Walmarts Failure In Germany Case Solution

2. Why did Walmart fail in Germany?

Germany was the third largest retailer market in the world, accounted for 15% of the European retail market and displayed an Oligopolistic structure in the retail sector in the year 2003, with the front runners being Metro, Rewe, Edeka, Aldi, and Tengelmann (Christopherson, 2007). Walmart arrived in Germany in the late 1990s. It began, in 1997 by acquiring the German retail chain Wertkauf (21 value purchase hypermarkets) followed by Interspar (74 Stores) in 1998 (Zeit Online, 1999). The failure of this German market penetration is owed to a number of factors, most simply stated as the inaptitude of Walmart in forcing its culture on Germany resulting in the incompatibility of Walmart’s business model in Germany. It could not live up to either of its value propositions of everyday low prices or excellent customer service. The other reasons a part from this include competition from local chains, breaching of German regulations and the reputation of acquired chains.

Retail stores depend on some critical elements for their success: the location of retail chains, their value proposition in terms of price or quality or both, product ranges that better -fit customer needs than do the rival’s products and exceptional customer service.

i. Market Structure and Business Model

Andreas Knorr and Andreas Arndt of the University of Bremen mention in their study called ‘Why did Wal-Mart Fail in Germany?’: "Wal-Mart's attempt to apply the company's proven US success formula in an unmodified manner to the German market turned out to be nothing short of a fiasco" (Knorr & Arndt, 2003).

Walmart had followed a retail internationalization policy that was flawed from the beginning, without the use of any modifications according to the German way of business. Within the internal and external workings of the organization, Walmart can be said to have succumbed to Market failure, Competitive failure, Operational failure and Business failure (See Table 1.0).

Strategies that are defined as internal resources of the firm and the reaction to external changes in market conditions e.g. technological changes, new market vacancies, policy changes, or threat of new entrants and competition. Since the 1990s, Walmart has used a smaller store format to expand to urban markets but has used its prevalent logistics and supply chain system to preserve its cost leadership strategy. Firm strategies in home markets usually include tactics to rise over regulations and mould government structures and policies to benefit the corporation’s interest. However, the same strategies used in the home market do not always work successfully in host markets, which was the case in Germany (Christopherson, 2007). The various ways, in which applied Walmart practices have proved incompatible with the German Markets have been mentioned this report.

a. Threat of Competition

Jon Jacobs, an analyst at Cantor Viewpoint in New York, said: "Germany's been a thorn in their side for many years. Shoppers, there are very price conscious and the competition essentially 'out-Wal-Marted' Wal-Mart" (Clark, 2006).

Germany seems to have quite a number of home-grown discount retailers that provide products at very low prices. Soon after establishing itself in Germany, Walmart fell prey to low prices of local retailers called hard discount stores (e.g. Aldi). Walmart could never expand enough to compete with these local retailers either. For example, Aldi had almost 4000 stores that benefitted it in logistics and marketing. The German’s are very sensitive to prices and found their local chain to be the obvious choice in the matter, who also happened to sell fewer and more ‘Own Brand’s’ than the plethora of product ranges and brands sold by Walmart that would often become inconvenient for customers. According to a German retail analyst, the Germans seem to have a ‘basket-splitting’ buying behaviour as opposed to the ‘One-Stop Shop’ solutions sought out by American consumers. These price sensitive German’s do not mind visiting different stores for various product types and fishing out the cheapest product available (DW, 2001).

Moreover, many marketing analysts say that Walmart did not abide by the retail regulation laws set by the German Government (explained later). That, coupled with the cut-throat competition from 14 local hypermarket chains, did not bode well or Walmart’s success (DW, 2001).

b. Pricing Strategy

“Even Wal-Mart's "Always low prices" approach failed to resonate in a country where roughly 30 percent of the retail market is dominated by local discount stores” (Avila, 2008). Walmart had assumed that its Every Day Low Pricing would do wonders in the expensive German economy. However, despite high prices and manufacturing costs in many of Germany’s economic sectors, the food retailing industry does not follow suit and in fact has one of the lowest prices and profit margins. This, accompanied by the numerous hard discounters, failed to boost Walmart sales over price. Moreover, the failure of the ‘US Style’ lean retailing system in Germany, the restricted supply chain networks, the induction of ‘greeters’ and other unnecessary labour costs, had made Walmart compromise on its price, making it less competitive in the German market.

c. Acquired Chains

“Unfortunately, some of "the stores that Wal-Mart bought and the locations that they were in were not 'winning sites’, says Bonanno of Management Ventures. “Many of the Interspar stores, in particular, were dingy and in need of renovation” (Avila, 2008).

