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Case Study: Wal-Mart’s Failure in Germany

Wal-Mart Stores, Inc. is the largest retailer in the world, the world’s second-largest company and the nation’s largest non-governmental employer. Wal-Mart Stores, Inc. operates retail stores in various retailing formats in all 50 states in the United States. The Company’s mass merchandising operations serve its customers primarily through the operation of three segments. The Wal-Mart Stores segment includes its discount stores, Supercenters, and Neighborhood Markets in the United States. The Sam’s club segment includes the warehouse membership clubs in the United States. The Company’s subsidiary, McLane Company, Inc. provides products and distribution services to retail industry and institutional foodservice customers. Wal-Mart serves customers and members more than 200 million times per week at more than 8,416 retail units under 53 different banners in 15 countries. With fiscal year 2010 sales of $405 billion, Wal-Mart employs more than 2.1 million associates worldwide. Nearly 75% of its stores are in the United States, but Wal-Mart is expanding internationally. The Group is engaged in the operations of retail stores located in all 50 states of the United States, Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, Central America, Chile, Mexico,India and China.

Wal-Mart’s Entry and Operation in Germany

Wal-Mart’s initial entry into German market was through the acquisitions of renowned 21 store Wertkauf chain for an estimated $1.04 billion in December 1997.It was followed one year later by the acquisition of In-terspar’s 74 hypermarkets from Spar Handels AG, the German unit of the French Intermarche Group , for ‚¬560 million. Thus Wal-Mart immediately became the country’s fourth biggest operator of hypermarkets. However, with a turnover of around ‚¬2.9 billion, and a stagnating market share of just 1.1 per cent, the US giant still was a negligible one in the German retail market. Even worse, with estimated accumulated losses of more than ‚¬ 1 billion, it is literally drowning in red ink although, according to Wal-Mart Germany’s CEO, Kay Hafner, its non food assortment, which accounts for around 50 per cent of its revenues, is profitable. Instead of expanding its network of stores by 50 units by early 2001, as originally planned, the company has been forced to close two big outlets, while at the same time it was only able to fully remodel three locations into its flagship Super center format. Due to its problems the company also had to lay off around 1.000 staff. On July 2006, Wal-Mart announced its official defeat in Germany and would sell its 85 German stores to the rival supermarket chain Metro and would book a pre-tax loss of about $1 billion ( £536 million) on the failed venture.

A Critical Analysis of Reasons for Wal-Mart’s Failure in Germany

There were several factors that contributed to Wal-Mart’s Failure in Germany. Amazing management blunders have plagued Wal-Mart’s German operation from the very start. Wal-Mart’s major mistakes on the German market may be summarized as follows.

• Cultural Insensitivity was the major reason of failure.
• Entry to German market by acquisition strategy.
• Failure to deliver on its legendary “every-day low prices” and “excellent service” value proposition.
• Bad Publicity about the company due to breaking of some prevailing German law and regulations.

In January 1997, Wal-Mart had first entry in Europe market with the acquisition of Wertkauf hypermarkets in Germany. Later in that year, Wal-Mart also acquired Interspar, another German hypermarket chain. While its first move — the 1997 takeover of the 21 Wertkaufstores was indeed a shrewd one, given that company’s excellent earnings, its competitive locations, and its very capable management. Wal-Mart’s 1998 follow-updeal with Spar for 74 hypermarkets was widely judged an ill-informed, ill-advised act, for several reasons. Spar is considered to be the weakest player on the German market due to its mostly run-down stores, very heterogeneous in size and format, with the majority of them located in less well-off inner-city residential areas.

Wal-Mart’s cultural insensitivity led to its failure in Germany.

Wal-Mart’s Failure in Germany – A Case of Cultural Insensitivity

Most of the Global mergers and acquisitions failed to produce any benefit for the shareholders or reduced value, which was mainly due to the lack of intercultural competence. Lack of sensitivity and understanding of language barriers, local traditions, consumer behavior, merchandising, and employment practices irreversibly damaged Wal-Mart’s image in Germany. One of the main reasons that failed Wal-Mart in Germany is when it attempted to transport the company’s unique culture and retailing concept to the new country. The top management refused to even acknowledge the differences in customer behavior and culture in Germany when compared to its US customers, and the top management failed to listen to the feedback from its employees. Not every new cross- border retailer can be a retail giant outer its home. The mistake of exporting its culture wholesale, rather than adapting to local market, leads Wal-Mart failed in Germany market.

Wal-Mart’s ambitions to position itself profitably in European markets through Germany have been hit badly by their inability to fully understand and to adapt to the specific conditions of doing business in other countries. This exposed their obvious lack of intercultural competence and management skills. The main challenge of post-merger integration is further complicated significantly if it is in a Cross-border Merger or acquisition, with all issues frequently being compounded by a lack of language and culture bridging skills. Failure to accomplish this task satisfactorily, results in mutual distrust, de-motivation and negatively impacts the merged companies’ competitiveness, profits and shareholder value. This is exactly what happened to Wal-Mart Germany.

Following are the main two factors that contributed to the Wal-Mart’s Failure in Germany;

1) Specific Difference in German Consumer behavior and Culture in comparison with US consumers:

The biggest mistake of Wal-Mart was to ignore the local culture, local buying habits and impose an American boss on its German operations. Wal-Mart stores are designed for customers who are willing to spend lot of time shopping. But in Germany, the shopping hours are shorter: Shops close by 5 PM on weekdays, and no shopping on Sundays. This meant that customers don’t have the habit of spending lots of time in a store – wandering around for the things they need. Coupled with this problem, German customers do not like to be assisted by Wal-Mart’s friendly store assistants. Germans prefer to do their own search for bargains. Instead of understanding and adjusting to the culture of its clients, Wal-Mart tried to impose their Culture on to the Customers, which never worked out.

Germans like to see the advertised discount products upfront without having to ask the store assistant. This implies that the discount products must be placed at the eye level. Instead Wal-Mart chose to use its US style merchandise display strategy – where premium priced products are kept at eye level and discount products are kept at higher shelf or in the bottom racks. This irritated the German shoppers. Wal-Mart also got its store inventory wrong, Wal-Mart stocked its store with clothes, hardware, electronics and other non-food products were given much bigger floor space than food products, as a result more than 50% of the revenue was from non-food products. But other German retailers stock more of food products. For example for Metro, food products constitute more than 75% of the revenue. Germans prefer to bag groceries themselves into reusable carriers, or at least to pay a small fee for the avoidable sin of needing a plastic bag.

German’s are introvert in nature and doesn’t like display of emotion in public, as they always care for their private personal space. Employees, like the reserved customers, didn’t care for Wal-Mart’s public displays of corporate moral such as the morning cheer. The German Customer’s even didn’t liked to be accompanied by the Cheerful employees either, as they would like to make choices by themselves. These are cultural misunderstandings as well, but one could say the cultural philosophy of Wal-Mart could not survive in the context of a German culture with a Happy Planet Index significantly higher than America’s.

2) Inefficient Top Management which ignored the relevance of local Culture:

It was clear that the cultural insensitivity of Wal-Mart started right at the top management. To begin with, it appointed four CEOs during its first four years of operation. The first head of German operations was Rob Tiarks, an expat from the USA – who did not understand Germany or its culture. He had previously supervised around 200 Supercenters in America. Not only did he not speak any German. Due to his unwillingness to learn the language, English was soon decreed as the official company language at the management level. He also ignores the complexities and the legal framework of the German retail market, ignoring any strategic advice presented to him by former Wertkauf executives. This has resulted in the resignation of top three management executives from Wertkauf. His successors were also unsuccessful in integrating German Outlets with the Wal-Mart’s Business model and culture.

Other Reasons of Failure

A number of factors that resulted Wal-Mart’s failure in Germany are such as different corporate culture, political influence, stiff competition and inefficient management and marketing strategies . Firstly, David Wild, Wal-Mart’s CEO in 2004, believed that cultural differences between American and German consumers were considerable challenges to Wal-Mart. Debby, CEO in 2006, concluded that German shoppers are accustomed to shop at small scale discount stores such as Aldi and Netto that provides a limited range of products with special offers each week and no customer service, unlike US customers. In addition to different corporate culture, the competition has become gradually more intense between Wal-Mart and domestic retailers. The price difference has so lessened that sometimes even Wal-Mart had a higher price than their competitors. Consequently, consumers had little incentive to visit Wal-Mart Germany because of no obvious price advantage.

