Walmart Raises Investment in Food Safety in China - Analyst Blog

Retail giant Wal-Mart Stores Inc. WMT intends to increase its investment in food safety measures in China to 300 million yuan ($48.32 million) over three years through 2015, up from 100 million yuan in the same period, announced last year. Walmart also stated that it will increase DNA testing on meat products and would regularly conduct supplier inspections. It will also test more of its stores with its two mobile safety labs.

Last year, Walmart had planned to start a mobile food-inspection program and increase supplier training, besides its plans to invest 100 million yuan to upgrade food safety measures in China.

China is a strategic market for Walmart and food safety remains the top concern for consumers. However, the company has not been able to maintain the set standards, which is denting its reputation.

Earlier this year, as per media reports, Walmart recalled all products from its local vendor DezhouFujude Food Company Ltd., after fox DNA was identified in samples (Walmart Recalls Meat Items from China). Thereafter, Walmart called back its executive Rob Chester to the U.S., who was earlier working as the chief compliance officer for Walmart's China operations (Walmart Moves its China Manager). According to Bloomberg, the company had encountered similar issues in China earlier like the mislabeling of pork in 2011.

Not only Walmart, Kentucky-based famous restaurateur Yum! Brands Inc. YUM also faced questions about the quality of chicken supplied to its KFC units in China. Though Yum Brands' KFC division is working to repair its reputation, sales in China continue to decline.

Walmart has been grappling with declining comp sales both in the U.S. and abroad following the recent slowdown of the economy. Moreover, amid several legal issues, the grocery giant had to part ways with its Indian joint venture partner, Bharti Enterprises in Oct 2013.

In such a scenario, we believe Walmart has to keep up its reputation in China. In fact, the company expects China's food and grocery market to be worth $1.5 trillion by 2016 and therefore very important for retailers like Walmart. The company is thus geared to expand its Sam's Club stores in China. Walmart currently has 404 stores in China and has plans to add as many as 110 stores by 2016.

Walmart currently holds a Zacks Rank #4 (Sell).

Some better ranked retailers include Ingles Markets, Incorporated IMKTA and The Koger Co. KR, both of them carrying a Zacks Rank #2 (Buy).

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