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How Wal-Mart Fabricated And Lied About Its "Strong" Chinese Sales For Years
For many, if not most, companies and especially retailers, the great wildcard that is the "massive" Chinese market with the potential of hundreds of millions of buyers in the country's nascent middle class, has been a slam dunk when it comes to boosting stock prices. After all, what can go wrong? America's largest retailer was one of those hoping to capitalize on just this shareholder euphoria for Chinese exposure, and just like everyone else, it milked its Chinese exposure for many years. And then, unexpected everything did go wrong: as Bloomberg explains, "After years of heralding China as one of its best markets, Wal-Mart in August said its performance there was among the worst in its major countries."
How is that possible?
Well, as Bloomberg further explains, China's reputation of fabricating every single number is there for a reason. And what's worse, it isn't just China, but it also includes US corporations operating in China. Such as Walmart, which succeeded in pulling the wool over its shareholders' eyes for years thanks to "questionable accounting and unauthorized sales practices, according to employees and internal documents reviewed by Bloomberg."
Among these: bulk sales to other retailers and some sales allegedly booked when no merchandise left the shelves. These illegal practices, and much more "made business appear strong even as retail transactions slowed and unsold inventory piled up, these people and documents say."
And nobody cared, because WMT (and every other) stock went up, clearly not on fundamentals but on the back of the biggest equity bubble blown by central banks in history. And it wasn't until the relentless price appreciation finally slowed down that someone started asking questions, however with accountants and regulators both in China and the US corrupt and complicit to the underlying fraud, it goes without saying that nobody did or ever will go to prison.
So what are some of these fraudulent practices that WMT engaged in? We ask simply because we know that this massive canary in the coalmine will give us insights into what all other retailers in China are doing, up to an including famous recent Chinese IPOs. Here are the details:
- Stores in China continue to make bulk sales, sometimes unprofitably and without required management authorizations, according to employees who’ve left the company this past month. Concerns about bulk sales, raised as far back as 2011 in an internal report, have been the subject of inquiries in China by Wal-Mart’s legal team as recently as May, according to an internal company e-mail and an employee interviewed by lawyers.
- The report and interviews with current and former employees say Chinese Wal-Mart stores, under pressure to meet earnings targets, resorted to temporary markups of inventory as an accounting move that can burnish profits without any added sales of merchandise.
- The bulk sales provided at least 1.6 billion yuan ($243 million) in sales, and the markups accounted for 4 percent of gross profits in 2010 alone at 98 hypermarket stores examined by Stanford Lin, who conducted the internal review. These stores accounted for about half of total hypermarket sales in China that year.
- By 2010... Wal-Mart’s Chinese operations were expanding, the stores weren’t running as profitably as those operated in the U.S. by the Bentonville, Arkansas-based retailer.
- Managers often told employees to raise prices in the last week of the
month, and to move them down at the start of the next month.- The employees couldn’t understand why. Higher prices, even if temporary, didn’t jibe with the everyday-low-pricing strategy that founder Sam Walton and his successors used to turn his Arkansas five-and-dime into the world’s biggest retail chain, with more than $480 billion in annual sales.
- The markups were 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, labeled “Highly Confidential.”
- Altering reported income by marking up inventory “only to turn around and mark it down again” after the end of the quarter “would be fraud,” said Lynn Turner, a former chief accountant for the SEC and now a managing director at LitiNomics Inc., an advisory firm in Los Angeles. Turner was speaking generally, and not about Wal-Mart.
- “The business was continually getting worse despite their pronouncements to the contrary,” Lin said earlier this year.
- The time spent on markups quickly caught his attention. When buyers asked stores to change prices, they had 24 hours to comply -- often scrambling to swap out labels on 1,000 or more products, according to one former operations executive for Wal-Mart China.
- In his report, Lin highlighted “Department 14,” or housewares. He said the division marked up 183 products in the last week of December 2010, increasing gross profits by 2.5 million yuan. In the first week of January 2011, the products were marked back down.
- It was an accounting entry, not added sales, that was behind these higher profits, according to Lin.
- In simplified retail accounting, gross profits are sales minus the cost of goods sold. The cost figure can be calculated by subtracting ending inventory from beginning inventory. Lin’s report said the price markups were applied to ending inventory, giving the appearance of lower costs.