Some other factors that lead to Wal-Mart’s failure in Germany were, their strategy of acquiring the top competitor did not work, as the German government did its best to ensure the welfare of the domestic players. Also, due to wage restrictions, Wal-Mart could not practice wage bargaining, as it did back in U.S, this was a huge, uncommon expenditure for the company. Its American strategy of restricting employee freedom and forcing them to work extra hours, brought up problems of high labour turnover and a negative image as an employer. Wal-Mart failed to have an effective management at the top level. It’s CEO’s changed every year, this in an obvious way effected the company’s performance. Wal-Mart constantly ignored the strictness of German laws, and was charged heavy penalties for doing so. One of the most challenging thing for Wal-Mart was capturing the market- share. As per German legislation it was illegal to sell products below cost,because of which Wal-Mart could never achieve the ‘Low price leader’ tag.

It is impossible to smoothly run any organization, until there is co-operation between the employees and the employer. Wal-Mart faced a severe labour unrest,which hampered its brand-image. Kay Hafner,CEO of Wal-Mart reduced the wages to cut cost, this negatively influenced individual behaviour , as an anti-union decision. As suggested by Arndt and Knorr, a firm needs to understand the specifications when indulging in global expansion.Out of all the CEO’s, only David Wild has been sensitive to cultural difference.He did bring about changes based on this understanding,which had some positive results,yet not profitable enough to impress investors for future investments.

Moreover,as per German legislation their were some specific retail related laws, such as, limited legal working hours (80 hours/week) which were way less than the other European countries and had strict rules governing closure on Sunday’s and holidays. Wal-Mart repeatedly infringement German laws but were able to do away with it mainly because of global presence and influence on the government of US which played a major role in global politics. Some of incidences where the company broke few laws and was able to get away are summed up below:

• ‘Unfair trade’ practices such as selling goods below the cost price was prohibited in Germany but Wal-Mart was found violating these laws as it randomly sold some product below cost.
• German law required a company to disclose it financial statements annually, Wal-Mart seldom did that and was spared without any fine or legal proceedings at number of occasions.
• Obligatory Deposit Regulation’s law stipulated the retailer to provide deposit-refund-system on few products like metal beverages, cans etc. But Wal-Mart never followed this law.

Thus from the above incidences it can be concluded that Wal-Mart used its global influence to refrain from some of the German laws.

However, because German culture is quite different from American culture and because of unfamiliarity with the legislation, it would be difficult for Wal-Mart to make marketing and promotion right. And in fact these difficulties had been proved in Wal-Mart Germany. Consequently, rather than choosing Germany as the gateway to Europe, virtually after two years of operating in Germany it had entered in U.K. Even though U.K is not in the Euro zone and its geographic location is less favorable than Germany, it has a similar culture and legal environment as U.S. which makes it easier to operate the company’s business and strategies. It has considerable success in the UK market which is called by as a ‘Wal-Mart-ready’ market. Therefore, the lessons learned from from Wal-Mart’s failure in Germany has proven useful for U.K.

Suggestions and Recommendations

Cross-border, Cross-cultural business is a challenge even for the biggest companies. Companies have to be sensitive to the local cultures and tailor their offerings to local market. To localize their offerings, Wal-Mart and other Companies that are going global companies must carry out cultural assessment of the Citizens of the Country before acquisitions. All their Corporate Business and Communication strategies should be based on this cultural assessment. This will help companies measure the effectiveness of its localization efforts and make adequate changes in local strategy & tactics as and when required. Considering the following steps would help Wal-Mart or any other Company while they are on lookout of Global alliance or business.

1. Political, Social, Economic and Cultural Analysis of the Country

Before expanding its business operations to a new country, the Company should understand the Political, Social, Economic and cultural aspects of the Country in depth. Wal-Mart’s case, Germany was selected primarily because of a central European location and economic attractiveness of the Wertkauf acquisition. But a serious research would have shown that Germany had strong national values resistant to change ; possibly the most deeply rooted retail traditions in Western Europe. This could have avoided either Wal-Mart’s selection of the Country or the strategies it has adopted in Germany.

2. Go global and think they are local

After conducting an in depth research about the prevailing trends in the customer’s Country, the Company should be ready to modify its own identity to suit itself to the cultural differences without compromising much on its Corporate Mission . This step will also force organizations to clearly define globalization goals. Wal-Mart put the company name on many German stores before being fully established. Immediately, the run down stores left an impression on consumers who formed a negative image of the Wal-Mart name.

3. Employment of Cross-Cultural Management approaches

Employment of Hofsted’s Culture Dimensions or HT&T Analysis will help Companies in understanding the minute cultural differences between the countries. For example , Communitarianism over Individualism

Germans degree of communitarianism is on the higher side mainly because Germans prefer participating on a team. Most Germans see business as a group of related persons working together. But, most of Americans see their company as a set of functions, tasks, people, machines and payments in which individuals compete.

This difference in Cultural dimensions between the 2 countries has resulted in inside management conflict among the employees, which also resulted in resignation of efficient German executives from Wal-Mart post integration.

Understanding the cultural dimensions of a Country through proven Cross-Culture models will always help a company to formulate a specific approach that will encourage team spirit and joy among the Global Team.

4. Continuous Updation of Strategies to successfully withstand the local competition

It is very important for a Global firm to continuously analyse the impact of their various strategies on the local market. Understand the shortfalls, and modify it in such a way as to cater the local market in a much better way than the competitors. It is always better to scrutinize the strategies adopted by them with a panel of local experts, as they will be having a better picture about the local consuming behavior and culture. Perceptions do matter a lot, So a surveys to find the customer’s perception about the company will also help them to change their strategies accordingly.

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Case 4.2 Wal-Mart’s retreat from Germany: How distance made the replication of a domestically successful model impossible[i]

US-based Wal-Mart, the world’s largest retail firm, announced in 2006 that it would sell its 85 stores in Germany to its German rival Metro, after nine years of struggle there. Why did WalMart’s successful US retail model fail in Germany? What lessons can Wal-Mart gain from its experience in Germany to help it succeed in other international markets?

The history of Wal-Mart

Sam Walton opened the first Wal-Mart Discount City in Arkansas, USA, in 1962. By 2012, Wal-Mart had nearly 8,970 stores and wholesale clubs across 27 countries. In 2011, its global revenue rose to more than US $419 billion, with nearly US $15.4 billion in net income. [ii] The key to its success is the Wal-Mart culture, particularly its ‘every day low price’ (EDLP) philosophy and its so-called ‘exceptional service’. EDLP is based on efficient distribution systems, very innovative technology, low prices negotiated with suppliers and efficient processes with suppliers. The so-called ‘exceptional service’ includes smiling at customers, assisting them and exceeding their expectations.

Wal-Mart started its international expansion in 1991 when it opened a Sam’s Club near Mexico City. Since then, Wal-Mart has expanded rapidly into countries such as Argentina, the UK, China, Brazil, Canada and Germany by transferring its domestic retailing model and corporate culture to each country while trying to adapt to local conditions.

Wal-Mart entered Germany by taking over 21 Wertkauf stores in 1997 and 74 Interspar hypermarkets in 1998. However, unique features of the German market meant that Wal-Mart could not just replicate its US model.

Unique characteristics of the German market for US retailers

The German retail market is characterized by fierce competition, strict regulations and a distinctive union and co-determination system. Specifically for Wal-Mart Germany, the locations of its warehouses and the distance between the headquarters of the two former chains brought additional problems.

Fierce competition based on price

In the early 1990s, German retailers competed fiercely with each other by focusing on low prices. The hard discounters, who offered around 600 to 700 products with a large share of store brands, sold products at very low prices with ultra-thin margins. On average, retailers’ profits varied between only 0.5 per cent and 0.8 per cent of sales.

Parsimonious consumers

As a result of this price-based competition, German consumers became used to shopping based strictly on price. For example, they might go to one store to buy soap and then to another one to buy better-priced laundry detergent.

Although Germany is a highly developed country with affluent consumers, many Germans have shifted a large share of their expenditures to non-retail products such as housing and travel. That desired spending pattern gives them another reason to try to spend as little as possible on products typically found in retail stores, such as packaged household products. German consumers have become very parsimonious.

Regulations

Three major regulations affecting the German retail market are German zoning laws, German laws regarding store hours, and German fair trading and antitrust laws.

First, German zoning laws required retail facilities larger than 1,200 square metres (12,903 square feet) to be located only in zoned areas where their likely impact on the surrounding facilities and population has been assessed as minimal. Because of these regulations, opening a new hypermarket in Germany could take five years or more. Wal-Mart used precisely this kind of very large store: the average size of a traditional Wal-Mart supercentre in the US was 187,000 square feet. [iii] Second, the German government limited store hours to a maximum of 80 hours per week.

Stores had to be closed on Sundays and holidays, and after 4 pm on Saturdays.

Third, Germany’s fair trading and antitrust laws prohibited retailers from selling products below cost on a permanent basis.

