Authorities in southwestern China detained Wal-Mart Stores Inc. employees in a probe of alleged fraud, highlighting legal—and political—obstacles the retailer faces as it struggles to make money in the world's most populous country.
Officials in Chongqing said Tuesday (Oct 11) they are holding an undisclosed number of workers and have closed 13 of Wal-Mart's stores, pending an investigation of whether the company sold ordinary pork as a more expensive organic variety.
The action was just the latest setback in what has been a rough, 15-year push by Wal-Mart into China. The Bentonville, Ark., company is spending billions of dollars to erect an empire in the country and now has nearly 350 stores in 121 Chinese cities.
China experts said the company is being buffeted by political pressures as officials jockey for power ahead of a 2012 leadership transition and when food sales are under a microscope as China grapples with runaway inflation. Pork, a staple of the Chinese diet, has been under particular scrutiny because its price has surged, jumping 52% in August from a year earlier.
Political analysts said Chongqing officials are showing off their political muscle in attempt to gain higher standing in a once-a-decade-leadership transition next year. The region's top Communist party chief, Bo Xilai, is poised for a promotion to the Politburo Standing Committee, China's highest decision-making body. Crackdowns on corruption and food safety, experts said, are likely to bolster Mr. Bo's image as a consumer watchdog.
Wal-Mart said it acknowledged the pork labeling problem last month and offered compensation to consumers who believed they had been wronged. The company and Chinese officials declined to say how many people were under detention, a process that is commonly used in China for criminal investigations and legal proceedings against local companies. Wal-Mart declined to detail the employees' positions.
With $7.5 billion in revenue in China last year, Wal-Mart is now the second-largest big-box retailer in the country, after the French-Taiwanese partnership Sun Art Retail Group Ltd.
But the U.S. company is running into problems, in part because its low-price business model isn't catching on with Chinese consumers. Wal-Mart recently reported a quarterly loss for China, which it didn't quantify, and said customer visits declined 8% from a year earlier.
The company also is contending with the unionization of its Chinese work force by groups closely tied to the government. In addition, Wal-Mart faces regulatory obstacles to opening stores in areas where foreign businesses are relatively new and nationalist sentiments are strong, as in Chongqing.
"There's no doubt that Chongqing's actions against Wal-Mart are very calculated and symbolize that upcoming leaders will not fear action against even the world's largest companies," said Cheng Li, a senior fellow at the Brookings Institution, a Washington think tank.
Wal-Mart said it takes the long view, citing plans to open stores in fast-growing, midsize cites. By 2025, when demographers predict more than 200 such Chinese cities will have populations exceeding one million, Wal-Mart said it will generate higher sales on lower costs.
"We open stores with the idea of what customers will look like in 30 years' time," said Scott Price, the head of Wal-Mart's Asia operation.
Hopes for growth in the U.S., where same-store sales have been declining for more than two years, are dim. As such Wal-Mart will rely on foreign markets, which drove a fourth of its $419 billion in revenue last year. Gaining ground in China, which now represents less than 2% of Wal-Mart's total sales, is critical.
Wal-Mart has prospered in other countries by buying big national retailers and expanding under their familiar names—75% of its stores outside the U.S. don't bear the company's brand. In China, there was no leading retailer for Wal-Mart to buy, so its only option was a one-new-store-at-a-time slog.
Wal-Mart, which named new chief financial, operating and marketing officers in China this summer after forcing out several other executives, has acknowledged making strategic mistakes. It failed to realize early on that Chinese consumers aren't monolithic, eating different mushrooms by region, for example, and requiring highly localized assortments.
"It's no surprise that we came in the beginning with an Americanized concept," said Wal-Mart China Chief Executive Ed Chan. Now, "We tailor to the city, to the culture, and we learn from our competition."
Wal-Mart was also slow to see the potential of its Sam's Club members-only stores as a tool to reach upwardly mobile Chinese, the most lucrative slice of the market. The company only had three of the stores in China before starting an expansion this year.
"If we had it to do over again I think we would have gone faster" with Sam's Club, Wal-Mart international head Doug McMillon said at a conference in China this spring.
And Wal-Mart misjudged the complexity of the sole big-store acquisition it made, the roughly $1 billion purchase of Trust Mart, a Taiwanese chain that operated more than 100 big-box stores in mainland China but which Wal-Mart has struggled to incorporate. Executives cited declines at the Trust Mart stores as the reason customer visits have dropped in China.
Some Chinese consumers have another explanation.
"I don't have time to compare prices," says Huang Yanjuan, a 38-year-old middle-school teacher in Beijing, explaining why she favors RT Mart stores, a big-box competitor that is outselling Wal-Mart despite having fewer stores.
Some critics questioned whether Wal-Mart can achieve the economies of scale it needs to get good deals from suppliers and execute its discount model.
"If Wal-Mart just plays the low-price card in China, they lose," said Gary Gereffi, director of Duke University's Center on Globalization, Governance & Competitiveness.