Wal-Mart's (NYSE: WMT) been struggling to reinvigorate its U.S. sales lately, but the Bentonville behemoth recently called its international business a growth engine. However, Wal-Mart's problems in the southwestern China city of Chongqing underline why international growth can be tricky for American businesses.
According to The Wall Street Journal, Chongqing officials have accused Wal-Mart of pulling a fast one on shoppers, fraudulently labeling cheap pork as higher-priced organic pork. The officials went so far as to order Wal-Mart to close 12 stores for 15 days. Wal-Mart issued apologies, and has temporarily closed seven stores in Chongqing.
Apparently Wal-Mart and Chongqing get along about as well as oil and water. Wal-Mart's been accused of 21 violations there, running the gamut from false advertising to food safety, and Wal-Mart might have to pay up 3.65 million yuan (or about $575,000) for two years' worth of mislabeled pork.
Whew. Wal-Mart's had its fair share of public relations issues here in the U.S., but these allegations enter a whole new realm. Wal-Mart's known for being a highly aggressive business and competitor, but sneaky, fraudulent activities don't sound quite like its style.
Along those lines, The Wall Street Journal pointed out that some of these actions likely have political underpinnings; roughing up some foreign businesses in the name of consumer protection and safety certainly could prove popular with people in the People's Republic. Meanwhile, a regional Communist party secretary who's based in Chongqing is on track to be promoted to China's highly influential Politburo Standing Committee.
Whether something smells rotten in Denmark or Chongqing, the conclusion's the same: International expansion can be very risky. Political, cultural, and regulatory differences abound, creating a different playing field than we're accustomed to in the U.S. Wal-Mart's situation reflects the risks all American companies can face in overseas and emerging markets.
Wal-Mart's not the only company that's sought added growth in China. Starbucks (Nasdaq: SBUX), Yum! Brands (NYSE: YUM), and many more see the populous country as a major growth area. Yum! Brands, in particular, has seen strong performance there in recent years. However, companies like Yahoo! (Nasdaq: YHOO) and Google (Nasdaq: GOOG), both of which are all about information and communication and, to a degree, freedom of information and communication, have had experiences that remind us of the darker side of Chinese expansion. (Click on the links for refreshers on Google's and Yahoo!'s tricky times doing business in China.)
Investors must remember that while American companies' desire to expand internationally is theoretically a no-brainer for drumming up additional growth, it's easier said than done. The promise of international expansion should never be an investor's sole growth thesis when investing in a stock.
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