Unionization  and the co-determination system

The high prevalence of worker unionization and the co-determination system in Germany were also new for Wal-Mart. ‘Co-determination’ means that companies and unions are closely connected, and employees participate in corporate decision making that might affect working conditions.

Geographic locations of warehouses and headquarters

The geographic locations of warehouses and headquarters also affected Wal-Mart. Wal-Mart relied on only two warehouses, located in the western part of Germany, nearly 500 kilometres away from its stores in the eastern and southern parts of the country. Furthermore, the physical distance between the headquarters of the two former companies forced Wal-Mart to consolidate and shut down one of the former headquarters, leading some infuriated executives to quit.

Wal-Mart’s difficulties in the German market

The unique characteristics of the German market hindered the replication of the successful Wal-Mart model. To make things worse, Wal-Mart was not sufficiently prepared to cope with all the liabilities of foreignness it faced in Germany. Beth Keck, an international spokeswoman for Wal-Mart, commented shortly after Wal-Mart’s retreat from Germany: “Germany was a good example of that naiveté … We literally bought the two chains and said, ‘Hey, we are in Germany, isn’t this great?’ ” [iv] Germany’s uniqueness affected key parts of Wal-Mart’s successful business model, including EDLP and the so-called exceptional service approach.

The impact of Germany ’ s uniqueness on EDLP

Because Wal-Mart had to source locally or regionally for some of its product offering, the small size of Wal-Mart Germany and its inability to expand rapidly made it impossible to reduce costs so as to provide everyday low prices. In addition, Wal-Mart Germany’s loss-leader strategy (a pricing strategy in which one item is sold below cost in order to stimulate other, profitable sales) was judged illegal, making it very difficult to create an EDLP image.

Many products had to be purchased from local or regional producers. For example, food like bratwurst and beer was primarily local, and many European brands in the non-food area, such as Fischer bicycles and Vernel fabric softener, were very different from what Wal-Mart sold in the US. Wal-Mart did not command as much market power in Germany as in the US, although it benefited from scale economies and low-cost production economies for some products such as toys and clothing imported from countries like China and India. In 2003, Wal-Mart had only 92 stores in Germany, much less than the German discounter Aldi, which operated 3800 stores. Even though the average Wal-Mart store was ten times larger than the equivalent Aldi store, Wal-Mart had less market power.

The small size of its German operations prevented Wal-Mart from exercising power over suppliers when purchasing German or other European products. For example, when Wal-Mart Germany asked its suppliers to switch to a new supply system and to supply directly to its centralized warehouse, a number of suppliers did not comply with the request.

In its effort to expand and gain purchasing power, Wal-Mart was hampered by German zoning laws. Because the planned stores were so large, the zoning laws required that the stores’ impact be assessed. In 2000, Wal-Mart Germany announced the construction of another 50 stores within the next three years, but by August 2003, it had opened only four new stores. Unable to expand rapidly, the relatively small size of its German operations affected the firm’s purchasing power, negatively influenced its operating costs and ultimately diminished its ability to keep prices low for consumers.

Furthermore, Wal-Mart was not allowed to replicate the loss-leader strategy that had been so successful in the US. Wal-Mart Germany tried to sell milk, butter and similar products as lossleaders by pricing them below cost to lure shoppers, but in September 2000, the German Cartel Office judged such activities illegal, and Wal-Mart was forced to raise its prices.

The impact of Germany ’ s uniqueness on service

Wal-Mart Germany was not only unable to supply truly low-cost products – it was also unable to provide customer service perceived as particularly good. A survey in 2002–2003 conducted by Gerhard and Hahn in Würzburg, Germany, reported that only 8.7 per cent of customers viewed Wal-Mart staff as friendly and helpful. [v] The reason was simply that several of WalMart’s basic operating principles were only partially compatible with German stakeholder expectations.

First, Wal-Mart required sales clerks to smile at customers when they came within ten feet (the so-called ‘ten foot rule’). However, the smile was interpreted as flirting by some male shoppers, and some shoppers even complained about being harassed. This practice was therefore terminated.

Second, Wal-Mart offered services such as grocery bagging. However, German consumers had been used to self-service bagging for decades, and they therefore assumed, at least initially, that they had to pay for any staff assistance. Indeed, as an important side effect, the additional personnel for such services did increase the labour costs at Wal-Mart Germany. In addition, many German customers did not like strangers handling their groceries.

Third, as noted above, the two retailers bought by Wal-Mart had headquarters in different cities, with Wertkauf’s headquarters in Karlsruhe and Interspar’s headquarters in Wuppertal. WalMart therefore decided to consolidate the headquarters’ activities in Wuppertal. In the US, this consolidation would have been routine, as ‘being transferred’ is a common employment practice in the US, and moving is part of the US culture. However, moving to another city was too big a step for some German executives, leading many talented managers to resign. The exodus of these executives made it even more difficult to learn the nuances of the German marketplace.

Finally, to make things worse, Wal-Mart had four local CEOs in the first four years of being active in Germany. The first two – one from the US and the other from the UK – lacked adequate knowledge about the German market. The second CEO even tried to run Wal-Mart Germany from his office in England. This turnover in leadership slowed the possible adaptation of Wal-Mart’s prevailing service routines to German market conditions.

Lessons learned

Wal-Mart appears to have learned from its mistakes in the German market and is using this experience as a guide for future growth. In 2006, Mike Duke, Head of International Operations and current CEO, realized an overhaul of Wal-Mart’s international strategy was needed to avoid the mistakes made in both Germany and South Korea.

Wal-Mart implemented a new system to evaluate international locations with a stronger focus on government restrictions, management requirements, cultural differences, and the specificities of the competitive landscape. The company also shifted its focus to put greater emphasis on the transition and integration stages of the acquisition process after new locations are selected. [vi]

The German experience highlighted areas of concern in management functioning and the need to make some decisions locally. For example, product buyers in Walmart’s German operations were actually Americans who may not have fully understood the needs of German consumers. [vii] Wal-Mart now leaves more of its buying functions and management decisions to local personnel. Greater autonomy for local management and more rigid financial goals have also improved Wal-Mart’s international operations. [viii] When the company bought the British chain ASDA in 1999, local managers were given substantial autonomy to run the business, allowing it to remain essentially a British operation. Successful executives were moved around and senior executives were brought in from outside to add constructive perspectives.

Wal-Mart now focuses on locations with a greater opportunity for growth. [ix] The German market was already saturated with discount retailers, leaving little room for growth and hindering expectations to gain immediate scale for EDLP. Wal-Mart has since pursued new opportunities in India, Central and South America where the market is less developed and provides an attractive competitive landscape.

In 2009, Wal-Mart entered into the lucrative Indian market by partnering with Bharti Enterprises to establish its wholesale presence as BestPrice Modern Wholesale. Government regulations restricted Wal-Mart’s ownership of this joint venture to 51 per cent. Learning from its mistakes in Germany, Wal-Mart has paid greater attention to local preferences by filling 90 per cent of shelf space with products that the Indian population knows and loves. [x] The company has also invested for years building relationships with suppliers and farmers to ensure that the quality and quantity of demand can be met. Responding to industry challenges in supply chain management, whereby wasted fresh produce amounts to 35 per cent, Wal-Mart has established the rule that fresh fruits and vegetables must be sourced from distribution centres within 200 kilometres of wholesale locations. [xi] Reinforcing Wal-Mart’s stance on adapting to local markets, Raj Jain, President of Wal-Mart India stated “India is not a homogenous market, so ours is not a cookiecutter approach from the U.S.” [xii]

It appears that Wal-Mart is successfully moving forward and using its failure in Germany as a positive learning experience.

• What are some of Wal-Mart’s FSAs? To what extent are these FSAs locationbound or internationally transferable?
• What distance components (relative to the US) do American retailers face in Germany? Give examples. How did these distance components affect the exploitation of Wal-Mart’s FSAs transferred to Germany?
• Did Wal-Mart overestimate the transferability of its FSAs?
• Can you provide an update on Wal-Mart’s international expansion, using materials available on the Web?

