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.
QUESTIONS
- 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?
Notes
[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).