WAL-MART IN GERMANY
The case features in David Needle (2010), Business in Context, 5th edition,
Cengage/South-Western, pp. 159-62.
The Wal-Mart Success Story
The first Wal-Mart store was established by Sam Walton in 1962 in Rogers, Arkansas. At
first expansion was steady with 24 stores by 1967. The initial focus for Wal-Mart
operations was small town, rural America. The company grew to 276 stores by 1980 and
the Wal-Mart empire reached 640 stores by 1984. The company currently has around 4,100
stores in the USA and by 2003 it was the world’s largest retailer, three times as large as its
nearest rival, the French company, Carrefour. It was also the world’s largest employer with
1.9 million employed worldwide in 2007. In terms of revenue, it remains the world’s
largest company and in 2002 it was ranked number one in the Fortune 500.
Wal-Mart is noted for its large and diverse product range, which includes food, clothing,
electrical goods, homeware, pharmaceuticals and so on. The USA business comprised four
types of operation, ‘supercenters’, ‘discount stores’, ‘Sam’s Club’ and a small number of
convenience stores. The ‘supercenters’ carry the full range of goods, including food and a
large variety of other types of merchandise. The ‘discount stores’ are like the ‘supercenters’
without the food and ‘Sam’s Club’ is a membership discount warehouse for bulk purchases.
According to Knorr and Arndt (2003) the success of Wal-mart is based on four factors.
• Low prices.
• A focus on customer service.
• IT driven logistics and inventory management involving large centralized
warehouses.
• A strong corporate culture and employee commitment.
The 2007 company web site describes its core values as, “quality goods at low prices,
responsible manufacturing, and opportunities for growth…dedicated to excellence in every
part of our business”. The company also prides itself on its service orientation. Staff are
expected to be committed to the organization and all are expected to be positive and
cheerful in their dealings with customers. The US operation developed a specific approach
to customer service and staff were employed to greet customers on entry to the store, to
assist them with packing their purchases into bags and to be proactive in assisting customers
anywhere in the store.
Going International
A number of factors influenced Wal-Mart management to expand outside the USA. The
company had perhaps reached the limits of expansion in the USA. There was strong
competition from such as Target and K-Mart, both with similar strategies to Wal-Mart and
both also started in 1962. Furthermore management believed that the success formula of
the American operation could be replicated elsewhere. The first international store was
opened in 1991 in a suburb of Mexico City and the company developed rapidly in both
Mexico, initially in a joint venture with the local firm Cifra, and in Canada, largely through
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the acquisition of Woolco. Mexico remains Wal-Mart’s biggest international operation with
over 900 stores. The company also opened stores in Puerto Rico, Argentina, Brazil, Japan,
South Korea, Indonesia and in Europe, in Germany and the UK. With the purchase of
Asda, Wal-Mart now owns 337 stores in the UK, its largest European operation. The most
recent developments have been in Central America with stores opening in Costa Rica,
Guatemala, El Salvador, Nicaragua and Honduras, all in 2005. There are plans to open in
India in 2008 as Bharti Wal-Mart in a joint venture with Bharti Enterprises. The major
international operations are listed below in Table 1.0.
Table 1.0 Number of Wal-Mart Stores outside the USA, October 2007
Country
Stores
First opened
Mexico
919
1991
Japan
392
2002
UK
337
1999
Brazil
298
1995
Canada
290
1994
China
184
1996
Costa Rica
140
2005
Source: http://www.walmartstores.com, October 2007
In 1993 Wal-Mart established an international division to develop and manage its
international operations, with the anticipation that these would soon contribute over a third
of the company’s profits. By 2007 the overseas operations contributed around 20%.
The Entry into the German Market
Some analysts believed that Wal-Mart’s decision to expand into Europe via Germany
instead of the UK was a strange decision given the cultural links between the USA and the
UK. However the German market was attractive as the world’s third largest economy with
80 million people, who were Europe’s largest retail spenders. Furthermore, management
saw Germany ideally located at the heart of Europe, and an important member of the EU.