[i] Ulrike Gerhard and Barbara Hahn, ‘Wal-Mart and Aldi: two retail giants in Germany’, GeoJournal 62 (2005), 15–26; Andreas Knorr and Andreas Arndt, ‘Why did Wal-Mart fail in Germany (so far)?’ mimeo (2003); Kate Norton, ‘Wal-Mart’s German retreat’, Business Week Online (28 July 2006); Gerrit Wiesmann, ‘Why Wal-Mart decided to pack its bags in Germany’, Financial Times (2006), 21; Mark Landler, ‘Wal-Mart to abandon Germany’, New York Times (29 July 2006), C.1; Mark Landler and Michael Barbaro, ‘No, not always’, New York Times (2 August 2006), C.1; Ann Zimmerman and Emily Nelson, ‘With profits elusive, Wal-Mart to exit Germany; local hard discounters undercut retailer’s prices; ‘basket-splitting’ problems’, Wall Street Journal (29 July 2006), A.1; Wendy Zellner, Katharine A. Schmidt, Moon Ihlwan and Heidi Dawley, ‘How well does Wal-Mart travel? After early missteps, the retailing giant may finally be getting the hang of selling overseas’, Business Week (3 September 2001), 82; The Economist, ‘Business: Heading for the exit; retailing’, The Economist 380 (5 Aug 2006), 54.

[ii] Wal-Mart, ‘About Us’ (2012).

[iii] Ibid .

[iv] Landler and Barbaro, ‘No, not always’, C.1.

[v] Gerhard and Hahn, ‘Wal-Mart and Aldi’, 15–26.

[vi] Mike Troy, ‘Wal-Mart bids auf wiedersehen, ends nine-year grind in Germany’, Retailing Today (7 August 2006), 45–14.

[vii] Mark Choueke, ‘Leader: Marketing at heart of all retail success’, Marketing Week (11 June 2009), 3 .

[viii] Matthew Boyle, ‘Wal-Mart’s painful lessons’, Business Week (Online) (13 October 2009).

[ix] Mike Troy, ‘Wal-Mart bids auf wiedersehen, ends nine-year grind in Germany’, Retailing Today (7 August 2006), 45–14.

[x] Emily Wax, ‘India’s first Wal-Mart draws excitement, not protest’, The Washington Post (13 July 2009).

[xi] Vikas Bajaj, ‘In India, Wal-Mart goes to the farm’, The New York Times (12 April 2010), B1.

[xii] Nandini Lakshaman, ‘Why Wal-Mart’s first India store isn’t a Wal-Mart’, Time (15 May 2009).

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Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture

By Mark Landler and Michael Barbaro

• Aug. 2, 2006

WIESBADEN, Germany, July 31 — Three days after Wal-Mart Stores announced that it would pull out of Germany, Roland Kögel was wandering through the aisles of a somewhat threadbare Wal-Mart in a strip mall in this western German city.

“Why are they giving up now?” he asked. “They have good prices and a good variety of products.”

Yet Mr. Kögel, 54, confessed that he never bought groceries at Wal-Mart. Food is cheaper at German discount chains. He also does not visit this store often, because it is on the edge of town and he does not own a car. His one purchase for the day was tucked under his arm: a neck pillow.

Shoppers like Roland Kögel help explain why Wal-Mart raised the white flag in Germany, the site of the company’s first foray into Europe.

After nearly a decade of trying, Wal-Mart never cracked the country — failing to become the all-in-one shopping destination for Germans that it is for so many millions of Americans. Wal-Mart’s problems are not limited to Germany. The retail giant has struggled in countries like South Korea and Japan as it discovered that its formula for success — low prices, zealous inventory control and a large array of merchandise — did not translate to markets with their own discount chains and shoppers with different habits.

Over all, Wal-Mart is still expanding outside the United States, particularly in markets where it entered by acquiring a strong retailer. Still, given Wal-Mart’s formidable record at home, the company’s recent setbacks have exposed a rare vulnerability overseas.

Some of Wal-Mart’s problems stem from hubris, a uniquely powerful American enterprise trying to impose its values around the world. At Wal-Mart’s headquarters in Bentonville, Ark., however, the message from these missteps is now registering loud and clear.

In particular, Wal-Mart’s experience in Germany, where it lost hundreds of millions of dollars since 1998, has become a sort of template for how not to expand into a country.

“It is a good, important lesson, a turning point,” an international spokeswoman for Wal-Mart, Beth Keck, said. “Germany was a good example of that naïvete.” She added, “We literally bought the two chains and said, ‘Hey, we are in Germany, isn’t this great?’ ”

Among other things, she said, Wal-Mart now cares less whether its foreign stores carry the name derived from its founder, Sam Walton, as the German Wal-Marts do. Seventy percent of Wal-Mart’s international sales come from outlets with names like Asda in Britain, Seiyu in Japan or Bompreço in Brazil.

Wal-Mart is also trying to integrate acquisitions with more sensitivity — a process that involves issues like deciding whether to consolidate multiple foreign headquarters and how aggressively to impose Wal-Mart’s corporate culture on non-American employees.

In Germany, Wal-Mart stopped requiring sales clerks to smile at customers — a practice that some male shoppers interpreted as flirting — and scrapped the morning Wal-Mart chant by staff members.

“People found these things strange; Germans just don’t behave that way,” said Hans-Martin Poschmann, the secretary of the Verdi union, which represents 5,000 Wal-Mart employees here.

Wal-Mart’s changes came too late for Germany, but they could help it crack other markets, like China, where it already has 60 stores and 30,000 employees. Far from being chastened by its setbacks, Wal-Mart is forging ahead with an aggressive program of foreign acquisitions.

In a single week last fall, Wal-Mart completed the purchase of the Sonae chain in Brazil, bought a controlling stake in Seiyu of Japan, and became a partner in the Carcho chain in Central America. The deals added 545 stores and 50,000 employees to Wal-Mart’s overseas empire.

“I’m hard pressed to name a U.S.-based general merchandise retailer that is doing better than Wal-Mart International,” said Bill Dreher, who follows Wal-Mart for Deutsche Bank in New York.

Starting from scratch 14 years ago, Wal-Mart International has grown into a $63 billion business. It is the fastest-growing part of Wal-Mart, with nearly 30 percent sales growth in June, compared with the same month last year. Even subtracting one-time gains from acquisitions, it grew at nearly 12 percent, about double the rate of Wal-Mart’s American stores.

Sustaining that pace is critical for Wal-Mart, because high fuel prices have helped sap the buying power of Americans. In June, store traffic in its home market declined. Wal-Mart estimated that its sales in the United States in stores open at least one year would increase only 1 percent to 3 percent in July.

Wal-Mart Germany, with 85 stores and $2.5 billion in sales, is almost a footnote for a company focused on Asia and Latin America. But the problems it encountered here have echoes elsewhere. For example, it never established comfortable relations with its German labor unions.

“They didn’t understand that in Germany, companies and unions are closely connected,” Mr. Poschmann said. “Bentonville didn’t want to have anything to do with unions. They thought we were communists.”

Ms. Keck said Wal-Mart did cultivate good relations with the leaders of the works’ council, which represents the unionized work force, and changed policies in response to employee concerns.

Wal-Mart will soon get another chance to deal with organized labor, albeit of a less independent sort. In China, the state-controlled All-China Federation of Trade Unions is organizing workers in Wal-Mart’s stores.

Germany also provides a lesson in the perils of buying existing chains. Wal-Mart’s purchase of Wertkauf and Interspar saddled it with stores in undesirable locations. The Wiesbaden outlet is worlds away from a squeaky-clean American Wal-Mart: nearby are a couple of sex shops.

“These were some of the least attractive of the big-box retailers out there,” said James Bacos, director of the retail and consumer goods practice at Mercer Management Consulting in Munich.

Compounding the problem, Wal-Mart shut down the headquarters of one of the chains, infuriating employees who opted to quit rather than move. Such a decision would have been routine in the United States, where Ms. Keck said, “moving is a big part of the Wal-Mart culture.” In Germany, she said, it prompted an exodus of talented executives.

In South Korea, Wal-Mart had only 16 stores — a small presence that contributed to its decision in May to sell out to a Korean discount chain. Many Koreans have never heard of Wal-Mart. In Seoul, a sprawling area of 10 million, there is only a single store.

This lack of scale causes another problem that has afflicted Wal-Mart in several countries: its inability to compete with established discounters, like the Aldi chain in Germany and E-Mart in Korea.

The obvious lesson is to try to bulk up. In Brazil, Wal-Mart opened only 25 stores in its first decade there and struggled to compete against bigger local rivals. Then, in 2004, it bought Bompreço, giving it a presence in the country’s poor, but fast-growing, northeast.

Wal-Mart did not change the names of the stores, which range from neighborhood grocers to large American-style hypermarkets. But with 295 stores in Brazil, Wal-Mart now ranks third in the market, after Carrefour of France and the market leader, Companhia Brasileira de Distribução.

Size has given Wal-Mart increased leverage with suppliers there, though analysts say the company needs even more stores to be in a position to undercut local discounters on the prices it offers customers.

