Wal-Mart's pork scandal highlights struggles in China

SHANGHAI Fri Oct 14, 2011 9:36am EDT

A shopper in the meat section of a Wal-Mart Supercenter branch in Beijing, August 9, 2006.    REUTERS/Claro Cortes IV

A shopper in the meat section of a Wal-Mart Supercenter branch in Beijing, August 9, 2006.

Credit: Reuters/Claro Cortes IV

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SHANGHAI (Reuters) - Wal-Mart's latest troubles in China involving mislabeling of its pork products reflect the retail giant's struggles in a complex market where rapid expansion and a cumbersome takeover has marred profit and growth.

After entering China in 1996, its expansion gathered steam in 2007 when the world's largest retailer bought a 35 percent stake in Taiwanese hypermarket chain Trust-Mart. It had 346 stores in the mainland as of end-August.

As a result Wal-Mart's market share in the hypermarket space jumped to 11.2 percent in 2010, from 4.8 percent in 2005, but spending involved in the expansion has been weighing on its profitability.

The company acknowledges that.

"Wal-Mart China made its maiden profit in 2008. Since then, we have made steady progress every year despite the aggressive store roll out program. As you know, new stores take time before they can generate substantial profits," a Wal-Mart spokesman said in emailed comments to Reuters.

Wal-Mart competes with French hypermarket chain Carrefour, Britain's Tesco, Germany's Metro AG, China's Sun Art and China Resources Enterprise in a hypermarket sector that is forecast to grow at a compounded annual rate of 10.1 percent between 2010 and 2015, according to Euromonitor.

In 2010, Sun Art was the number one player in China with 12 percent of the market, followed by Wal-Mart, China Resources and Carrefour. Carrefour's market share has remained flat over the past three years at around 8 percent.

Struggles and difficulties in integrating its Trust-Mart operation were reasons behind the departure of Wal-Mart's top two China executives earlier this year, local media has reported.

"Carrefour and Tesco have a long track record of being successful outside their home market whereas Wal-Mart has not," said Paul French, chief China analyst at retail consultancy Access Asia.

Some other American retailers have faltered too. Best Buy, the world's largest consumer electronics chain, closed all of its namesake stores in China earlier this year to cut costs, although it said last month that it is mulling a return.

"In general, European and Asian (retail) companies are much better operating outside their home territories than American companies," French said.

While Wal-Mart's retail expansion may have mixed success, analysts see its e-commerce strategy as promising. Earlier this year, Wal-Mart opened an e-commerce headquarters in Shanghai and bought a minority stake in Chinese e-commerce firm Yihaodian. Wal-Mart was also part of a consortium that invested in Chinese online electronic retailer 360buy.

"Recent players like Yihaodian and (other) B2C retailers, their memberships are growing very fast...It's a good model for certain segment so Wal-Mart is moving fast by doing investments now," said Adam Xu, a Shanghai-based consultant with Booz & Co.

STATE MEDIA INCREASES SCRUTINY

Authorities in Chongqing in southwestern China have detained 37 Wal-Mart employees, arresting two, over accusations that Wal-Mart mislabeled ordinary pork as organic over the past two years.

The company said on Monday it had temporarily closed 13 stores in Chongqing to "complete comprehensive actions to upgrade the standards" of the stores.

The issue of food safety has been a hot one in China, with reports of watermelons exploding after being injected with growth hormones, to poisonous milk and infant formula scandals.

Earlier in the year, China's Premier Wen Jiabao called on Chinese businessmen to "thicken their moral blood" and not just focus on profits.

"In China you see big (food safety) problems. I think the problem is widespread, foreign and local retailers all face this problem," Xu said.

Other major Western firms have recently come under increasing scrutiny from China's state media, facing exposes and fiery criticism over hot issues like food safety, and garment quality.

All retailers in China are vulnerable to food safety issues as gaps in the supply chain could lead to exploitation by errant employees, analysts say.

In February, China fined Carrefour and Wal-Mart a combined 9.5 million yuan ($1.5 million) for manipulating product prices in some of their stores.

Wal-Mart was also fined in March for selling duck meat past its expiry date in Chongqing.

The problem of price manipulation and mislabeling at Wal-Mart could be the result of a breakdown in its system due to the lack of training, consultancy Access Asia's French said.

"Obviously you cannot change the sell-by date on something and you can't claim that something is organic when it's not. But do these guys (low level employees) think it's really that big a deal?," French said, adding that poor monitoring and training could be the cause of the problem.

Despite the scandals, some consumers remain committed to Wal-Mart.

"There are many problems in the distribution chain and so even the supermarkets themselves can't guarantee their food quality," a female office worker in her twenties who would only give her surname as Dong, said outside a Wal-Mart store in Shanghai.

"The scandal won't affect my choice of Wal-Mart," Dong said.

(Additional reporting by Donny Kwok in HONG KONG and Jessica Wohl in CHICAGO; Editing by Kazunori Takada and Muralikumar Anantharaman)

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