Unlike the UK, Germany was part of the Euro zone.
Wal-Mart entered the German market at the end of 1997 with the purchase of 21 stores from
Wertkauf and added to this in 1998 with the purchase of 74 Interspar stores from the French
company, Intermarché. After only 4 years of operation in Germany it was clear that WalMart was struggling with estimated accumulated losses at around 1 billion Euro, although
only estimates were available as the company published no accounts. The estimated losses
continued at the same rate and by 2005 the company had cancelled its expansion plans,
closed 2 of its stores and laid off 1350 staff. The failure was not unique to Germany. In
Indonesia and South Korea all Wal-Mart stores had either been closed or sold. The
company was not doing particularly well in Japan and Brazil, countries where it had large
numbers of stores.
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The Problems
A large number of reasons have been given for the failure of Wal-Mart to establish itself in
Germany. We identify the main ones below.
The nature of the German market. At the time Wal-Mart entered the German market,
retail spending had stagnated and was about to enter a period of decline as the German
economy slowed-down in 2000. In any case the German retail market was historically one
where only low margins were possible and it was already dominated by a small group of
retailers notably Metro, Aldi, Rewe and Schwarz (with the brand Lidl). The acquisition of
Wertkauf and Interspar gave Wal-Mart only a 1.1% share, which many argued was too
small to create a critical mass for expansion. Furthermore, further acquisitions were
difficult as no other firm wanted to sell. Some of the competitors, notably Aldi had
strategies and styles very similar to Wal-Mart with discounted goods, low prices, own
brands and a diverse range of products.
The acquisitions. Both Wertkauf and Interspar were generally regarded as second class
operators in the German retail market and both had relatively poor reputations. WalMart
bought the stores but not the land on which they were located giving the new company
problems with leases and imposing limits on alteration and expansion. In any case, WalMart was prevented from building big stores by German zoning regulations which favoured
small to medium stores such as Aldi and Lidl. The stores that were purchased varied in
size, and lay-out and rarely were they in prime locations. As a result the company had
difficulty upgrading the stores to match Wal-Mart brand expectations. Wertkauf presented
an additional problem in that all its stores were located in the south west, hardly giving
Wal-Mart national coverage.
The senior managers. The company employed 4 different CEOs in the first 4 years of its
German operation, 3 American and one Englishman. None spoke German and Allan
Leighton, formerly of Asda, preferred to conduct the German operations from a UK base.
Although German CEOs were appointed later, the main language of business was initially
English. The senior managers from Wertkauf and Interspar, who transferred to Wal-Mart
found the level of expenses cut and some were even asked to share rooms on overnight
stays for company meetings. In general, middle and lower level managers felt that their pay
was lower than average for Germany. Wal-Mart on the other hand was concerned about the
high labour costs in Germany.
Corporate culture. Wal-Mart USA prides itself on its strong corporate culture across all
locations. The culture stresses customer orientation through a friendly, proactive and
committed staff. This clashed with German expectations. As Jűrgen Glaubitz of the HBV
trade union stated, “German workers do not like to be regarded as cheerleaders but as
personalities with their own ideas and rights”. In addition the German operation was
operating with three corporate cultures, the Wertkauf culture, the Interspar culture and that
of Wal-Mart US. Senior management had failed to integrate the 3 cultures.
Supply chain issues. Wal-Mart USA was used to wielding considerable power over its
suppliers. With a 1.1% share only of the German market, the company found suppliers
unwilling to tow the line. Nonetheless the senior managers behaved as in the USA and
demanded access to suppliers’ premises to check their operations and the quality of the
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products. This did not go down too well with German suppliers and as a consequence WalMart failed to build good relationships and never established the supply and logistics
network it wanted. Wal-Mart’s American buyers made classic errors in Germany such as
stocking large numbers of US pillow cases which did not fit German pillows.
