Costco-Coke Spat Highlights Retailers' Strength

Coke and Costco have just resolved their dispute over wholesale prices, but their very public fight highlights the increasing tensions between retailers and suppliers. Supply and demand is out of whack and retailers have the upper hand.

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Coca-Cola and Costco appear to have made up. Last month, Costco said it would no longer carry Coke products because Coke wouldn't provide the products at a low enough price. But as of today, Coke is back on the retailer's shelves. The spat between the two companies represents something larger: tensions between retailers and manufacturers are growing as consumers demand low prices.

NPR's Wendy Kaufman reports.

WENDY KAUFMAN: Michael Zakkour is the founder of China BrightStar. His firm supplies electronics, clothes and lots of other things to retailers big and small. Those retailers, he says, are under enormous pressure to offer low prices.

Mr. MICHAEL ZAKKOUR (Founder, China BrightStar): An outstanding example of that is the country's two largest toy retailers: Toys 'R' Us and Wal-Mart, have completely reset their merchandising to place $20 and under items up front and center.

KAUFMAN: The reason is obvious: shoppers aren't buying as much as they once did, and when they do buy, they want deals. So, for example, the same leather coat that sold for $150 last year is now less than $100. But for retailers to offer prices like that and still make money, they have to cut costs. As Zakkour explains, department stores, consumer electronics outlets and others are telling the manufacturers who make their stuff to drop their wholesale prices.

Mr. ZAKKOUR: They're really pressuring the Chinese and Asian manufacturers to cut their product prices by anywhere from 10 to 30 percent.

KAUFMAN: To do that, manufacturers may have to skimp on raw materials or workmanship and the quality of products might suffer. Zakkour says manufacturers and middlemen, like himself, are feeling the price squeeze in other ways, too. Some of the big retailers, he says, are imposing tougher contract terms and additional fees or charge backs.

Mr. ZAKKOUR: If the goods don't arrive at the exact moment they're scheduled to on the loading dock, there's a charge back. If the boxes are not labeled to specs, there's a charge back.

KAUFMAN: He's describing some of the fees a jacket supplier might have to pay to a major department store and there are others. If the jackets don't sell as well as the retailer anticipated, the supplier might have to take them back. Or he might be assessed a fee if too many had to be put on sale. And, says attorney Donald Kreindler, who often represents suppliers...

Mr. DONALD KREINDLER (Attorney): The vendor has little choice, but to - he may try to negotiate that. But if he does not either agree to it or come to some agreement with respect to it, he may be told, well, you know, we may not be doing business with you in the future.

KAUFMAN: Retailers have often had more power than manufacturers, but it's especially true now, because the supply of so many items is so much greater than demand.

Dartmouth Professor Richard D'Aveni says retailers are doing whatever they have to to keep their prices down.

Professor RICHARD D'AVENI (Dartmouth College): I think they're not only behaving logically, but they're behaving in the only manner that is left to them under the circumstances. They must put pressure on the suppliers/producers.

KAUFMAN: If they don't, he says, consumers won't be buying anything at their stores.

Wendy Kaufman, NPR News.

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