Wal-Mart's Plan To Win The Chinese Market

Richard Robinson's picture

Monday, December 26, 2016 - 11:30am

by Richard Robinson

While looking for a place to sit near the Great Wall of China, my Chinese interpreter snatched a plate of food from my hands. She immediately tossed it into the trash. Stunned that the only food available in the last 14 hours was now sitting in a trashcan, I was crestfallen. And hungry. Very hungry.

It was a surreal moment. Trying to maintain my composure, I asked the local college student why she did that... Did I inadvertently violate some Chinese custom?

No, she said, the food I was about to eat wasn't safe.

But I told her I bought it at a local chain restaurant with its headquarters in the United States. Surely, the food was safe. Boy, was I was about to be educated...

She told me that nobody in China trusts the food -- especially the plate of pork I had bought just moments earlier. After going to a local hotel where the food was trusted, she told me about food safety in China. In essence, she said there isn't any.

As evidence, she told how Chinese dairy farmers intentionally added melamine to baby formula, making more than 300,000 infants sick. Melamine, an irritant and carcinogen, is a chemical used in making plastics, insulation, and laminate flooring.

Now, why would anyone add melamine to baby formula? The reason is simple: melamine increases the measurable protein content of foods. And with higher protein content comes higher prices and greater profits.

Too bad for the kids, though. The ingested chemical led to kidney stones and renal failure -- and caused six officially-reported deaths. Unofficially, the estimates are much higher.

But that's just one example. In June of last year, the Chinese government seized frozen meat in a nationwide raid. The meat's value was just under $500 million.

What was wrong with the meat? Some of the meat in the raid was estimated to be more than 40 years old! It had been thawed and re-frozen multiple times over four-decades and then added to fresh meat to hide its smell and appearance.

Had the product not been seized, untold millions of people would have died or gotten very sick from eating meats processed in 1975. Needless to say, the remainder of my trip to China was conducted largely on an empty stomach. But relief is coming...

The world's largest food retailer has a solution for increasing food safety in China. And Wal-Mart's (NYSE: WMT) solution may surprise you.

You see, the company is deploying the same blockchain technology behind the cryptocurrency Bitcoin. Blockchain technology creates a digital ledger that keeps track of information with an unchangeable "block" of information, creating ultra-secure but easily accessible data storage.

In the case of Wal-Mart, the company's ledger will contain farm origination details, factory and processing data, expiration dates, storage temperatures, and shipping details. The data is linked through a code on the product package and is nearly impervious to hacking.

By using the technology, Wal-Mart will dramatically increase food safety in China. They plan to use the technology to track food every step of the way from farm to grocery store shelf.

For now, the company is starting relatively small. Their first initiative is to use blockchain software to track Chinese pork products through the supply chain.

After all, pork is the most-consumed meat in China. China consumes more than half the world's supply of pork -- more than 55 million metric tons in 2015. But as my interpreter pointed out to me, most Chinese people are afraid to eat domestically produced pork because they don't trust it. That's why the country has seen pork imports increase 150% annually since 2007.

But that will change as Wal-Mart begins tracking details about every ounce of Wal-Mart pork through the food chain in China. Best of all, the blockchain is virtually impossible for anyone to change or manipulate -- giving Wal-Mart absolute control over its merchandise.

What Does This Mean For Wal-Mart?
Wal-Mart is already the world's largest food retailer. But the level of transparency and accountability the company will guarantee by employing blockchain technology will make Wal-Mart the premier food retailer in the world's biggest market -- China.

Wal-Mart will generate billions in new revenues once it fully implements the technology. It will advertise having the "cleanest" meat in China. Now maybe that's not a pithy marketing statement, but in a land where food poisoning is the norm it's a serious competitive advantage.

Patient WMT investors with a time horizon in excess of five years should put Wal-Mart on their investment radar. Dollar-cost averaging into a WMT position is the best way to put your retirement money to work in this retailer. And since another dip to the October low is expected, buying the stock on dips brings much lower risk.

Buying the dips will lower your cost basis, making a trip to China affordable in a couple of years, and best of all, you can do so on a full belly. That makes it a win for all involved.

Risks To Consider: Wal-Mart's International segment continues to face headwinds -- especially in light of the stronger dollar. Wal-Mart has been slow to hedge their currency risks, which explains their lower international sales last quarter.

Action To Take: Buying WMT shares is a long-term investment. Use the time-honored investment strategy of dollar-cost averaging into the stock. Time your purchases to buy on the dips, but at no more than $73 per share. Use a $55 hard stop to protect yourself, and put no more than 2-3% of your capital into the stock.

Editor's Note: In the last few years they've seen gains of 296%... 545%... even as much as 696%! But a single new technology is poised to make 2017 their biggest year yet... Full story...

does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.