Wal-Mart Stores’ Chinese operations are under scrutiny. An investigation into pork prices has led to staff arrests and stores closed. Days after the scandal became public, the head of Wal-Mart’s business in the country quit for “personal reasons” and he is the latest in a number of senior executives to depart in recent months. Sam Webb looks at the retailer’s woes and asks what lies ahead for Wal-Mart in China.
Serious questions are being asked about Wal-Mart’s business in China. This week, its local chief executive resigned just days after Chinese authorities arrested staff and closed stores in an investigation into the company’s pricing on pork. Ed Chan said he had quit for “personal reasons”, an explanation that convinced few. However, even if Chan’s departure was not linked to the investigation, he is just the latest in a series of senior executives to leave Wal-Mart’s business in the country this year.
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Two weeks ago Chinese authorities detained 25 staff and closed all of Wal-Mart’s 13 stores in the city of Chongqing after it emerged that 63,547kg of ordinary pork was sold as organic, or “green” pork, generating CNY730,000 (US$114,334) of illegal income. The company was also fined CNY2.7m.
The world’s largest retailer, which has 353 stores and nearly 100,000 staff in the country, a few days later announced the departure of Chan, president and CEO of its Chinese division, and Clara Wong, senior vice president for people, who both resigned for “personal reasons”.
The “Green Pork” scandal is the latest in a long line of breaches in the city. The Chongqing Administration of Industry and Commerce pointed out that Wal-Mart has been punished by the local government 21 times since the company entered the city in 2006.
“Monitoring Wal-Mart is as effective as punching cotton,” Tang Chuan, a senior enforcement official in Chongqing, last week told Xinhua, China’s official news agency. “Wal-Mart is very quick to admit the mistake, but it never improves.”
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By GlobalDataShaun Rein, managing director of the China Market Research Group and author of the upcoming book “The End of Cheap China” says Wal-Mart has severely hurt its image, especially because Chinese consumers are fearful about food safety amid a spate of food scandals, including the 2008 tainted-milk scandal that left six children dead.
“It is going to take [Wal-Mart] a long time to rebuild trust with both consumers as well as the government. Many consumers feel Wal-Mart betrayed them,” he tells just-food.
“The main reason consumers before the scandal told us they shopped at Wal-Mart was because they trusted Wal-Mart to only sell safe and healthy products and would have better oversight of the supply chain.”
It begs the question why it keeps happening at Wal-Mart, although it’s perhaps only fair to point out that other retailers, both foreign-owned and domestic, have also faced censure for similar offences.
Torsten Stocker, the Hong Kong-based head of the consumer goods practice at US consulting firm Monitor Group, says part of the problem for Wal-Mart is the disparate nature of regulation in China.
“The regulatory environment can be unique from region to region, so they may not be aware of the rules they are breaking,” he says.
“It’s very difficult for Wal-Mart to control its business in a fast growing and heterogeneous environment. They are dealing with different local governments and different suppliers for fresh produce.”
But is it all Wal-Mart’s fault, or is it a scapegoat for wider political concerns in China?
Rein feels the retailer has partially been a victim of politics and public fears over food safety. His company surveyed 5,000 consumers in 15 cities and found that food and product safety were the biggest concerns in the majority of people’s lives – ahead of paying for medical bills and education fees.
“The food supply chain in China is a complete mess that threatens to undermine the government. They needed to make a strong example by cracking down on Wal-Mart to show they will no longer tolerate unsavoury business practices. Chinese consumers are demanding it.
“The problems, realistically, are not just at Wal-Mart. The food supply is a serious problem that faces all retailers and the reality is that Wal-Mart probably does a job as well as any big hypermarket.”
Stocker says the retailer has to continue to improve the training of its people but also tackle the tricky issue of finding a mix between exerting control and giving autonomy to store managers.
“I think all of these issues are relatively typical for an emerging market. There will always be growing pains,” he adds.
Better recruitment, enhanced pay and removing the “glass ceiling” for mainland Chinese executives are vital to improve these issues, according to Rein. “If you are a top Chinese, why would you work at Wal-Mart? All of their top people are from the US or Hong Kong.”
Question marks remain over management. Chan and Wong have joined the ranks of other high-profile company execs who have also left the company this year – In May, COO Rob Cissell and CFO Roland Lawrence decided to leave the business and a month later Shawn Gray, vice president of Wal-Mart’s hypermarket operations, also handed in his notice. All five left for “personal reasons to explore other opportunities”, according to the company. Stocker, however, says the company’s turnover in China is “not normal”.
Greater continuity at the top level would allow Wal-Mart to steady the ship. Wal-Mart faces increased competition from other international retailers like Tesco and local retailers like Sun Art Retail Group, a joint venture between French retailer Auchan and Taipei-based Ruentex Group. An established, confident and experienced managment team seems vital to counter this threat.
The latest resignations also lead to questions over how Wal-Mart is handling the “Green Pork” scandal.
“Saying that the CEO Ed Chan stepped down for personal reasons that had nothing to do with the scandal seems disingenuous. No one believes it and Wal-Mart seems far too PR-focused,” Rein says. “Wal-Mart needs to take full responsibility for its actions, apologise and rebuild trust with consumers.”
However, there is some debate over what will be the long-term impact of the pricing scandal on Wal-Mart’s reputation in China.
Stocker thinks the effect will be short-lived. “I don’t think it will affect customer perception too badly. In the short term it creates some noise but customers forget relatively quickly,” he says.
“This isn’t about somebody being ill or, God forbid, even dying. As bad as it is on one level, I feel that at the end of the day consumers, as long as the company seems sincere about addressing the problems, will continue to shop there. I think they also recognise this sort of thing happens elsewhere.”
Rein, disagrees, saying Wal-Mart is in a lot of trouble in China, pointing to existing problems like a plummeting market share from 8% to 5.5% in the last three years as wealthier consumers switch to speciality shops, and as domestic retailers like Lianhua renovate stores and go more upmarket. “Wal-Mart is going to have to have a major strategy re-think going forward,” he claims.
No one at Wal-Mart China was available for comment.