- say a store had $20,000 of wine at the start of a month, and was left with $10,000 worth at month’s end. Its cost of goods sold would be $10,000. If sales were $15,000, gross profits would be $5,000. But if ending inventory is marked up 20 percent, the cost of goods sold drops and wine profit rises to $7,000.
- “The store was under a lot of pressure from the HQ to meet certain sales and margin targets every month,” said Tom Huang, an administration manager at the Wal-Mart in the city of Changde, which closed in March. At around 8 p.m., when sales were slow, store-level managers responsible for various product categories would call wholesalers and “ask them to come down and buy” items in bulk, said Huang, a union representative who has been involved in legal efforts to get more severance for the laid-off Changde workers.
- The company was losing money on bulk sales of groceries and barely selling above cost on a range of other products, Lin’s report said. Bulk transactions of 10,000 yuan and above were supposed to be approved by store managers, but to avoid the sign-offs, employees would simply break them up into smaller lots ’’against company policy’’ -- in one case splitting up a sale of 9,600 bottles of soybean oil into 32 separate transactions, Lin said.
- In some cases, a store would register a sale to a supplier of the same goods the vendor had previously sold to Wal-Mart -- but the goods didn’t go anywhere, according to Lin. Recording the transaction would automatically trigger Wal-Mart’s ordering system to place a new order for the same goods, he said. “It’s all engineered on paper,” Lin said. “The items never actually leave the shelves.”
- A sale like that is “a plan designed to mislead. It’s inflating sales,” said Douglas Carmichael, former chief auditor of the Public Company Accounting Oversight Board and a professor at Baruch College in Manhattan. ’’It certainly would create a distortion of the income statement.’’
- During U.S. earnings calls throughout Chan’s tenure, Wal-Mart’s Bentonville executives highlighted Chinese sales performance. In August and November of 2008, the company said same-store sales in China were strong and driven by increases of up to 18 percent in the size of the average transaction -- a sign that growth mostly stemmed from big sales. No mention was made of sales of Wal-Mart merchandise to other retailers. In fact, individual customer traffic was beginning to fall, and transactions in the hypermarkets Lin examined fell 3 percent from 2008 to 2010.
And, of course, the oldest trick in the book: the most epic channel stuffing imaginary money can buy:
A back room at one South China store shown to Bloomberg News in September held boxes of goods piled to the ceilings, covering light switches and leaving only a foot-wide aisle for employees to move around in. A Wal-Mart store in Shenzhen provided an address for a warehouse one employee said was opened to handle added inventory five years ago. At the address, a security guard said Wal-Mart had two warehouses there.
When the findings of his Feb. 14, 2011, report were presented to his boss, Shawn Gray, then vice president of operations in China, Gray said the “best option was to keep things quiet,” according to Lin. After a discussion of the issues with Roland Lawrence, then chief financial officer of Wal-Mart China, Lin said he saw no action.
Phone calls and e-mails seeking comment from Gray and Lawrence weren’t returned.
End result, when Walmart first conducted an internal audit in 2011 it said the following: “None of the financial issues we’ve reviewed in China were determined to be material to Wal-Mart’s consolidated financial condition or results of operations,” the statement said. Wal-Mart didn’t address specific questions on accounting issues, and leadership changes. It said bulk sales to retailers are common practice in developing markets, monitored regularly, and a modest part of its Chinese business."
And more recently, following the Lin report:
Wal-Mart named Lin as a vice president of financial services in April 2012. He left in May 2013 for his job with Visa. Lin said he traveled to Bentonville at one point after the report and bumped into Price and McMillon, who, through a Wal-Mart spokeswoman, declined to comment on Lin’s account. “Doug took me aside, shook my hand and said, ’thank you very much for what you did over there,’” Lin said of the encounter. “That was it. No further follow-ups. Nothing more was discussed. It was like it all never happened.”
In short, WMT lied and kept lying for years. Why?
“There is a general flexibility on ethics” in China, Lin said in an interview. “There was a huge desire to perform. In this market, they believe if they’re hitting the numbers, then they’re doing the right thing.”
