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:
1. ‘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.
2. 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.
3. 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.