At a Wal-Mart store in suburban Rio de Janeiro the other day, Ana Paula Cunha de Almeida, a 26-year-old housewife, had loaded her shopping cart with rice, beans and flour. But she was also carrying a bag from a smaller grocery store, where she had bought meat, cheese and cold cuts.

“These are always cheaper somewhere else,” she said.

The grocery business has proven the most difficult for Wal-Mart to crack. Aldi, with 4,100 stores in Germany, undercuts Wal-Mart on price, while still offering high-quality food.

Even in Canada, where Wal-Mart steamrolled local department store chains when it entered the country as a nonfood retailer in 1994, the grocery trade looms as a challenge. Wal-Mart recently announced plans to build supercenters that will also sell groceries. But analysts predicted Wal-Mart would face stiff competition from Canada’s largest chain, Loblaw.

Bernie Skelding, a vacationer shopping at a Wal-Mart in Huntsville, Ontario, north of Toronto, said he liked going to the store when he had a varied shopping list. But he added, “If I’m looking for food, I go to Loblaw’s.”

Wal-Mart’s most successful markets, like Mexico, are those in which it started big. There, the company bought the country’s largest and best-run retail chain, Cifra, and has never looked back. This year, Wal-Mart is spending more than $1 billion in Mexico to open 120 new stores.

Taking over Cifra “gave them a critical mass to build from,” said Tufic Salem, an analyst at Credit Suisse First Boston in Mexico City. “The management stayed, and they knew the market very well.”

Perhaps the most striking example of a Wal-Mart success is Asda, which was Britain’s No. 1 discount chain when Wal-Mart acquired it in 1999. With sales of $26.8 billion, Asda now accounts for 43 percent of Wal-Mart’s international revenue.

Wal-Mart’s German experience also taught it to use local management. The company initially installed American executives, who had little feel for what German consumers wanted.

“They tried to sell packaged meat when Germans like to buy meat from the butcher,” Mr. Poschmann said.

Some of Wal-Mart’s missteps — selling golf clubs in Brazil, where the game is unfamiliar, or ice skates in Mexico — are so frequently mentioned, they have become the stuff of urban legend. But even more subtle differences in shopping habits have tripped up the company.

In Korea, Wal-Mart’s stores originally had taller racks than those of local rivals, forcing shoppers to use ladders or stretch for items on high shelves. Wal-Mart’s utilitarian design — ceilings with exposed pipes — put off shoppers used to the decorated ceilings in E-Mart stores.

Beyond the ambience, Wal-Mart’s shoes-to-sausage product line does not suit the shopping habits of many non-American shoppers. They prefer daily outings to a variety of local stores that specialize in groceries, drugs or household goods, rather than shopping once a week at Wal-Mart.

“They have stacks of goods in boxes,” said Lee Jin Sook, 46, a housewife sitting on a subway in Seoul. “That may be good for some American housewives who drive out in their own cars.” But Koreans, she said, prefer smaller packages: “Why would you buy a box of shampoo bottles?”

“I heard Wal-Mart later tried to change their style,” Ms. Lee added, “but I guess it was too late.”

BUS615: International Marketing

Marketing failure: walmart in germany.

Competition in the grocery industry in Germany is fierce. There is a growing number of discount supermarket chains that are all competing for business. When Walmart entered this market, they anticipated the same kind of success they enjoyed in other countries. However, because they didn't sufficiently understand the marketplace, their efforts were a failure. There were breakdowns in communication due to language barriers. They didn't fully understand the laws and regulations in the country. They didn't understand how consumers approached their shopping trips, and there were insufficient locations available for expansion. As you read, think about how you might have approached this market entry. What steps could Walmart have taken to have an ongoing presence in Germany?

Wal-Mart is the biggest food retailer in the world and has a presence in several nations. In some nations (e.g. the US, Canada, China), Wal-Mart is a great success. However, Wal-Mart has failed in some countries (e.g. Germany, South Korea). First, we describe Wal-Mart's failure in Europe's largest economy. Second, we use Wal-Mart's experiences in Germany to illustrate some key principles related to product failure and product deletion (see Table 13.4). Wal-Mart's experiences are also an example of the importance to adapt to culture when starting a business in a new country. 

The German grocery industry

There is fierce competition in the German grocery industry, due to the increasing number of discount supermarket chains. As a result, there is low profitability in the food retail sector; profit margins range from 0.5 percent to 1 percent which is one of the lowest profit margins in Europe. By contrast, profit margins in Great Britain are 5 percent, in this same sector. In particular, Metro is a tough competitor, and it already applies some of Wal-Mart's successful strategies (e.g. related to economics of scale and low prices). Of course, Wal-Mart is interested in other metrics beyond profit (e.g. shareholder wealth, market share), but, as indicated above, profitability and margins are of key concern to retailers.

Wal-Mart: strategic concept

Wal-Mart is the world's largest retailer with approximately 6,500 stores worldwide. The main feature of Wal-Mart's business model is to cut costs (continuously) and therefore offer lower prices than their competitors. For instance, Wal-Mart has introduced new logistical technologies such as radio-frequency identification (RFID) to optimize its logistic processes. RFID is an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags or transponders. Wal-Mart tries to minimize labor costs by offering minimal health care plans. Wal-Mart pressures its suppliers to cut costs, on a continuous basis. In brief, Wal-Mart's managers are constantly seeking out ways to cut costs, and some of their successes are passed on to shoppers, in terms of lower prices.

Wal-Mart's entry into the german market

In 1997, Wal-Mart acquired over 21 stores from the supermarket chain "Wertkauf". One year later, Wal-Mart bought an additional 74 stores from the supermarket chain "Interspar". As a result, Wal-Mart became the fourth biggest operator of supermarkets in Germany. The objective was to expand to 500 stores in Germany. However, the number of stores never exceeded the 95 stores that were originally purchased in the first two years. Wal-Mart's position in the marketplace deteriorated over the years. In 2002, Wal-Mart had some financial difficulties due to a low turnover which resulted in the dismissal of some employees. At the end of 2006, Wal-Mart was bought out by "Metro", one of Germany's largest retail groups. Finally, Wal-Mart left the German market with a loss of one billion dollars before tax.

Mis-steps in the German market

In general, there are five key issues related to Wal-Mart's ultimate withdrawal from Germany: ( a) market structure; (b) business model (these first two are discussed together here); c) cultural and communication; (d) politics and regulation; and (e) product/service failure. Each of these issues is discussed in turn. Note also that these five issues are highlighted in Table 13.4.

Market structure and business model

A retailer that wants to follow Wal-Mart's strategy of low prices needs to expand rapidly. In Germany, there are not enough appropriate locations to support such expansion (see Table 13.4). As previously mentioned, Wal-Mart did not build their own stores but took over 21 existing "Wertkauf" supermarkets that had a totally different business model. The stores themselves were very small and had a limited range of goods. A related problem is that these stores were located far apart, which resulted in high logistical costs.

When entering a new market, it is important to anticipate competitors' reactions. In Germany, Wal-Mart's biggest competitor, Metro, wanted to expand their stores; at the same time, Metro wanted to prevent Wal-Mart from executing their expansion plans (Senge 2004). Many times, a product has to be deleted because the competition is too strong.

With the strategy of "Every day low prices," Wal-Mart is very successful in the United States and also in many other countries. In Germany, there is extreme competition in the retail food sector. Therefore, the German customer is quite accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart's strategy of offering low prices did not create sufficient competitive advantage (see Table 13.4).

Culture and communication

When products are introduced, it is important to consider cultural factors. In this case, corporate culture played a key role. Wal-Mart's top executives decided to operate the German locations from their offices in the United Kingdom. Thus, Wal-Mart's "corporate language" was English. However, many of the older Wal-Mart managers in Germany do not speak English. As a result, there were often breakdowns in communication. Some managers of the acquired stores did not stay on after the Wal-Mart acquisition. Key business connections were lost. As a result, several key suppliers (e.g. Adidas, Samsonite, Nike) declined to work as suppliers for Wal-Mart. Wal-Mart did not just lose important suppliers; they also lost an important part of their range of goods. The situation could have been improved by retaining and communicating effectively with the German managers who had know-how about the local market (see Table 13.4).

Politics and regulation

The managers of Wal-Mart were not sufficiently familiar with the laws and regulations in Germany, as they violated them several times. One of Wal-Mart's fundamental principles is to stay union free. However, in Germany, unions have a powerful position. Through collective bargaining and related tactics, they can have a strong influence on political decision making. Ver.di is a German union in the service sector. With 2.4 million members, it is one of the largest independent, trade unions in the world.

According to the German Commercial Code, all incorporated companies are obligated to publish a financial statement, including a profit and loss statement. Due to the fact that Wal-Mart refused to publish their financial statements for the years 1999 and 2000, Ver.di sued in a court of law. Wal-Mart was sentenced to pay a fine. The coverage of this law suit in the German press led to a negative public image for Wal-Mart.

