Wal-Mart's China woes began with phone call, then snowballed

Wal-Mart's PR nightmare over sales of mislabelled pork in China began with a phone call two months ago from an irate housewife.

By the time the dust had settled, officials in Chongqing in central China had raided and shut the U.S. firm's 13 stores here for violating food standards by selling regular pork as more expensive organic meat.

After an apology and a pledge to set things straight through staff training and more contact with shoppers, Wal-Mart's stores reopened on Tuesday after a two-week closure in this vast municipality of 28 million.

The punishment was the toughest ever imposed on a foreign retailer in China, a country that offers rich prospects for store owners but also holds numerous pitfalls, from regulators' determination to improve lax food standards to increased scrutiny of foreign-owned businesses.

The troubles for Wal-Mart, the world's largest retailer, started with a phone call to a consumer hotline on Aug. 24.

A housewife in her 30s complained that the organic pork she bought was the same as ordinary pork, said Zhao Jia, spokesman for the Administration for Industry and Commerce, or AIC.

The Chongqing administration had already cited Wal-Mart stores 20 times in the past five years for violations ranging from food sold past expiration dates to selling products that were deemed "substandard," including washing machines, television sets and women's clothing.

The administration jumped on the housewife's complaint, Zhao said, recalling how the case unfolded in a conversation in his Chongqing office.

Within 24 hours, the agency sent out investigators who discovered three Walmart stores were selling ordinary pork labelled as organic pork. The meat was priced about 43% higher than it should be.

Deciding it had a case, the AIC called in the police and expanded the probe. Authorities found that 12 of Wal-Mart's 13 stores in Chongqing were selling mislabelled organic pork.

To the AIC, that was the last straw.

"Many times we sent our opinions and sent them notices," Zhao said. "They never explained anything to us clearly."

AIC investigators then delved into Wal-Mart's inventory books.

"As the No.1 retailer, their management has been perfected," Zhao said. "They can track anything."

Investigators traced the organic pork to a local meat supplier called Gaojin. Interviewing employees at Gaojin, the numbers didn't add up.

Investigators worked out that of more than 78,500 kilograms of pork sold in Walmart stores since January 2010 as organic, only 15,000 kg, or 19%, was organic meat.

"They sold more than 600,000 yuan ($95,240) worth of false organic pork," Zhao said. "That's consumer fraud."

Asked if he thought Wal-Mart tripped up in the pursuit of profit in China's cut-throat retail industry, where a competitor's hypermarket may be only a stone's throw away, Zhao said he didn't think the stores intentionally sought to deceive customers.

"One employee told us they were instructed to keep the special display shelf for organic pork stocked with meat," Zhao said. "They didn't want to show empty shelves."

Walmart Asia spokesman Anthony Rose declined on Friday to comment about the pork, noting that Chongqing authorities are continuing their investigation.

But he said the company is pleased with the stores' reopenings.

"We are glad that after working with the AIC and implementing corrective actions, we have reopened all of our stores in Chongqing and customers have responded very positively," he said. "Walmart will continue to make the very best efforts to exceed our customers' expectations."

Unlike Walmart stores in the United States, which are often accessible mainly by car and cater largely to discount shoppers, Walmarts in China are in densely populated areas, often in basements or the lower floors of skyscrapers, serving as a one-stop shopping centre for groceries and household goods.

Indeed, when the Walmart stores in Chongqing reopened, they were overrun by shoppers who said they were drawn by price, selection and the ability to walk to the store from home or take the retailer's free shuttle van.

Bias against foreign firms?

The administration's sanction against Wal-Mart was tough: closure of all its stores in the municipality for 15 days.

The AIC also slapped a 2.7 million yuan ($423,000) fine on Wal-Mart and arrested the manager and deputy manager of one store, Zhao said. Authorities are investigating 25 others for possible criminal charges.

Some executives have raised the question of bias against foreign firms in China.

Both the American Chamber of Commerce and the European Chamber of Commerce in China have published reports in the past year saying foreign firms are sometimes unfairly singled out for sanctions.

Not here, said Zhao.

There were many more complaints about Wal-Mart stores in Chongqing than outlets run by France's Carrefour SA , Germany's Metro AG , or domestic competitors such as Yonghui, Shinshiji and Chongqing Baihuo, he said.

And consumer monitors are not just concerned with big players in Chongqing, a sprawling metropolitan region the size of Austria.

A small-scale entrepreneur in Chongqing was caught adding food coloring to make his steamed "mantou" buns appear fresher. The AIC fined him 40,000 yuan and banned him from working in the food industry for life, Zhao said.

Wal-Mart has not said how much it spent on improvements or staff training during the shutdown, but "it is significant and in keeping with the positive response we want to see from our customers," spokesman Rose said.

Analysts also don't expect the issue to affect Wal-Mart over the long term in China.

Visiting a number of Walmarts in Chongqing on Tuesday, the day stores reopened, shoppers were raucously cheerful as they jammed aisles and loaded up on cooking oil, soy sauce, peanuts and fruit, some even taking their turn at gutting rabbits.

Wang Dingbao, 66, brought his wife and a camera to the Jiulongpo Walmart to snare some bargains as well as some snapshots of the hustle and bustle.

"I like the selection and the prices," said Wang, who lives within walking distance and also shops at Yonghui and Shinshiji.

He said he likes Walmart the best, and trusts the retailer. "They said they would fix things, and they did."

(Published by Reuters - October 28, 2011)