How quaint: breaking the law and lying to shareholders in hope of "doing the right thing."
The U.S. Department of Justice and the Securities and Exchange Commission have been investigating Wal-Mart for possible violations of the Foreign Corrupt Practices Act, the company has disclosed. Internal investigations of possible misconduct are open in four countries, including China, the company has said.
Nothing will happen: all it will take is a few multi-million wire transfers in donations, pardon, lobby spending to make sure the DOJ finds absolutely nothing.
The good news is that WMT is the only one who engaged in all these criminal practices. One company which certainly has not resorted to fraud, at least according to its exuberant underwriters (all of whom certainly performed underwriter due diligence, right) and its share price, is Alibaba. So as boring old WMT engaged in boundless fraud in China, we urge investors to buy Chinese "new normal" retailers built on hype surrounding the second dot com bubble, and operating in the most "ethically-challenged" country in the world.
Because, as above, what can possibly go wrong?
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All Liars Lie!
Its easier at this point to ask, "Who isnt Lying?".
RIPS
Is that FallMart? or FauxMart?
Wake me up when the thousands of mortgage bankers are tossed in the clink for the tens of thousands of forged documents submitted to US courts in the foreclosure fraud.
Walmart making shit up in China?
Well, when in China, act as the Chinese do.
Walmart is just trying to fit in over there.
pods
A general flexibility in ethics; plus a general education that consists entirely of 6th. grade levdl propaganda; they're literally not even civilized.
Wall*mart is forget that great wall of china is building on crush bones of slave class.
boris, please, don't stay away so long. you've been missed.
I predict a $1 million slap on the wrist...carry on
"I predict a $1 million slap on the wrist"
I predict the SEC won't get past Asian MLF
Is HR Clinton, former Walmart board member the MILF of which you predict?
Please don't use the words Hillary and MILF in the same sentence. I just threw up in my mouth.
you got by easy. I just filled my waste basket. :(
now it stinks in my office.
What? You mean that when you buy from people who are paid $2 per hour and sell to people who are paid $2 per hour, you don't make as much money as when you buy from people who are paid $2 per hour and sell to people who are paid $20 per hour?
But China has more people. Surely you can make it up in volume!
Or perhaps Chinese people don't want to buy cheap shit that breaks and seek out quality to exchange for their hard-earned.
I don't know. I've never visited the place ...
Boris, again, +10. Or maybe +100.
I love orientals. They're so damned scared of their social status and the stigma of failure (ANY failure), lying about everything is the only natural outlet they have.
A whole fucking continent of people who can NEVER admit anything is wrong. It's fucking fantastic. They're doomed. Ask that Korean pilot who shaved the landing gear off his 787 as they under-shot the runway into San Fran. The "junior officer" in the cockpit unwilling to point out the obvious mistake of his more senior captain.
A WHOLE NATION OF PEOPLE WORKING AT THAT SAME LEVEL OF DENIAL.
"Jail is for the little peeples."
It aint' just a river in Eqypt anymore. I think you hit the nail right in the nuts, that time. or something like that.
U doctor yet? Call me when u doctor.
I actually did LOL at that one. Well played.
A WHOLE NATION OF PEOPLE WORKING AT THAT SAME LEVEL OF DENIAL.
USA!USA!USA!USA!
That is China in a nutshell....They should just wear the slogan with pride....
China : “There is a general flexibility on ethics”
"In this market, they believe if they’re hitting the numbers, then they’re doing the right thing.”
??
LOLZMART
What we need here is a massive ass whoopin.
Off Topic, BUT worth the WTF
http://wkrn.com/2014/12/10/millersville-police-looking-for-car-dead-baby...
And here it comes!
Wi cel tu lo
why would the chinese people buy goods made in china at walmart when they actually live there and make the crap?
Most people can't think that good. Really. Tha t's my story and I'm sticking to it.
back in the 1960's no one wanted to buy Japanese stuff. So Japanese companies started putting 'made in usa' on many products.
Now, Americans being very savy and observant, saw 'made in u.s.a' and bought the crap. See, there was a city... usa, Japan.
The Chinese have much to learn from Japan, like how to print money really fast.
confucious say "wal mart lie"
Sam Walton would be so proud.
