The Big Squeeze, Wal-Mart Style?

Gus J. Bourgeois, III

July 19, 2010

Wal-Mart announced in mid-June 2010 that it is considering pulling business from its outsourced transportation providers (including, potentially, Swift Transportation, Con-way Freight and Greatwide Logistics) with respect to delivery of goods from suppliers to its distribution centers, and instead moving that freight using its in-house private fleet, wherever it is cost-effective to do so. According to a Bloomberg report, Wal-Mart is in the processing of contacting manufacturers about this approach, with the goal being to lower costs for its suppliers, which in turn would lower the cost of goods to Wal-Mart.

The real question is whether this represents a serious effort by Wal-Mart to reduce costs by using its in-house resources (which aren’t exactly sitting idle now, as anyone traveling any U.S. interstate this summer can attest), or whether this is merely the first move by Wal-Mart to force its outsourced transportation providers to cut their rates.

The larger question involves the effect of this move on the U.S. trucking industry. According to John Schulz of the Gerson Lehrman Group, “If Wal-Mart were to pull that freight off common carriage — or even threaten to pull it — that would result in tons of excess capacity at a time when the U.S. trucking industry is just recovering from a three-year freight recession.”

I think it’s reasonable to assume that forcing its outsourced transportation providers to cut their rates in order to keep the business would have a similar detrimental effect on the U.S. trucking industry, just at the time when many hoped that even a small recovery in U.S. manufacturing activity would at least offer support to current (already discounted) rates.