Wal-Mart Challenges China on Food Safety

Hilary Tuttle


June 1, 2014

RM0614_ff.walmartIn the last three years, China has fined Wal-Mart a total of $9.8 million for food safety violations. In response, the company ramped up its inspection program, tasking hundreds of employees with examining more than 600 products a day for flaws. Earlier this year, the grocery giant had to recall donkey meat snacks from its 408 stores in mainland China when DNA tests found the meat was actually fox. After the scandal, Wal-Mart began conducting more DNA tests of meat than it does in any other country. The company even cut ties with 300 suppliers to ensure quality and accountability. Further, it pledged $16 million last year to increase food safety across China.

In March, Wal-Mart took its efforts a step further. The company explicitly called out Chinese authorities for their failures to build and maintain a strong, safe food supply chain. Local authorities are not being fair, the company said, in both how they structure the inspection system, and the way fines are doled out.

Small fees have snowballed for Wal-Mart: $383 for an English font size that was bigger than Chinese characters on a product label, $486 for a net weight that was printed too small, $2,323 for not listing the correct official name of a special species of almond as labeled in the botanical dictionary. All of these surprisingly tiny increments and infractions have added up to almost $10 million in just a few years.

The money is not really the issue-Wal-Mart makes five times as much in profits every day. Indeed, given China's $1 trillion grocery market, $10 million may be a small price to pay for access. The problem is that Western companies that sell flawed products suffer legal liability in China and reputational damage across the brand, including at home.

Typically, foreign companies that do business in China opt to keep a low profile to maintain good relations with regulators. "It's not something you see often in China," Ben Cavender, senior analyst at China Market Research Group, said of Wal-Mart's strategy to go public with its concerns. "Wal-Mart is letting consumers know that there are other companies and players who should be involved in food safety, not just the retailer."

On the books, China's food safety policies call for responsibility and accountability to be shared at every step of the food chain. In practice, however, retailers bare the brunt of lapses anywhere in the system. "There's an overemphasis at the point where the product meets the consumer," Bejing-based attorney Lester Ross told the Wall Street Journal. "That's in part because it's easier to do."

That is the crux of Wal-Mart's objection. "That isn't the way to resolve food safety," said Greg Foran, the company's China chief. "You resolve it by putting in place the right processes at the base. That is something the government should be held accountable for, as they are in most other countries."

This structure may also put an  unfair onus on international entities, the company said. Those responsible for sourcing and processing food are largely local suppliers, with Wal-Mart mainly stepping in at the end to put the goods on its shelves. Yet it is the one that is fined.

Wal-Mart is in a unique position in China. Most companies exploring new international growth are at the mercy of the host country and have little recourse for a flawed system or perceived unequal treatment. But Wal-Mart is a major employer in China, the largest American buyer of Chinese-manufactured goods, and the country's eighth-largest trading partner in the world. They have the clout to fight back.

The company's efforts may be having an impact, though the government has not commented on Wal-Mart's campaign. At the end of April, the China Food and Drug Administration and the Ministry of Public Security announced plans to create a special police unit for food and drug law violations. This unit aims to increase enforcement with criminal law instead of simply imposing fines, and should target those who introduce impure products into the food supply.

Hilary Tuttle is managing editor of Risk Management.