By Nandita Bose
CHICAGO (Reuters) - U.S retailer Target Corp (N:TGT) is asking many suppliers to take on up to an extra 3-5 percent of the cost of promotions and price cuts after slow sales so far this year.
Retailers often use price discounts combined with promotions - such as two-for-one offers - to sell slow-moving items and make room for newer products.
Suppliers also have their own offers and advertising, and usually negotiate with retailers on how the cost of these promotional budgets will be split.
A dozen suppliers confirmed to Reuters in May that Target has demanded they take on more of the costs of marketing and selling slow-moving items, from candy to electronics.
The size of these costs varies on a case-by-case basis, they said, and are confidential. In total, during the year ending Jan. 30, 2016, suppliers gave Target $379 million to fund such marketing costs, according to its latest annual report.
Minneapolis-based Target, the second-largest discount retailer in the United States, wants to minimize the impact of markdowns on profit in a tough year as middle income customers make fewer discretionary purchases.
In May, Target reported a drop in sales for the quarter ended April 30, and Chief Executive Brian Cornell predicted an extended period of promotions ahead for the retailer and rivals.
Most suppliers who spoke to Reuters said they will have to comply or at least deliver part of Target's demands so old stock can make way for new season products. That will strain already thin margins.
"Target is not leaving a lot of room for negotiation here," said one supplier, who asked to remain anonymous. "They want to get this unsold stock out of their stores in the next three months."
Target spokeswoman Katie Boylan declined to comment on whether it has begun to demand suppliers pay more for marketing. She said Target regularly works with vendors to build promotional plans that drive sales.
Target's bigger competitor, Wal-Mart Stores Inc (N:WMT), had a better start to the year as its lower-income consumer base continued to spend. It is asking suppliers simply to give it lower prices, according to its suppliers. A Wal-Mart spokesman declined to comment.
It is not clear whether other retailers will follow Target's move. Four retailers including Macy's Inc (N:M), Nordstrom Inc (N:JWN), Gap Inc (N:GPS) and Kohl's Corp (N:KSS) declined to comment.
Burt Flickinger, managing director of consultancy Strategic Resources Group, suggested any retailer looking to recover from a slow start this year "would be considering pushing their suppliers for more discounts, if they haven't started doing that already."
TOUGH BUSINESS
Target stepped up the pressure at recent annual one-on-one meetings, said nine suppliers.
One leading consumer goods manufacturer, who asked not to be named, said this year, Target insisted on meeting with all three product division heads instead of just one contact, to ensure its demands were met.
Suppliers of consumables like processed food budget 10-12 percent of total sales for discounts and promotions. That goes up to 20-30 percent for products like apparel, accessories and furniture, Flickinger said.
Target's suppliers reduced spending last year on promotions and price cuts - known as vendor income receivables - by 11 percent from $426 million at the end of Jan. 31, 2015, according to the company's annual report.
At the same time, inventories hit $8.6 billion from $8.28 billion a year earlier, data in the annual report showed.
Cornell, who started as Target CEO in July 2014, is focusing on tightening up the supply chain and selling more higher-margin products to turn sluggish sales around. In late 2015, he appointed John Mulligan as chief operating officer to fix supply chain problems and has also brought in a new merchandising officer and a supply chain officer.
Last month, Target pressured suppliers to tighten up on delivery times with the threat of fines.
Two of the suppliers who spoke with Reuters said if they are fined for missing delivery deadlines, they would consider cutting promotional fund payments by an equivalent amount.
"We have budgets to stick to," said one supplier, who did not wish to be identified. "We cannot just keep giving them discounts on (product) volumes they are not able to sell - we have to make money when doing business with Target."
(This version of the story corrects percentage of costs Target wants many suppliers to take to up to 3 to 5 percent, instead of just 3 to 5 percent in the first sentence.)