Payback

Many vendors are willing to take their lumps as the price of doing business with Wal-Mart. The last thing any sane supplier wants is to go head-to-head in court against the world's largest retailer. Then there's Chuck Mitchell

Near the end of his long-awaited meeting at Wal-Mart headquarters, Chuck Mitchell yanked a snapshot out of his briefcase and slid it onto the desk. "All I said was, 'And then there's this," he recalls.

It was a small gesture but a momentous one. Dim as the Polaroid photo was, it was still a bombshell. But Mitchell didn't wave it around like a weapon or a victory flag. He hadn't made the daylong, three-airline trek from Tallahassee, Fla., to tiny Bentonville, Ark., to alienate his company's biggest customer. GTO Inc., the $4-million company he had taken over nine months earlier, depended on the Sam's Club division of Wal-Mart Stores Inc. for 40% of its revenues. "As a company," says Linda Williams, GTO's director of sales, who had accompanied Mitchell on the September 1994 trip, "our priority was definitely to keep Wal-Mart satisfied."

Nothing had been more critical to GTO's success than signing Sam's Club. In 1989, when GTO was just barely two years old, spilling nearly $464,000 of red ink on revenues of just over $1 million, Sam's Club agreed to sell GTO's automatic gate opener. In doing so, it endowed GTO with the credibility to lure other big retailers, such as Home Depot. Feedback from Wal-Mart customers even inspired the company to create its GTO Pro line, aimed at professional installers. In 1993, GTO placed 120th on the Inc. 500, this magazine's ranking of the country's fastest-growing companies. Looking back at what Sam's Club's endorsement had meant to GTO in its early days, Williams says, "As a start-up, you're in heaven."

But by 1994, the relationship between GTO and Sam's Club was heading toward a much more fiery locale.

Which is why Mitchell had traveled to the meeting with Sam's Club hardware buyer Jim Bevis. Mitchell recounts that he waited, while "steaming on a couple of levels" in the hot, unfinished barn that served as a "holding cell" for suppliers, until Bevis showed up for their 8 a.m. appointment 45 minutes late. Once past the small talk, Mitchell began a rehearsed recitation of complaints, all couched in terms of potential remedies that GTO would agree to shoulder. "We went out there with solutions," says Mitchell. "We figured we're littler, so we'll assume the responsibility for making the relationship better."

Mitchell fully expected his most valued customer to address his main gripe: Sam's Club was sending back, as defective, at least 20 gate openers a month. Under its contract GTO had to pay freight costs, ranging from $9 to $40 for each of the 30-pound units returned, plus a 10% handling credit amounting to $36.65. "There are products coming back that are not defective," Mitchell says he told Bevis. "And we need to deal with these." (Bevis declined Inc.'s request for an interview and, in January, left the company.)

Mitchell went on to detail all the steps that GTO would take to help. Some of the gate openers were coming back missing components--often one or both of the handheld transmitters. Since it was much cheaper for GTO to ship out a replacement part than to deal with the return of a whole unit, the company would redesign its packaging, spending $5,000 on new dies so that Sam's Club workers could tell at a glance whether any components were missing. Mitchell even showed Bevis a rough rendering of a revamped box, which had the added benefit of being 20% smaller. It would feature a drawing of all 15 major components and list them all on the outside. And GTO would print its toll-free number on each box, Mitchell volunteered. Good, Bevis suggested, and how about a sticker with the number on the gate opener's control box? Done. Bevis was "real excited," recalls Williams.

But then GTO's president suggested that Sam's Club might make one concession in how much it charged its vendor for returns. Of course, Mitchell quickly reassured Bevis, he wanted Sam's Club to send back anything. And no, he added, he wasn't expecting Sam's Club employees to take time to determine whether the highly mechanical product was truly defective. All he was suggesting was a system that would prevent Sam's Club from charging GTO for nondefective returns. If Sam's Club returned nondefective merchandise, as determined by GTO, it would not get the extra 10% handling credit. As a sweetener, GTO would throw in a 1% credit for Sam's to spend on "customer satisfaction."

Furthermore--and here Mitchell was about to unload the one-two punch that had brought him to Bentonville--GTO would even accept $24,000 as full payment for the $80,000 in improper credits that Wal-Mart had taken so far that year, which GTO had documented.

But before Bevis could react, Mitchell passed him the photo.

On the surface, it looked rather harmless. All it showed was a package of Pampers, spanking clean ones. Absurd as it sounded, Sam's Club had returned the diapers in August 1994 to GTO in an E-Z Gate Opener box, taking a 10% handling credit for them. "Be glad you didn't get 50 more," Mitchell quotes Bevis as saying. To which Mitchell shot back, "Well, Jim, we can't do business in an environment where I have to feel lucky not to get Pampers."

Mitchell remembers Bevis nodding and adding, "I hear what you're saying." Bevis then brought the meeting to a close, asking for a formal proposal. "My understanding was that we had a new understanding," Mitchell says.

Mitchell wouldn't see Bevis again for almost three years. At their next meeting, Mitchell would be accompanied by his lawyer, because by then GTO had sued Wal-Mart for breach of contract. Mitchell's decision to sue his company's largest customer, which, with $138 billion in sales, also just happens to be the largest retailer in the world, sounds irrational. Seasoned vendors to the so-called big boxes--superchains like Wal-Mart--know that dealing with them requires a constant series of compromises and accommodations. They believe such slights and injustices are costs of doing business, not the stuff of litigation.