Risk & Compliance

Wal-Mart Found China Operation ‘Out of Control’

An internal review of Wal-Mart stores in China found questionable sales and accounting practices designed to make profits look stronger.
Matthew HellerDecember 11, 2014

A Wal-Mart internal review found that questionable accounting and unauthorized sales practices masked problems at its stores in China, making business appear strong even as retail transactions slowed and unsold inventory piled up, Bloomberg reports.

The retail giant caught many by surprise in August when it announced, after years of touting China as one of its best markets, that its performance there was among the worst in its major markets. Since then, it has shaken up management and cut jobs to help lower costs.

But according to Bloomberg, a confidential review in 2011 by a member of the company’s strategy and innovation teams and interviews of current and former employees “raise questions about how the company has booked results in the world’s second-biggest economy.”

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What the review found was “a Chinese operation veering out of control,” Bloomberg said, with bulk sales to other retailers and some sales allegedly booked when no merchandise left the shelves.

Workers at Wal-Mart’s hypermarkets told Stanford Lin, a former McKinsey & Co. consultant, that they spent hours marking up thousands of goods as part of a pattern of “unusual,” unauthorized, and “unsustainable” accounting moves and deals with suppliers and rivals that made sales and profits look stronger than the underlying retail trends in the stores, according to Lin’s 32-page review.

The bulk sales provided at least $243 million in sales, and the markups accounted for 4% of gross profits in 2010 alone at 98 hypermarket stores examined by Lin, Bloomberg said.

Eight days after Lin’s written review, Wal-Mart said in a conference call that China was among markets with the highest sales increases in its fiscal year ended Jan. 31, 2011. But net sales fell in the latest fiscal quarter ended Oct. 31 and the company has said it will close about 30 of roughly 400 Chinese stores.

In a statement, Wal-Mart said it discovered discrepancies in pricing and inventory at its China operations in 2011 but none of the financial issues it had reviewed in China “were determined to be material to Wal-Mart’s consolidated financial condition or results of operations.”

Bulk sales are common practice in developing markets and represent a “modest portion” of its business in China, the company said.

Source: Bloomberg

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