Wal-Mart China CEO quits after pork scandal

SHANGHAI/HONG KONG Mon Oct 17, 2011 11:03am EDT

Customers walk out of a Wal-Mart store located in a shopping mall in Yanqing county of Beijing November 20, 2010. REUTERS/Alan Wheatley

Customers walk out of a Wal-Mart store located in a shopping mall in Yanqing county of Beijing November 20, 2010.

Credit: Reuters/Alan Wheatley

SHANGHAI/HONG KONG (Reuters) - The head of Wal-Mart Stores Inc's (WMT.N) China business has resigned citing personal reasons, after the world's largest retailer ran into trouble with Chinese authorities leading to store closures and employee detentions.

The departure of China CEO Ed Chan, along with Senior Vice President of Human Resources Clara Wong, is another setback for Wal-Mart which is facing stiff competition from local firms in the strategically important market.

The company, which recently celebrated its 15th anniversary in China, closed more than a dozen stores in central China last week following allegations they sold regular pork as organic pork over the past two years.

Authorities in Chongqing have arrested two Walmart China employees and detained 37 others over the incident.

Both resignations announced on Monday were for personal reasons and had "no correlation" with the investigations in Chongqing, Walmart Asia spokesman Anthony Rose said.

"We have used the last few days to put in place corrective actions in our stores," Rose said, adding that the stores would reopen by October 25.

This is the second round of top-management resignations at Walmart China in less than five months. In May, its chief financial officer and chief operating officer resigned "to explore other opportunities," the company had said.

"It's really hard to say whether this (Monday's resignations) is a consequence of that (pork scandal)," said Torsten Stocker, a China retail analyst with Monitor Group.

"It might be, but I think at the end of the day, it is still not clear what really happened in Chongqing," he said.

"Obviously what happened in Chongqing is impacting their business in Chongqing and presumably ought to be having some impact on the grand overall business. Any type of leadership change like this, it's never a good thing."

STRUGGLE IN CHINA

After entering China in 1996, Wal-Mart's expansion gathered steam in 2007 when it bought a 35 percent stake in Taiwanese hypermarket chain Trust-Mart. It has 353 stores in the mainland.

Wal-Mart's market share in hypermarkets was 11.2 percent in 2010, in second place after China's Sun Art (6808.HK), but spending for the expansion has weighed on its profitability.

Wal-Mart's problem is that it is trying to compete with domestic chains on price, said Shaun Rein, managing director at Shanghai-based China Market Research Group.

"If your strategy is 'cheaper than Chinese companies', you are never going to win the market," Rein said.

"But that is what Wal-Mart is trying to do. The strategy is all wrong since the very beginning, and that is why it has never been profitable here."

Wal-Mart competes with French hypermarket chain Carrefour (CARR.PA), Britain's Tesco (TSCO.L), Germany's Metro AG (MEOG.DE), China's Sun Art and China Resources Enterprise

(0291.HK).

China's hypermarket sector is forecast to grow at a compounded annual rate of 10.1 percent between 2010 and 2015, according to Euromonitor. But price competition is particularly tough in that segment.

Walmart Asia CEO Scott Price, who will also serve as interim China head, said China was a strong market for the group.

"China is a very important market for Wal-Mart and China's 12th five-year plan will provide strong opportunities to the retail industry," Scott said in a statement on Monday.

FIRMS UNDER SCRUTINY

Major Western firms are under scrutiny from China's state media and face criticism over issues including food safety and garment quality. Some executives complain privately that their companies are subject to stricter enforcement than local firms.

This summer, oil company ConocoPhillips (COP.N) was roundly criticized by Chinese media over a June oil spill off China's east coast. The State Oceanic Administration has threatened to sue ConocoPhillips, but not its state-owned partner, CNOOC (0883.HK).

Last week, European luxury group Gucci said it had replaced two managers in southern China after former workers at a store released an open letter alleging employee abuse.

"Walmart's problems are similar to other rivals, particularly the foreign operators, including competition for staff," said Alex Wong, a director at Ample Finance Group.

"A relatively high (staff) turnover rate suggested that it has some problem with its incentive plan in recruiting and retaining sales people," Wong said.

(Additional reporting by Terril Yue Jones in BEIJING; Editing by Ken Wills and Vinu Pilakkott)

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