Many analysts thought things could not get much worse for Wal-Mart (NYSE:WMT) in China. It already faced plummeting market share - from 8 percent in 2008 to 5.5 percent over the past three years - and lost key senior executives this summer including its chief operating and chief financial officers.
But things did get much worse for the retailer last week when authorities in Chongqing detained 24 executives and shut 12 stores for 15 days for mislabeling regular pork as organic for several years.
Consumers lit into Wal-Mart on online chat rooms and in interviews with my firm saying they would “never shop” at the chain again for “destroying their trust” and “cheating” them.
On Monday Wal-Mart announced that Scott Price, the head of Asia, would takeover as interim head of China, replacing Ed Chan.
The Wall Street Journal’s John Bussey argued that the Chinese government is “bullying” Wal-Mart and that the detentions are yet another example of China’s unfair practices towards foreign firms. He also says what is being sold in domestic chains is even worse.
The reality is Wal-Mart broke the law and betrayed public trust. This is simply not a case of the government treating foreign firms unfairly or about protectionism as Bussey argues. The Chinese government must fix the nation’s food supply chain, which is in such a mess that it threatens the government’s authority and health of the people.
In interviews with 5,000 consumers in 15 cities, my firm found their biggest concern was food and product safety. Consumers were more worried about buying toxic food than paying for their children’s education or medical costs. The situation is so bad, we found, that many Chinese dine at Western fast food restaurants like Kentucky Fried Chicken (NYSE:YUM) and McDonald’s (NYSE:MCD) because they consider them healthy as they do not use cooking oil salvaged from sewers.
The government has to demonstrate to the people that they are listening to their fears and pro-actively trying to solve problems against foreign and domestic companies alike. In August, after a countrywide crackdown the government announced it had arrested 2,000 people and shut 4,900 restaurants. They forced the consolidation of the milk industry by shutting 50 percent of the country’s dairies in 2011 because of melamine worries.
Contrary to Bussey’s position that the government is treating foreign retailers unfairly, the largest hypermarket chains, Wal-Mart, RT Mart, Carrefour , Tesco Auchan, Lotus, are all foreign owned because consumers trust foreign retailers more not to cut corners. Combined, they control the majority share of the modern retail market. Where are the barriers to foreign retail investment?
Most consumers, before the incident, told my firm they “trusted” Wal-Mart to sell good quality products. The government supports foreign retailers because they positively impact the food supply chain. So when even a trusted Wal-Mart sells bad products, it destroys public trust more and the government needs to make an example of them.
As one 30-something woman shopper in Shanghai told me, “If Wal-Mart did this, I shudder to think what domestic chains will do. The government needs to stop the problem now by arresting people, not just issue little fines.”
The main lesson from Wal-Mart’s problems in China is that the company has to ensure strict oversight of local employees so that they do not do anything to harm the reputation of the brand. Consumers and the government are not forgiving, so brand managers must ensure they never do anything to hurt trust. Wal-Mart will face an even tougher road back to prosperity in China.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.