Wal-Mart China Fights Off New Food Safety Violations

Wal-Mart (NYSE:WMT), the world’s largest retailer, is facing allegations pertaining to food safety violations in China. According to claims by Beijing Food Safety Administration, Wal-Mart sold sesame oil and squid with dangerous amounts of cancer-causing chemicals in March. The sesame oil exceeded standard amounts of benzopyrene and squid contained hazardous levels of cadmium which are considered to be harmful for human consumption. The company is facing another accusation by Dazhou’s animal husbandry department of selling pork ribs derived from diseased pigs in January. ^[1]

These two allegations have raised serious questions on the food safety measures followed by Wal-Mart. Last year, the retailer had to deal with a pork-labeling scandal that affected its China operations adversely and damaged its reputation. The allegation led to the arrest of two store managers, the closure of stores, and a consequent restructuring of the management team in China.

Emerging economies such as Brazil and China are very important for retailers from a strategic growth perspective. According to our estimates, international operations contribute approximately 40% to Wal-Mart’s current valuation.

Wal-Mart’s strategy this year is to focus on its existing international operations rather than scouting new regions for growth. (See our previous post: Wal-Mart Can Reach $72 Focusing On Existing Intl. Markets For Growth) However, such allegations could damage its image in the emerging economies and jeopardize its future operations.

We maintain a $71 price estimate for Wal-Mart’s stock, implying about 5% premium to the current market price.

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1. See: Wal-Mart China accused of new food safety violations, BBC News [↩]