On entering the German market, the acquisition of Wertkauf and Interspar put Walmart at the 11th position in German Retail sales which was a relatively weak position considering 80% of the sales were grasped by the top five chains. This position acquired through second class chains was not good enough to get sufficient critical mass for Walmart’s expansion. The headquarters of both chains were located in different cities which made it difficult to manage them. To solve this problem, Walmart tried to merge both headquarters to a single city, but instead of serving as a solution, this led to further problems as managers and employees of these separate chains quit in retaliation.

d. Supply Chain

Walmart’s success in most of its expansions as well as in the US has been owed to its network power and the ability to get to scale quickly and efficiently, ensuring maximum distribution at minimum costs. However, the regulated German market prevented this, and the concept of lean retailing that was first applied successfully by Walmart in the US was unable to be implemented here. The break in supply chains due to holdups and a long waiting time before unloading cargo led to insufficient supply to stores. An important strategy used by Walmart in the U.S. was to reduce costs by getting supplies directly from factories, making wholesaler intermediaries superfluous. However, in Germany, it could not apply the same due to strong power of wholesalers between food producers and distributors as compared to the weak power of Walmart in Germany’s existing retail system (Christopherson, 2007).

ii. Cultural Variation

"Wal-Mart was not very humble when they went in," says Bryan Roberts, an analyst at Planet Retail, an industry research firm. "They wanted to impose their own culture" (Norton, 2006).

Walmart made the grave mistake of enforcing American ethics and culture on the German population which was one of the major reasons it receives bad press and reputation. Walmart Labor regulations banned any workplace relationships or romances and even introduced a telephone hotline for employees who would come across such instances to immediately report it to the management. The official language used in Walmart at the management level was English; however, many German employees did not speak English.

“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 (Landler & Barbaro, 2006).

The example of Walmart’s ‘greeters’ and its ‘Ten-Foot Rule’, that have further been explained in customer service, also constituted as a manifestation of the cultural disparity between the United States and Germany. The German’s simply could not comprehend the smiling, greeting of the workers at a fast-paced discount store.

iii. Institutional and Legal Issues

Walmart had also received warnings from the German Cartel Office that blamed Walmart for not adhering to the fair competition laws and instead using dumping prices (below cost) that was adversely affecting the small and medium sized local competitors. It was eventually charged with predatory pricing and as a consequence was forced to increase the prices of household staple foods including milk, butter, rice, flour and cooking oil.

Furthermore, Germany Government is focused towards protection of small keepers and the various rules laid out instead of that fared adversely for Walmart. The Federal Law prohibited most stores to stay open later than 8 PM on weekdays and opening on Sundays. Retailers were not allowed to operate more than 80 hours a week which prevented Walmart to make use of its 24/7 convenience stores for their intended purpose. The law also discouraged discount offers to customers part of loyalty programs and schemes. Walmart, despite agreeing to follow the rules, had still been focused on lowering the cost of living in Germany and beating the competition (Andrews, 2000).

Walmart is also known to run in its Big-Box retail format that further facilitates its ‘pile it high, sell it cheap’ approach. However, German retailing is done in small neighbourhood stores and Big Box formats are looked down upon (Christopherson, 2007). The implementation of zoning regulations prevented Walmart from achieving its competitive advantage and utilizing its merchandising and retailing potential to the maximum.

a. Labour Unions

The Walmart management had multiple run-ins with the labor unions, labor laws and German employees throughout their tenure. Their anti-union policies clashed with the strong German unions. The largest union in the world, Germany’s Ver.di had filed a lawsuit against Walmart for not disclosing year-end figures that could be used to negotiate on wages. As a result, Walmart was forced to compromise, leading to a 0.5% more wage increase than the standard retail sector level (Jui, 2011). The Union also complained about Walmart ignoring co-determination rules, which gave the employees rights in corporate decisions (Ewing, 2005).

iv. Product/Service Failure

a. Customer Relations

“The problem was the company’s business philosophy, which had always worked so well,” wrote Frankfurt’s Börsenzeitung in what pretty much amounted to an obituary. “It’s people-centred – but that doesn’t actually work when the people aren’t American (The Tim Channel, 2012).