At least Wal Mart is once again having a Holiday food drive.....for their own employees. Season's Greetings ya"ll
Walmart buys things made by slaves to sell to other slaves; what's more equitable than that?
But...but...don't the Chinese need to have an intermediary on the other side of the world in order to sell Chinese crap to Chinese people?
This might be bad news for Goldman's ice futures business in the emerging Eskimo market.
^^^^^^^^^^^^^^^^^^^
This one!!!!!!!!
++++++++++++++++++++++
don't worry about the walton clan, they got plenty
Change the last name to Waltonbergstein and become a bank holding company.
Voila! Investigation over.
pods
them damn waltons breed like mormons. just hire a few dozen joo lawyers and they're golden.
Any Walmart execs going to jail?
I thought so.
for really big crimes you just hire a joo lawyer then plead ignorance of the facts and that (along with some judicious campaign contributions) gets you off the hook.
We (Walmart US) knew nothing. It was them (Walmart China). Good luck putting them in jail.
The concept seems simple enough. Hire people over there to break laws over here. No extradition, no problem.
I paraphrase what I once read. Perhaps it is relevant?...
Top executives are TooBigToFail, don't you know.
And TooBigToServe on juries in our justice system. They are not our peers.
They have privileges to ensure immunity from fairness and bothersome rules, as long as they obey their plutocrat masters.
And plutocrats are driven to preserve their status, primarily by using communication lines established with other plutocrats over generations. They already are the movers and shakers and will never voluntarily give up that status. More wealth is only incidental.
That is what distinguishes "old money" [rockefellers] from the "new money" [billgates], the latter being merely superrich with no powerful and lasting comm lines that have stood the test of time.
Obligatory link: http://www.peopleofwalmart.com/
All the fat fucking scooter warriors are to blame, they're slowing down consumerism!
The entire Chinese "economy" is a lie. Wallmart doesn't have backing of the chinese politiburo apparently ....
It's absolutely true; it's not even funny; it's just true.
I'm with both of you on this. This has similar overtones to the "Japan is going to take over the world" meme of the 1980s (yes, I was around for that one).
I think China's mostly just full of horseshit, quite frankly. I think we're foolish to have excessive fear of them or stand in awe of their amazing ability to "get things done" in their centrally-planned economy.
Absolutely. Read the book, "Why China will never rule the World"; it's a real eye-opener.
I think I may have just written my version of it. See above in this thread.
Illustrate it with still pictures of them launching that yacht! That was fucking hillarious.
Or maybe the toxic shit they pump into the rivers?
China has used slave wages and no environmental protection to become the biggest manufacturer and somehow they are going to rule the world?
Jesus, can China actually even design anything?
Chinese joke:
What do you call a Chinese hacker school?
Design school.
pods
When 6,000 dead hogs found floating in the city's water supply doesn't impact water quality, you know they are all drinking beer or immune to every disease on Earth. This is progress!
You got it alright; but you'll love the book; it's a travel documentary by a Canadian Teacher resident in Taiwan, who speaks perfect Mandarin and travels all over the "Real China"; it's un-real, and scary, and hilarious.
I'll download it on my Korean-made Samsung tablet and give it a read.
shocking news I say, shocking......NEXT
Behind every great fortune is a great crime
http://www.motherjones.com/mojo/2012/07/walmart-heirs-waltons-wealth-inc...
Boy, it looks like Llyod jumped the shark on this one...
LOL!!
‘illegal practices
Pfft. Two fines and $5,000,000 in campaign contributions instead of Hail Mary’s.
LOL, Bernanke as Hu Flung dung. Formally BS mouth.
"bulk sales to other retailers and some sales allegedly booked when no merchandise left the shelves. These illegal practices, and much more "made business appear strong even as retail transactions slowed and unsold inventory piled up, these people and documents say."
Yea, that's not cool unless you're an auto manufacturer. Freeking Walmart, fucking it up for the car guys.
I have to ask, given the apparently non-existent accounting discipline, how many times the 'inventory' was simultaneously (re)sold to others?
channel stuffing vs ponzi... in one game the sky's the limit.
“We didn’t jail some Folks.”
