Sourcing products from Chinese factories has always been a cost-saving tactic of American companies like Walmart (NYSE:WMT), the largest U.S. retailer. However, as wages, energy costs and overseas demand continue to increase, Walmart is looking to domestic for products to stock its stores.
Walmart will spend $50 billion in the coming decade in an attempt to tap into an American supplier market where fewer disruptions in production occur and energy prices remain low. The company’s willingness to look within suggests the shipping and related costs are weighing on Walmart’s profit margin.
As Duncan Mac Naughton, the company’s chief merchandising and marketing officer, told Time recently, “When we buy overseas, we may buy more than we need to fill the container.” In fact, the overall cost of bringing the item to its store shelves isn’t always attractive to Walmart. The tales of Walmart muscling manufacturers into selling goods cheap — so the savings will make it to consumers — have been told on numerous occasions, yet Walmart will need to change its image in that department to pull off another go at its “Made in America” campaign (they’ve taken to calling it “Made Here”).
The system has worked on a number of occasions, as Walmart contracted for Georgia-based 1888 Mills to supply the retailer with terry towels of superior quality. Seeing how the towels sell will determine how committed Walmart remains to the concept, but its long-term deal with 1888 Mills allowed the company to commit to producing its towels in Georgia. Ironically, the company itself had been relying on overseas outsourcing to meet customer orders.
Walmart acknowledges that keeping manufacturing going in the U.S. will mean that more American shoppers will have money in their pockets — some of which they are likely to spend at a nearby Walmart. To that end, Walmart plans to make prices lower on the new wave of American-made merchandise. Pride and prejudice only matter so much when a customer is faced with 20-30 percent higher price tags in order to “buy American.”
The $50 billion investment, while large, only represents a tiny portion of what Walmart will spend on supply in the coming decade. However, if the returns continue to be favorable, China’s dominance in the manufacturing sector could take a hit. Once Walmart goes, the other big retailers are likely to follow.