After the expansion strategy failed due to the lack of suitable store locations, Wal-Mart began a price war to drive small competitors out of business. The intention was to take over the stores of the insolvent supermarket chains and convert them into Wal-Mart stores. One part of the price war was to introduce a private label called "Smart Brand" and sell most of these products below manufacturing costs. The reaction of many competitors was to decrease their prices, which led to a profit setback for the entire industry. However, the Federal Cartel Office interceded and stopped the price war because there is a law in Germany that enjoins companies from selling goods below manufacturing costs on a continuing basis.

Product/service failure

Wal-Mart planned to introduce a sophisticated customer service program which threatened many of its competitors because German discount supermarket chains often do not provide good customer service. Therefore, good customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart's customer service program was called the "ten foot rule". Every ten feet, a service employee offered some help to the customer. However, the customer reaction was rather negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They do not necessarily expect to talk with employees.

Therefore, the "ten foot rule" was perceived as rather annoying and did not result in a reputation for providing good customer service.

Wal-Mart also imported the idea of placing a "greeter" at the entrance to the store. Again, German customers were not used to this custom, and they did not adopt this "service" with any enthusiasm.

Conclusion of Wal-Mart Mini-case

Wal-Mart tried to apply its US success formula in an unmodified manner to the German market. As a result, they didn't have sufficient knowledge about the market structure and key cultural/political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. Also, there were some instances of product or service failure. The final outcome was that Wal-Mart had to abandon its offerings in Germany. 

Table 13.4 Product failure: examples from Wal-mart's investment in Germany

Why Walmart Failed in Germany and Europe: The Main Reasons

Walmart is a multinational american company that runs chains of large discount department stores, supermarkets, and warehouse stores. it sells a variety of products, but they are most well-known for its low prices on groceries and household items. walmart operates retail stores in various retailing formats in all 50 states in the united states. also, it serves customers and members more than 200 million times per week at more than 8,416 retail units under 53 different banners in 15 countries. as one of the most successful retailers, it might come as a surprise that walmart has not been successful when expanding in europe. throughout this content, we will demonstrate what went wrong in germany that led walmart to fail in the eu to sustain there..

Why did Walmart Fail in Germany?

Walmart’s story in the EU has begun with its attempt to expand its business in Germany. In 1997, Walmart entered the German market with the acquisition of the Wertkauf and Interspar hypermarket chains. But Walmart’s global fame and aggressive entry into foreign markets didn’t work out well in Germany. Walmart’s German stores struggled because its business model wasn’t working there. It tried hard, but after 9-years, Walmart sold its 85 outlets in Germany in 2006 resulting in a $3 billion loss.

There were several factors that contributed to Walmart’s Failure in Germany. From the very start, amazing management oversights have affected Walmart’s German operations. We have figured out some of the important reasons behind their failure.

1. Below-Cost Strategy: Walmart wanted to follow the below-cost strategy, But the German business owners didn’t like Walmart’s low-cost pricing tactic as well as the German government. As a result, the American giant was ordered to raise its prices by the German high court which became an obstacle for it to having a customer base.

2. Walmart and German Unions Were Incompatible: In the United States, Walmart is notorious for playing low wages and suppressing unions. In Germany, unlike in the US, unions are very much a part of the culture and have broad support amongst the government, the community, and even businesses. Walmart didn’t understand that in Germany, companies and unions are closely connected. Also, The German workforce is accustomed to negotiating their pay with their union. This caused friction between the workers and the company. 

When Walmart refused to join Germany’s regional wage bargaining system, the worker’s union went on strike. Walmart was taken aback for this reason. This also gave them a bad reputation in the community and likely affected their sales.

3. Walmart Underestimated Their Competition: In the USA, Walmart has primarily been considered a low-cost, one-stop shop for just about anything a person could need. 

In Germany, however, the people value the quality of products as much as they value the price. They weren’t about to abandon the small grocery chains they had always shopped at. Walmart did not expect such resilience from the 14 hypermarket chains that were popular across Germany, and they failed to adapt even after they found out.

4. Retail Chains Were Already Doing Poorly in Germany: Part of the problem with Walmart’s transition into Germany is that retail chains were growing at an alarmingly low rate at the time. In fact, when Walmart came into Germany, the average growth rate for a retail chain was just 0.3% per year. This acted as an immediate disadvantage in Walmart’s journey towards sustainable growth in the country.

5. Employees Felt Uncomfortable With Walmart’s Practices: It wasn’t just the pay and lack of worker rights that upset Walmart employees. It was also some “team-building” practices that many Germans didn’t feel comfortable doing.

At Walmart, workdays started with light exercises and motivational chants. While in US culture, these activities can sometimes bring a team closer together, in Germany, they are entirely unexpected and only served to make the employees uncomfortable.

6. Employees Felt That Walmart Overreached Into Their Personal Lives: In the United States and in many countries, it is taken as a given that employees that work in the same department cannot engage in romantic relationships. In Germany, however, this is not the standard. In fact, it is considered a huge overstep in a person’s life.

7. Walmart Failed to Take Into Account Cultural Differences Surrounding Shopping: In the United States, it is considered commonplace or almost by default that people like to drive out to one store and buy everything they need there at a reduced price. This is part of why Walmart has been so successful in the US.

In Germany, on the other hand, shoppers have different habits, and the way the economy is structured lends more significance to smaller discount chains. Below are just a few differences in culture, which caused fewer Germans to go to Walmart and more to go to smaller chains.

Many Germans like to shop at places that are within walking distance. The idea of “service with a smile” is not as emphasized in Germany and came across as odd and uncomfortable. Smaller discount chains in Germany can sell goods at lower prices than big retail chains by law.

Walmart enforced a corporate culture that ran counter to the values of many Germans. On the other hand, the small chains were in line with their beliefs.

8. Walmart Didn’t Focus Their Services Enough: Walmart sells just about anything a person would need; food, clothes, entertainment, car parts, gardening supplies, and more. Given the German population’s tendency to shop at smaller, more focused stores, this didn’t work on a cultural level.

It also didn’t work on an economic level. Part of the reason Walmart can sell so many goods at such a low price in the US is that they receive tax subsidies and pay workers a lower wage.

As we’ve seen previously, they were challenged on all of these issues. Still, they tried a more focused approach, perhaps on groceries or home goods, they could have carved out a corner of the market.

9. Walmart Failed to Adapt to Germany’s Economy: You put all this together, you get the primary reason why Walmart failed to gain any steam in Germany. They could not, and would not, adapt to the different economic systems.

To conclude, Walmart failed in Germany and eventually in the EU due to a variety of factors including the inability to adapt to german retail market conditions, lack of competitive prices against Garman stores, underestimated local competition, environmental cultural differences, and different organizational rules, and corporate culture for Walmart employees. If the folks at Walmart had been more proactive in studying Germany’s economic system and consumer habits, their stores might not have failed. We hope that you understand why Walmart failed in Europe. If you have found our conversation helpful, please leave a comment, share our post, and subscribe to our blog.

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Barriers to ‘US style’ lean retailing: the case of Wal-Mart's failure in Germany

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Susan Christopherson, Barriers to ‘US style’ lean retailing: the case of Wal-Mart's failure in Germany, Journal of Economic Geography , Volume 7, Issue 4, July 2007, Pages 451–469, https://doi.org/10.1093/jeg/lbm010

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Wal-Mart's exit from the German market in 2006 after 10 years of attempting to achieve sustainable competitive advantage contributes an interesting case to the small but expanding literature on ‘failure’ in international investment. The work on the disinvest decision in all its forms has been critical to a re-conceptualization of the international investment process as dynamic rather than static, linear and inexorable. An important segment of the work on investment and disinvestment as dynamic processes focuses on the environment in which investment and disinvestment decisions evolve. While the environment of the host country market has begun to be examined, the market environment of the country in which the retail transnational corporation (TNC) originates also affects the international disinvestment process. To explore this ‘home country effect’, I examine the resources Wal-Mart brought into the German market and their ability to use those resources in the German context. Wal-Mart's resources were shaped by the market governance regime in which the firm evolved, and not insignificantly, over which it had and has influence. Within this theoretical frame, Wal-Mart's reliance on the resources of network dominance and autonomous action that made for its success in the USA contributed to unsuccessful strategies in the German retailing market.

