliers will pay into a fund to help with “key corporate initiatives,” starting in March of next year.  

In a statement to CBC, spokesperson Lisa Gibson didn't deny the strategy, simply saying "We don't share specifics of our conversations or agreements with our partners."

Our costs tends to go up every year, but they expected us to take their costs down. Any reduction would have come straight out of our pockets- Danny Moretto

But there’s no question that large retailers are able to flex their muscle in the marketplace in a way smaller companies could never dream of.  Consumers may love the low prices that can result, but some small business owners wonder if people understand what’s at stake.

“It’s that big bully in the school yard mentality,” says Danny Moretto, who runs a trucking company out of Windsor and Montreal.  He says Target’s move is similar to what he experienced in his relationship with Wal-Mart.  Moretto’s firm had a contract to transport farm produce to Wal-Mart’s distribution centres, but he walked away from $1.1 million worth of business with the giant three years ago.

“Every year when we’d renew the contract, they’d want a price reduction,” Moretto explain.  “Being in transportation we have fixed costs — fuel, equipment, drivers.  Our costs tends to go up every year, but they expected us to take their costs down. Any reduction would have come straight out of our pockets.”

Big box store contracts a 'mixed blessing'

Small business owners celebrate when they score a deal with a massive customer like Target or Wal-Mart.  When I worked at Venture, CBC’s long-running program about entrepreneurs, we watched as rookie business owners prepped for their pitch to a big box store and then high-fived everyone in sight when a lucrative order was promised.  

But Dan Kelly of the Canadian Federation of Independent Business calls contracts with big companies a mixed blessing.  

"Small suppliers are happy to get large, national orders if selected, but the pressure to lower their prices can be tough. Once a relationship has started, ongoing requests to cut pricing can make it unprofitable, but the supplier becomes quite dependent," Kelly said.

That’s exactly what happened with Danny Moretto. “You get to the point where you’re depending on that sales volume, you build your business up based on the volume, and then they ask you for a price reduction.”

He says it took his company almost six months to restructure after the decision to break up with Wal-Mart, but layoffs were avoided.  

Hard to walk away

“It’s hard to walk away, but at some point you just cut your losses and try to find a more accommodating partner,” he says.  Nowadays his firm works with the Metro and Loblaw chains.  For its part, Wal-Mart Canada told CBC News via email that Moretto’s experience “does not represent our typical supplier feedback.”

And it’s not only low prices that the big players may demand.  Packaging, delivery, point-of-purchase displays - the list of requirements can be endless.  I remember being in the back office at a Costco in B.C., watching a merchandise manager lay out the terms a supplier would need to meet.  “It’s gotta be an individually wrapped towel, it’s gotta be palletized, it has to come in at the right price,” she said.

There didn’t seem to be much room for negotiation.

Of course, that’s how business works.  It’s the law of the jungle to some extent — the small businesses fear and obey the big and powerful.  Can it be any other way?  And everyone fears the customer, who will go elsewhere if they choose.  The big players also want to stay in business.  

Target got some flack this week, with its two per cent squeeze on suppliers being described in published reports as a “cash grab” and “arbitrary,”  Back in January it was Sobey’s taking the heat, for wanting a  one per cent discount from all of its suppliers.  This across-the-board approach is different that the usual price pressures big boxes have put on suppliers for years, on a case-by-case basis.  Analysts have commented that Wal-Mart may be next in line to use the new tactic.  

This may not be a case of buyer beware, but seller beware.

About the Author

Dianne Buckner

Dianne Buckner has reported on entrepreneurs for two decades. She hosts Dragons' Den on CBC Television and is part of the business news team at CBC News Network.


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