Wal-Mart Stores Inc. (WMT) vows to exceed expectations tomorrow when it reopens 13 Chinese outlets shut for mislabeling pork, a rising challenge in an industry that’s blossomed with competitors since the retailer arrived in 1996.
Wal-Mart has promised to revamp procedures after officials in the southwestern city of Chongqing shut the stores two weeks ago and detained 37 people after the world’s largest retailer was found to be labeling ordinary pork as organic.
Now Wal-Mart needs to keep customers who helped double its market share in five years from switching to China’s biggest hypermarket retailer, Sun Art Retail Group, or rivals including Carrefour SA (CA) and Tesco Plc. At stake is a market Euromonitor International says may double to 911 billion yuan ($143 billion) by 2015 from 447 billion won in 2010.
“There is already so much competition between Wal-Mart and its peers,” said Jason Yuan, an analyst at UOB Kay Hian Holdings Ltd. in Shanghai. “The latest incidents add even more pressure on Wal-Mart and drive consumers to its competitors.”
The mislabeling punishment was the most serious Wal-Mart has faced in China after at least 21 citations in Chongqing alone since 2006. Violations included selling expired duck and displaying misleading price tags. Some shoppers are wary of going back.
“I think I’ll avoid going to Wal-Mart for a little while until I’m sure they’ve corrected their mistakes,” said Peng Xiaoyu, a 25-year-old clothing-store owner, as she emerged with milk, apples, cookies and shampoo from a Yonghui Superstores Co. outlet in Chongqing. “Chinese supermarkets have been catching up in recent years.”
Wal-Mart’s biggest competitor in China is Sun Art, which controlled 11.9 percent of the market in 2010, according to Euromonitor data. The company, which opened its first store in Shanghai in 1998, reported first-half net income rose 42 percent from a year earlier to 784 million yuan. It plans to open 48 stores in China this year, according to Executive Director Peter Huang.
China Resources Enterprise Ltd. (291), the government-backed company whose businesses range from retail to beverages, has doubled market share since 2005 to 6.2 percent. Sales at the retail business surged 63 percent from the previous year to HK$55 billion in 2010, according to Bloomberg data.
Its retail division aims to increase market share by expanding its network nationwide and offering more mid and high- end products.
“China is a big market,” China Resources spokesman Vincent Tse said. “We are all friendly competitors.”
There are many of them. China has at least 32 operators of hypermarkets, or food and beverage outlets with more than 2,500 square meters, according to Euromonitor. The U.S. has at least 10, and Wal-Mart controls 80 percent of that market.
Chinese hypermarket operators are nimble and good at catering to local tastes, said Torsten Stocker, a partner at Cambridge, Massachusetts-based consulting firm Monitor Group.
“They are investing at least physical infrastructure and IT system,” Stocker said. “There is no doubt that they are formidable competitors.”
Wal-Mart entered into China in 1996, less than a year after Carrefour arrived in December 1995. In the last decade, it has grown to 353 stores from eight in what it forecasts will be the world’s largest grocery market by 2014. Since 2005, its China market share has more than doubled, from 4.8 percent to 11.2 percent, making it second-largest in the country behind Sun Art.
Ed Chan, the president of its China operations, resigned nine days after the incident for “personal reasons,” the company said. Asia CEO Scott Price, who took interim control of China operations after Chan’s resignation, apologized to Chongqing Mayor Huang Qifan on Friday, promising to take effective measures to correct problems at the closed stores.
Hong Kong-based spokesman Anthony Rose says customers will notice changes once the Chongqing stores reopen. Rose would not specify what the changes would involve. Tang Chuan, the director of law enforcement at the Bureau of Inspection and Enforcement in Chongqing, said Wal-Mart plans on-site food-safety testing labs and consumer-rights desks.
“There is a whole list of interventions going on as we speak,” Rose, a Hong Kong-based spokesman for Wal-Mart, said in an e-mail on Oct. 18. “Stay tuned for the 25th.”
In the past, Chinese shoppers went to Wal-Mart because they trusted it wouldn’t cut corners and would only sell safe products, said Shaun Rein, an analyst at Shanghai-based China Market Research Group.
“But now if you can’t trust Wal-Mart, why would you go there and pay a premium?” said Rein, who expects Wal-Mart’s market share to decline.
Tested Many Times
On a recent day, customers visiting a Wal-Mart in downtown Beijing perused freezers full of pork and beef. A female employee assured customers that the pork was safe because it wasn’t supplied by the same company that delivered to Wal-Mart in Chongqing. “Don’t worry, the pork has been tested many times,” she said.
Xiao Li, a 30-year-old office worker who bought two meat buns and two chicken wings for lunch at the store, said Wal-Mart would get beyond the Chongqing problems. He likes to shop there because the stores are clean and the food is laid out well, he said.
“Wal-Mart is still a reliable brand,” Xiao said. “There will be impacts from Chongqing of course, but that will be short term.”
In an e-mail sent soon after the Chongqing stores were shut Oct. 9, Wal-Mart spokesman Rose said the company would “exceed customer expectations” when it reopens.
“Let our actions speak for our mission of saving people money so that they can live better,” he said.
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