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Wal-Mart in Europe

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Gunnar Trumbull

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• Wal-Mart in Europe  By: J. Gunnar Trumbull and Louisa Neissa

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• Case, example of product failure: Wal-Mart in Germany, 1997 to 2006

Wal-Mart is the biggest food retailer in the world and has a presence in several nations. In some nations (e.g. the US, Canada, China), Wal-Mart is a great success. However, Wal-Mart has failed in some countries (e.g. Germany, South Korea). First, we describe Wal-Mart’s failure in Europe’s largest economy. Second, we use Wal-Mart’s experiences in Germany to illustrate some key principles related to product failure and product deletion (see Table 13.4 ). Wal-Mart’s experiences are also an example of the importance to adapt to culture when starting a business in a new country.

The German grocery industry

There is fierce competition in the German grocery industry, due to the increasing number of discount supermarket chains (KPMG 2006). As a result, there is low profitability in the food retail sector; profit margins range from 0.5 per cent to 1 per cent which is one of the lowest profit margins in Europe (Frankfurter Rundschau 2007). By contrast, profit margins in Great Britain are 5 per cent, in this same sector. In particular, Metro is a tough competitor, and it already applies some of Wal-Mart’s successful strategies (e.g. related to economics of scale and low prices). Of course, Wal-Mart is interested in other metrics beyond profit (e.g. shareholder wealth, market share), but, as indicated above, profitability and margins are of key concern to retailers.

Wal-Mart: strategic concept

Wal-Mart is the world’s largest retailer with approximately 6,500 stores worldwide (Business 2006). The main feature of Wal-Mart’s business model is to cut costs (continuously) and therefore offer lower prices than their competitors. For instance, Wal-Mart has introduced new logistical technologies such as radio-frequency identification (RFID) to optimize its logistic processes. RFID is an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags or transponders. Wal-Mart tries to minimize labor costs by offering minimal health care plans. Wal-Mart pressures its suppliers to cut costs, on a continuous basis. In brief, Wal-Mart’s managers are constantly seeking out ways to cut costs, and some of their successes are passed on to shoppers, in terms of lower prices.

Wal-Mart’s entry into the german market

In 1997, Wal-Mart acquired over 21 stores from the supermarket chain “Wertkauf.” One year later, Wal-Mart bought an additional 74 stores from the supermarket chain “Interspar”. As a result, Wal-Mart became the fourth biggest operator of supermarkets in Germany (Lebensmittelzeitung 2006). The objective was to expand to 500 stores in Germany. However, the number of stores never exceeded the 95 stores that were originally purchased in the first two years. Wal-Mart’s position in the marketplace deteriorated over the years. In 2002, Wal-Mart had some financial difficulties due to a low turnover which resulted in the dismissal of some employees. At the end of 2006, Wal-Mart was bought out by “Metro”, one of Germany’s largest retail groups. Finally, Wal-Mart left the German market with a loss of one billion dollars before tax (Manager-Magazin 2006).

Mis-steps in the german market

In general, there are five key issues related to Wal-Mart’s ultimate withdrawal from Germany: ( a) market structure; (b) business model (these first two are discussed together here); c) cultural and communication; (d) politics and regulation; and (e) product/service failure. Each of these issues is discussed in turn. Note also that these five issues are highlighted in Table 13.4 .

Market structure and business model

A retailer that wants to follow Wal-Mart’s strategy of low prices needs to expand rapidly. In Germany, there not enough appropriate locations to support such expansion (see Table 13.4 ). As previously mentioned, Wal-Mart did not build their own stores but took over 21 existing “Wertkauf” supermarkets that had a totally different business model. The stores themselves were very small and had a limited range of goods. A related problem is that these stores were located far apart, which resulted in high logistical costs.

When entering a new market, it is important to anticipate competitors’ reactions. In Germany, Wal-Mart’s biggest competitor, Metro, wanted to expand their stores; at the same time, Metro wanted to prevent Wal-Mart from executing their expansion plans (Senge 2004). Many times, a product has to be deleted because the competition is too strong.

With the strategy of “Every day low prices,” Wal-Mart is very successful in the United States and also in many other countries. In Germany, there is extreme competition in the retail food sector. Therefore, the German customer is quite accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart’s strategy of offering low prices did not create sufficient competitive advantage (see Table 13.4 ).

Culture and communication

When products are introduced, it is important to consider cultural factors. In this case, corporate culture played a key role. Wal-Mart’s top executives decided to operate the German locations from their offices in the United Kingdom. Thus, Wal-Mart’s “corporate language” was English. However, many of the older Wal-Mart managers in Germany do not speak English. As a result, there were often breakdowns in communication. Some managers of the acquired stores did not stay on after the Wal-Mart acquisition. Key business connections were lost. As a result, several key suppliers (e.g. Adidas, Samsonite, Nike) declined to work as suppliers for Wal-Mart. Wal-Mart did not just lose important suppliers; they also lost an important part of their range of goods (Senge 2004). The situation could have been improved by retaining and communicating effectively with the German managers who had know-how about the local market (see Table 13.4 ).

Politics and regulation

The managers of Wal-Mart were not sufficiently familiar with the laws and regulations in Germany, as they violated them several times. One of Wal-Mart’s fundamental principles is to stay union free. However, in Germany, unions have a powerful position. Through collective bargaining and related tactics, they can have a strong influence on political decision making. Ver.di is a German union in the service sector. With 2.4 million members, it is one of the largest independent, trade unions in the world (Ver.di 2008).

According to the German Commercial Code, all incorporated companies are obligated to publish a financial statement, including a profit and loss statement. Due to the fact that Wal-Mart refused to publish their financial statements for the years 1999 and 2000, Ver.di sued in a court of law. Wal-Mart was sentenced to pay a fine. The coverage of this law suit in the German press led to a negative public image for Wal-Mart.

After the expansion strategy failed due to the lack of suitable store locations, Wal-Mart began a price war to drive small competitors out of business. The intention was to take over the stores of the insolvent supermarket chains and convert them into Wal-Mart stores. One part of the price war was to introduce a private label called “Smart Brand” and sell most of these products below manufacturing costs. The reaction of many competitors was to decrease their prices, which led to a profit setback for the entire industry. However, the Federal Cartel Office interceded and stopped the price war because there is a law in Germany that enjoins companies from selling goods below manufacturing costs on a continuing basis (Knorr and Arndt 2003).

Product/ service failure

Wal-Mart planned to introduce a sophisticated customer service program which threatened many of its competitors because German discount supermarket chains often do not provide good customer service. Therefore, good customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart’s customer service program was called the “ten foot rule”. Every ten feet, a service employee offered some help to the customer (Knorr and Arndt 2003). However, the customer reaction was rather negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They do not necessarily expect to talk with employees.

Therefore, the “ten foot rule” was perceived as rather annoying and did not result in a reputation for providing good customer service.

Wal-Mart also imported the idea of placing a “greeter” at the entrance to the store. Again, German customers were not used to this custom, and they did not adopt this “service” with any enthusiasm.

Conclusion of Wal-Mart Mini-case

Wal-Mart tried to apply its US success formula in an unmodified manner to the German market. As a result, they didn’t have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. Also, there were some instances of product or service failure. The final outcome was that Wal-Mart had to abandon its offerings in Germany.

