Wal-Mart Cries Foul on China Fines

Over the past three years, Chinese authorities have fined Wal-Mart Stores Inc. WMT +1.15% $9.8 million, sanctioning the retailer for using misleading pricing, selling poor-quality products and even peddling donkey meat that turned out to be fox.

Wal-Mart has increased testing and inspections. Food testers at Wal-Mart distribution centers in China check more than 600 products daily to catch flaws before the food is sent out to stores. After Wal-Mart found the fox meat labeled as donkey in January, the company said it would start testing its products' DNA.

But Wal-Mart is also doing something rare for a Western company: Telling Chinese authorities they need to clean up their own act.

In the U.S. and most other countries, it is usually manufacturers, rather than retailers, that have primary responsibility for the quality of the products they sell, whether it is ketchup or dried beef. But in China, the manufacturers "aren't accountable. We're accountable," says Greg Foran, Wal-Mart's China chief. And while China's domestic companies are often criticized by local media for subpar quality, regulators seldom call out local retailers for faulty products or food-safety problems.

Analysts agree that Wal-Mart's cries of unfair treatment have some validity. "When the Chinese government wants to make a point on food safety, they go after a multinational rather than a Chinese company," says Christian Murck, former president of the American Chamber of Commerce in Beijing. Other people say Chinese authorities and state media focus on foreign companies because their operations are often bigger, their names are better known and such an approach can help set an example.

Wal-Mart executives have met in recent months with China's Food and Drug Administration, urging officials to step up their inspections of all food purveyors. They plan to meet again this month. The agency didn't respond to requests for comment.

The Bentonville, Ark., company's pushback runs counter to what experts say is the safer strategy—keep your head low—for foreign companies in China: "It's not something you see often in China," says Ben Cavender, a senior analyst at consulting firm China Market Research Group. But Wal-Mart's combative approach may have an up side: "Wal-Mart is letting consumers know that there are other companies and players who should be involved in food safety, not just the retailer."

Four local Chinese grocers said regulators don't frequently visit their stores or issue fines. State-controlled Bright Food (Group) Co., which operates 2,200 outlets of Shanghai Nong Gong Shang Supermarket, regularly inspects its fresh products and faces surprise food-safety checks on occasion, but in the past few years the chain hasn't been fined, a spokesman says. China's largest grocery retailer by number of stores, China Resources Enterprise Ltd. 0291.HK +0.21% , declined to comment.

Both the Chinese government and the food industry face rising pressure from the country's growing consumer class to clean up the food supply. In a survey last year of more than 3,200 Chinese people, 38% said food safety is a "very big problem," up from 12% in 2008, according to Pew Research.

Experts say the government has improved food safety since 2008, when six infants died and more than 300,000 fell ill because dairy producers added the industrial chemical melamine to watered-down milk. Last year the country created the China Food and Drug Administration, a superministry that consolidated tasks previously handled by nine different bureaucracies into one. Officials have pushed agricultural consolidation as well, attempting to create bigger farm operations that mirror those in the U.S. and are easier to supervise.

A customer shops at a Wal-Mart store in Beijing. Reuters

China's food-safety laws say responsibility and accountability should be shared at every step of the food chain. But experts say those laws aren't well enforced.

"There's an overemphasis at the point where the product meets the consumer," says Lester Ross, a Beijing-based attorney with U.S. law firm WilmerHale who has represented foreign food companies. "That's in part because it's easier to do," he adds.

Wal-Mart says it ended relationships with 300 suppliers last year because they didn't pass the retailer's testing and safety standards, yet those suppliers had paperwork proving that they had passed muster with local food watchdogs. In the past two years, Wal-Mart has built up its ability to test products, adding DNA testing and food-safety trucks that can move to several stores in the course of a day, Mr. Foran says.

"But that isn't the way to resolve food safety," he says. "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."

In the U.S., much of the responsibility for food safety is on the farms, as well as the plants that package the foods. Retailers are responsible for keeping food at appropriate temperatures and selling items before their expiration date.

Wal-Mart doesn't disclose what portion of its $476.29 billion in annual sales is generated in China. But 408 of the company's 10,957 stores world-wide are located in the country.

In Shanghai, one of China's most affluent cities, the Municipal Food and Drug Administration says the government has increased testing and shares responsibility for food safety with retailers. Part of the problem is that enforcement is regional, says Gu Zhenhua, deputy director general of Shanghai's Food and Drug Administration.

A number of foreign companies in China have increased testing in recent years.

British retailer Tesco TSCO.LN +2.70% PLC has implemented microbiological testing in China, checking some products up to four times to ensure they are safe.

In a space at their Shanghai headquarters that resembles an air-traffic control room, managers for French retailer Carrefour SA CA.FR -0.05% monitor refrigerator temperatures and supplier data at their 236 stores in China. They can see on monitors the government's product recalls; consumer complaints; store stocking data, including which products are in which stores; and supplier phone numbers to call should there be problems with any of the goods.

In 2012 Chinese media said a Carrefour store in central Henan province had sold expired chicken and had mislabeled ordinary chicken as a more expensive organic variety. Carrefour responded by closing the store and apologized to consumers.

"Food safety in China is complicated, far more complicated than in other countries," says Loïc Frouart, Carrefour's Shanghai director of risk prevention.