Sam Walton's kids did whatever it took. Lie, cheat and steal.
Once at the top it doesn't always stay that way. It's a long fall down.
Look at how high and mighty Sears once was. Look at it now.
You are correct -
How To Blow $9 Billion: The Fallen Stroh Family This story appears in the July 21, 2014 issue of Forbes. “AS WITH MANY OF AMERICA’S GREAT FORTUNES, the Stroh family’s story starts with an immigrant: Bernhard Stroh, who arrived in Detroit from Germany in 1850 with $150 and a coveted family recipe for beer. He sold his brews door-to-door in a wheelbarrow… And in the 1980s Stroh’s surged…. The Stroh family owned it all, a fortune that FORBES then calculated was worth at least $700 million. Just by matching the S&P 500, the family would currently be worth about $9 billion.Yet today the Strohs, as a family business or even a collective financial entity, have essentially ceased to exist. The company has been sold for parts. The Stroh Companies has doled out its last dividends to shareholders. The last remaining family entity owns a half-empty office building in Detroit.”
Sad.
As the old saying goes, "Shirtsleeves to shirtsleeves in 3 generations."
Ahhh! the Strohs was "Fire-Brewed"!!
You are correct -
The Formatting Gods are full of spite!
In China itself that would be considered perfectly normal behavior; if you don't lie to everyone, especially your customers, you are regarded as retarded.
I have been biding my time.
Wait until you see what happens with Alibaba.
alibaba is regarded as retarded
I got it. I know what's going to happen with Alibaba; and I know you know too.
Remember, it's Alibaba and the Forty Thieves. So who are the 40 accomplices?
regarded as retarded
can i use that?
I lived and worked in China for 6 years. did a couple of acquisitions while there. If I had the time and patience to write down what I found most of you would not believe it. Place is a cesspool and many multinationals Chinese operations are accounting disasters (looking at you GE). I met Jack Ma once in Hangzhou. Alibaba is a scam, outright fraud. Fitting operation for Goldman and MS. They are the only companies corrupt enough to get China because they have zero ethics.
. . . also KFC fabricated their chicken , cluck cluck
They should have just been selling gold. Chinese actually save their money in that product.
As far as the unauthorized bulk sales at a loss, now I know where all those street vendors selling everything cheap get their products.
https://www.youtube.com/watch?v=Vth6k9otgR0&list=UUp_i632yhFIF3vp0Lt7dl1A
S&P500 up 1.35% so far today.
Who cares if Walmart is double or triple dipping revenues?
Trade / scalp the stock as much as possible.
Fundamentals are meaningless - fodder for financial MSM to spew crap.
"Raising prices" as an accounting trick? That means they have bogus accounting. The "trick" would appear to be raising *current* prices to inflate *past* sales! NO system should work that way. In fact I don't believe it. If they diddled prices they diddled sales reports, not current prices. Betcha.
They raised the prices SO THAT they could mark up the 'value' of period ending inventory. And thus, for the simple calcs, it will look like your COGS was lower than it actually was.
bizarre. who calculates inventory at retail price???
http://finance.yahoo.com/tumblr/blog-wall-streets-newest-bubble-loans-against-200536562.html
securities-based lending... why does that sound so much, like borrowing 110% of the Equity in your house.. and how did that Work out For America.. that will Not end Well.. ( again ) but hey if it makes Money for the Banks, who cares right...
This here:
Nothing will happen: all it will take is a few multi-million wire transfers in donations, pardon, lobby spending to make sure the DOJ finds absolutely nothing.
I don't know, Walmart is REALLY HATED and would make a great punching bag, Feds go after them and make it look like they are actually doing something.
Choke Wallyworld to death and who suffers? Poor an dmiddle class shoppers, not bankers.
Sum ting wong wi yu Walmart!
Since workers didn't have to work to restock the shelves they were asked to change the prices. Keep em busy.
'made in china' doesn't sell in china. lol
And yet, WMT is still in new high territory.