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• Centralized
• Decentralized
• Chapter summary Us legal issues
• Competitive advantage through human resource management
• Providing employee voice and influence
• Managing differences in organizations
• Methods of recruitment
• Evaluating recruiting policies
• Selective hiring
• Behavioral interview
• Situational interview
• Selection tests
• Background checks
• Benefits of training
• Need for training
• Training methods
• Training in the context of global business
• Aligning employee career development with organizational growth Best of East and West
• Purpose of appraisals
• Creating an appropriate appraisal process
• Appraisal methods
• Performing the appraisal
• Giving feedback
• Receiving feedback
• Internal equity
• External equity
• Combining internal and external equity
• The benefit of benefits
• Detriments of benefits
• Compensation techniques
• Components of pay for performance
• Pay secrecy
• Good outcomes of paying for performance
• Folly of reward systems in different organizations
• Cautions for introducing a pay system
• Elements to job design
• Brief history of traditional approaches to job design
• Current approaches to job design
• Steps to effective job design
• How meaningful job design can impact an organization
• Defining marketing
• Macromarketing versus micromarketing
• Service marketing versus goods marketing
• For-profit marketing versus nonprofit marketing
• Mass marketing, direct marketing, and Internet marketing
• Local, regional, national, international, and global marketers
• Consumer goods marketing and business-to-business (industrial) marketing
• Standardization and customization
• Reasons for entering international markets
• Reasons to avoid international markets
• The stages of going international
• Joint ventures
• Direct investment
• US commercial centers
• Trade intermediaries
• The corporate level
• The business level
• Marketing objectives
• The functional level
• Product/promotion
• Distribution and logistics
• Evaluating results
• Business norms
• Religious beliefs
• Political stability
• Monetary circumstances
• Trading blocs and agreements
• Expropriation
• The technological environment
• The economic environment
• The competitive environment
• One of three strategic functions
• Strategic versus tactical operations decisions
• Operations management provides competitive advantage!
• The input/output transformation model
• Inventory decisions
• Capacity decisions
• Quality decisions
• Scheduling decisions
• Process decisions
• Technology decisions
• Location decisions
• Quality costs
• TQM’s seven basic elements
• Quality awards and standards
• Causes of the bullwhip effect
• Counteracting the bullwhip effect
• Other factors affecting supply chain management
• Supplier selection
• Inventory reduction to expose waste
• Demand-pull production system
• Quick setups to reduce lot sizes
• Uniform plant loading
• Flexible resources
• Line/cellular flow layouts
• Total Quality Management
• Employee empowerment
• Conclusion: The evolution of JIT into “lean operations”
• Trends in management
• Trust: the foundation for a successful relationship
• Functional relationship
• Relational partnership
• Strategic partnership
• Foundations of successful relationships
• Phases of relationship development
• Skills for building positive relationships
• Outsourcing
• Potential external relationship obstacles
• Why an accounting system is important
• Basic types of accounts
• Chart of accounts
• Basic financial statements
• A short history of accounting and double entry bookkeeping
• Types of ledgers
• Cash flow forecasts
• Working capital analyses
• Profitability analyses (e.g. by customer, product, region)
• Sources of financing for your organization
• The technology sub-system
• The process sub-system
• Relationships between the four components
• Some practical advice for start-ups
• Acquiring a suite of commonly-used programs
• When to think about using database management software
• Creating a Web presence
• Know the basics
• eMarket your website
• Competitive advantage
• Porter and competitive advantage
• Have the IS department set priorities
• Have a cross-functional steering committee set priorities
• Develop a formal plan for information systems
• Project management risks
• Security risks
• Internet risks
• Summary of IS risk management
• Detecting competitive threats
• Eliminating or lessening surprises
• Enhancing competitive advantages by lessening reaction time
• Finding new opportunities
• Human intelligence
• Fee based companies
• What is an industry?
• Industry structural characteristics
• Concept of strategic groups
• Bargaining power of buyers
• Bargaining power of suppliers
• Threat of new entrants
• Threat of substitute products
• The intensity of competitive rivalry
• Personal ethics: four ethical approaches
• Management: the meta profession
• The paradox of the public pledge
• The paradox of pay
• Corporate Social Responsibility
• Product categories
• Examples of business models from the music industry
• Traditional business model
• Digital music stores
• Open content
• Artist-centered website hub
• Artist’s personal website
• Non-traditional “record labels”
• Tax-the-device model
• Summary of new business models
• Evaluating new products
• Product failure
• Case: “Apples: Newton and Pippin”
• What is globalization? Case: United States Domestic Automaker, Ford
• Elements of economic globalization
• Negative effects of globalization for developing country business
• Positive effects of globalization for developing country business
• Globalization and the small business entrepreneur
• Phone, Fax and SMS
• Technology for the business entrepreneur
• Host country research and cultural implications
• Cross-culture training
• Cultural classification
• Hofstede’s 5 Cultural Dimensions
• Ethical considerations
• What is political risk?
• Forms of investment and risk
• Protection from political risk
• Government policy changes and trade relations China establishes a new employment contract law for 2008 (www.aon.com)
• What is legal risk?
• Political and legal risk for the small business entrepreneur
• Case: Toyota has a vehicle for every market
• What is global marketing?
• The 4 P’S of the Marketing Mix (NetMBA, 2008)
• Importance of culture on markets
• Global branding—creation of a marketing strategy
• Global marketing and the small business entrepreneur
• Exchange rates
• Foreign exchange market
• Introduction to currency risk
• Introduction to derivatives
• International accounting standards board
• Global finance and the small business entrepreneur
• International division
• Global functional structure
• Product structure
• Area/geographic structure
• Matrix structure
• Beyond the matrix
• Staffing choices in a globally far-flung company
• Trends and challenges in a global HR environment
• Corporate Social Responsibility and sustainable development defined
• CSR and corporate strategy
• Case: Built to Last by Jim Collins
• Successful Implementation of CSR and Sustainable Development
• CSR, Sustainable Development, and the Future of Businesses
• CSR and the small business entrepreneur
• Definition and statistics
• Growth models
• Growth through buying out other companies
• Growth through cooperation
• Stopping growth by selling the firm
• Growth through innovation
• Management mistakes
• Incompatibility of growth strategies and organizational structure
• Inadequate or incorrect marketing, cooperation, finance, or HR strategies
• Inadequate or incorrect internal accounting
• Dependence on third parties
• Acculturation problems when buying companies
• References, and further literature
• About the chapter author
• About the chapter editor
•  Back Matter

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WHY WALMART FAILED IN GERMANY AN ANALYSIS IN THE PERSPECTIVE OF ORGANIZATIONAL BEHAVIOUR

This case study is a critical analysis of the failure of Wal-Mart stores in Germany under the context of organizational behavior. For achieving the purpose, relevant theoretical approaches of Organizational Behavior will be engaged and used as an analysis tool for evaluating the real factors of significant failure of Wal-Mart stores in the lively economy of Germany. Lastly, drawing a concrete conclusion highlighting the mainstream failure issues and adaptable improving steps based on the above conducted analysis. Mismanagement of Cultural Diversity and Adaptation of inappropriate leadership style are the factors identified for this gigantic failure. The Organizational Culture model of Pacanowsky and O'Donnell-Trujillo, Lewin Change Management Model and Transformational leadership should be engaged by the Wal-Mart management in Germany to avoid that defeat as it would deeply addresses the issue of managing culture diversity and assisting managers in defining policies to successfully overcome the problems of different national cultures and would assist in leading people to work in teams besides having different cultures.

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Retail industry is one of the dominant players in U.S economy, generating almost $966 billion a year, which contribute for approximately 5.7% of the U.S GDP annually, with employment to 5 million people. Moreover, since retailing provides a way for products to get to consumers, it also supports the $1.08 trillion wholesaling industry of the U.S. as per Euro monitor, 2017. Wal-Mart Inc. and Costco Wholesaler Corporation are both retail merchandising multinational companies operating domestically and internationally. Through descriptive research this paper is an effort towards analysis of both the companies in terms of their organizational design and structure. The study discusses how the companies managing their organizational structure-culture and business strategy to achieve competitive advantage by focusing on 1) Transaction Cost 2) Differentiation and Integration 3) Centralization and Decentralization 4) Standardization and Mutual Adjustments 5) Organic and Mechanistic Structure

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Why Walmart Failed In Germany

It's a place where you can buy your weekly grocery order and get your prescriptions refilled in one visit. It's a place where you catch up on the local gossip with your neighbor in the cereal aisle or watch a fellow shopper in ill-fitting pajama pants buy a single rotisserie chicken. For all its ups and downs, Walmart is no doubt a genuine American institution. Originally a simple five-and-dime general store in Bentonville, Arkansas — a place that still exists as the official Walmart Museum  – Sam Walton's store has a long history. While you can find a Walmart superstore just about anywhere in the United States, you're probably not going to hear the name if you head over to Europe.

That doesn't mean Walmart didn't try to expand over in Europe, however. In the final years of the '90s, Walmart attempted to bring old-fashioned American productivity, low prices, and efficiency to the German public (via New York Times ). Unfortunately, Walmart had to say auf wiedersehen to its grand plans in the country by 2006. Just what exactly happened that made Walmart abandon its plans? 

Germans simply didn't understand Walmart culture

While we are not vastly different than our neighbors over in Germany, it's safe to say that our customs and culture are not totally alike. Germans are stoic, friendly people who strive for the best in their lives (via LiveScience ), so one would expect that Walmart could thrive as a company that aims to meet all their customer's needs in one store. The reality is that Walmart, with all of its American values, simply didn't fit into German culture. As reported by The New York Times , the worker unions typical in the country were not embraced by the company.

The Global Millennial  detailed three more reasons for the failure of Walmart in Germany. The first reason was that Walmart's "employee motivation training" like team-building exercises outside of the store may have come across as too regimented or too silly. Another issue was that German people were uncomfortable with Walmart employees smiling at them so much. Smiling awkwardly at the cashier in line may have been strange for people who typically reserved smiles for close friends and family. The third reason was due to conflicts with Walmart's ethic codes, which required employees to monitor each other in case of misconduct.  

Whatever the reasons, it was clear that the corporation's American customs did not align with the culture in Germany. Perhaps one day, Germans and Americans can bond over what foods you should never buy at Walmart .