Academic journal article Issues in Accounting Education

Big Customers and Their Suppliers: A Case Examining Changes in Business Relationships and Their Financial Effects

Academic journal article Issues in Accounting Education

Big Customers and Their Suppliers: A Case Examining Changes in Business Relationships and Their Financial Effects

Article excerpt

ABSTRACT: In this case, you will analyze large retailers' increasing clout and its implications for the pricing, inventory, and credit practices of their suppliers. You will use accounting data to explore how changes in these business practices and other phenomena at the firm and industry levels affected retailers' and suppliers' financial performances. In addition, you will examine stock return information to determine how Wall Street responded to the effects of these changes on firms' profitability. As a result, the case will increase your understanding of how to use accounting data to assess the effect of marketing and managerial decisions on financial performance. You will consider these issues for four large retailers (JCPenney, Target, Toys "R" Us, and Wal-Mart) and three manufacturer-suppliers (Garan, Mattel, and National Presto).


The 1990s witnessed the growth on a national scale of low-price retailers such as Wal-Mart, Target, and Home Depot. As a result, the percentage of national retail sales accounted for by the top 10 retailers climbed from 11.0 percent in 1989 to 16.1 percent in 1999 (Standard & Poor's 1992, R79; Hoover's Inc. 2000). This increase occurred in part due to Wal-Mart's spectacular growth; the firm's sales increased at an average annual rate of more than 20 percent during this period (Wal-Mart 10-K 1999).

This consolidation at the retail level has been accompanied by sales concentration in the manufacturing sector, where manufacturers report that fewer retailers account for an increasing share of their sales. Accounting standards require that firms disclose the existence of a major customer--defined as "a single firm, group of firms, or government responsible for at least 10% of its sales" (FASB 1997, para. 39).

Table 1 presents the results of one study that looked at changes in major-customer citations and sales concentration during the 1989-1997 period (Gosman and Kelly 1999-2000, 58). As noted there, major-customer citations became much more frequent during that time period. In fact, 55 of the 98 suppliers reporting at least one major customer in 1997 had no major customers eight years earlier.

The identity of a firm's major customer is a required SEC disclosure only when loss of that customer "would have a material adverse effect on the registrant and its subsidiaries as a whole" (SEC Regulation S-K). Nevertheless, suppliers usually name their retailer major customers--in 80 percent of all cases according to one study (Kelly and Gosman 2000, 53).

As "big customers" with increasing clout, large retailers have been able to initiate a variety of changes in business practices that have altered their relationships with the manufacturers who supply them. This case focuses on changes in three areas: pricing, inventory, and credit terms. Four large retailers are highlighted: a traditional department store (JCPenney), two discount department stores (Target and Wal-Mart), and a category specialist (Toys "R" Us). Three manufacturers that supply at least two of these retailers are also featured: a clothing manufacturer (Garan), a toy producer (Mattel), and a housewares maker (National Presto). The four retailers capture a variety of different pricing and/or product-line strategies, while the three manufacturers represent diverse industries and (as will be seen) varying levels of sales dependence on their retailer customers. As a result, the relationships among these firms offer a broad perspective concerning the impact of big customers on their suppliers' busine ss practices and financial results.

The case is divided into several sections. The first section describes the anticipated learning outcomes. The second section details the extent to which the three manufacturer-suppliers' sales are concentrated among the four large retailers. The third section discusses changes in pricing, inventory, and credit policies that have resulted from large retailers' increasing clout. …

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