The exact same stuff is happening right now in American retail stores on a daily basis. I saw plenty of it when I worked in grocery management. The channel stuffing is especially bad, and the general culture of "make the numbers no matter what" has led to all sorts of chicanery and frauds both major and minor. There is a very large cohort of incompetent, timid, and unprofessional individuals in the managerial corps of America's super retailers (they're the only ones who stick around long enough to get promoted) who do not understand that at the end of the day, the numbers really don't matter; it's reality that matters, but reality is the very thing that the retail culture systematically refuses to deal with.
Did a lot of business with the retailers, Never found an industry that was populated with cowboys as much as the retail industry. Guys in senior positions that should have been forklift drivers. Seriously, it's a culture I never found in many other industries I dealt with.
ZERO WALMART'S IN #ERITREA
Bulk sales at a loss???
How do we do it?
VOLUME!!
is this the same walmart whose stocks are trading near all time high?
Fuck Walmart.
The Chinese have EBT cards and morbidly obese fatasses on scooters? Whoda thunk it?
What is happening in China is : WalmartChina and other value retailers are losing battles against Alibaba and other net-tailers.
Recently went to a meeting with an Asian broker involved in the BABA deal, trying to flog the China e-commerce story.
Reminded me of 1999-2000. Asking questions about valuations was like letting off a really odorous fart - just not done.
"You shouldn't really focus on valuations too much when we're talking about a structural shift here. There is so much growth only PEG ratios count."
Also "as investors we should be glad that the finance and logistics operations are in partly-owned subsidiaries - that way if there's a problem they only own show up in the associates, not the top line or operating numbers."
There is also the whole saga of "sales brushing' that the FT discussed before the IPO which will come to the fore at some point. The broker conceded that once it gets greater airtime, the stock could tank.
http://www.ft.com/intl/cms/s/0/d72ec42a-2f87-11e4-83e4-00144feabdc0.html...
5-15% of the Gross Merchandise Value (GMV) is bullshit, ie deliveries of empty boxes designed to ramp up volumes and give merchants better placement – and therefore a better chance to garner more real sales – on Taobao.
It does show that some of BABA's traffic is fictitious but it also implies that massive e-commerce volumes can get out of whack with the underlying economic reality.
The analyst told me that it doesn't have any mechanical effect on BABA's bottom line, but I didn't understand why.
Then there is the Yu'e Bao money market fund whose unit price fell 7% in Q3 as liquidity conditions tightened. Apparently its higher rates of interest derive from BABA's ability to demand wholesale, uncapped rates and pass them onto punters for whom retail deposit rates are otherwise capped.
Settlement had to be changed from T+0 to T+1 because banks were getting scared about liquidity. But even T+1 seems too low given that the banks have invested those deposits into God-knows-what.
http://economictimes.indiatimes.com/news/international/business/alibaba-...
Finally, there is the issue of logistics where the e-commerce cos are piling in. Apparently rental income growth is dropping off as there overcapacity in many cities (but..but I thought the n° of high end warehouses in China was the same as that of Boston?), as PE, foreign logistics players and others have piled in.
In BABA's case logistics and finance are contained in a partly-owned subsidiaries, so yeah don't worry, it's all OK.
Short BABA anyone?
WMT up 1.5% today. Probably should do some more of it.
fotos of wall mart china
http://www.omgfacts.com/lists/16830/Enter-Wal-Mart-In-China-And-Be-Prepa...
I don't see anything wrong. When you have to hire employees, you have greatly increase the margin between retail and wholesale.
When you can then sell these items in bulk to a store that is family run and only "employs" family, you can sell these items at the midpoint of your wholesale to retail and they can still turn a profit until such time as you can force them out of business.
It is very difficult to predict what will happen in China over time, but one thing should be obvious by now: whatever happens, some Chinese will make money but for foreigners, China is a sucker bet.
"...and operating in the most "ethically-challenged" country in the world."
To leftists and communists there is no such thing as ethics - only 'for the greater good' (Theirs)
Like McDonalds, the success of Walmart is due to their 'system'. Squeeze prices lower for the privilege of selling your products in their stores, create a superb inventory and distribution system, and reduce costs in your stores for displays and employees. It works in the US. It has not worked as well with on-line sales (out of system) nor has it worked in China (out of system).
Did I miss somethng? I don't undersstand isnt this the same as Quartly window dressing.
Did I miss somethng? I don't undersstand isnt this the same as Quartly window dressing.