Employee relations issues. In the USA Wal-Mart is a traditional non-union employer and
senior US managers failed to appreciate the role of trade unions in German business. The
company failed to join the Employers Association, a key body in Germany and refused to
enter into industry-wide collective agreements. There was a failure to consult with the
Works Council as required under German law and the union received no financial data such
as profit and loss accounts and balance sheets. This led to a series of strikes over pay, and
legal battles with the union over recognition and information disclosure. Wal-Mart was
frequently in the courts and frequently fined.
In February 2005 Wal-Mart issued its employees with a code of ethics. The code forbade
them from accepting gifts from suppliers and barred them from having relationships with
colleagues in a position of influence over them. Moreover all employees were asked to
report immediately any transgression of the code via an anonymous ‘hotline’. The
company argued that their stance was ethical and protected employees from sexual
harassment. However the employees were annoyed, the unions and the Works Council
objected and ultimately the German courts ruled that it was illegal for a company to impose
restrictions on the nature of relationships.
Pricing issues. Wal-Mart’s simple strategy was to enter a new market and undercut all its
competitors to build market share. In Germany the competition, especially Aldi and Lidl
retaliated with their own price cuts and consumers felt that Wal-Mart was not offering the
best deal. As one New York analyst put it, “the competition essentially out-Wal-Marted
Wal-Mart”. A tactic frequently used in the USA was the use of loss leaders, selling below
cost price on a limited range of goods to attract people into the store. Such a tactic was
contrary to German fair trading and anti-trust laws to protect the smaller firm from unfair
competition.
Customer relations issues. In the USA, Wal-Mart have an opening policy of 24/7.
German law forbids shop opening beyond 80 hours per week and there is no opening on
Sundays and public holidays. Germany has the most restrictive opening times in Europe;
stores in the UK are allowed to open for 168 hours and those in France, for 144 hours. WalMart’s marketing strategy is based on the concept of customer service as a competitive
edge. In a number of independent surveys Wal-Mart Germany was rated below average by
its customers. Three related practices illustrate the problem Wal-Mart had with its German
customers. Wal-Mart have always employed ‘greeters’ and ‘baggers’. The ‘greeters’
engage customers as they enter the store and the ‘baggers’ help customers by putting their
purchases into bags at the check-out. Throughout the store there is also a 10 foot (3 metre)
rule, whereby employees are required to offer direct assistance to anyone within this
distance from them. German customers saw greeters as a form of harassment and did not
like anyone else handling their purchases especially where food was involved. In general
customers wanted to be left alone to get on with their shopping and saw the intervention of
Wal-Mart staff as an imposition. In addition some customers believed that these ‘extra’
personnel added unnecessarily to the cost of products in the store.
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Financial reporting. The company was fined repeatedly for failing to comply with
German regulations on the disclosure of financial information and they were pursued by the
unions through the courts, resulting in well-publicised legal battles.
Image and publicity. All the above contributed to a generally bad press for Wal-Mart
throughout its time in Germany. The national trade union organization issued warnings to
all union members about the failure of Wal-Mart to comply with the law. In 2006 at the
Berlin Film Festival, Germans watched the premier of a US film, “Wal-Mart – the high cost
of low price”, released in the USA the previous year. The film exposed Wal-Mart for
behaving unethically towards employees and suppliers and for its corrupt dealings with
local politicians. The film became a success in Germany. The operation of Wal-Mart in the
German market was at a time of fairly widespread anti-American sentiments within
Germany over the US involvement in Iraq.
Wal-Mart pulls out
By 2006, Wal-Mart had 85 stores remaining in Germany. In July that year these were sold
to a rival company Metro. In typical fashion no financial details were disclosed but the deal
is estimated to have been concluded at less than the value of the assets at a loss to Wal-Mart
of US$ 1 billion. Just after the conclusion of the deal in Germany, Wal-Mart sold all its
stores in South Korea and by 2007 operates in only 13 countries. Its international rival
Carrefour operates in 29 countries. Historically Wal-Mart has always done best in markets
closest to the USA, namely Mexico and Canada. Asda in the UK is a rare success
contributing 43% of Wal-Mart’s international revenue.
The failure in Germany is summed up by two academics thus: “Wal-Mart’s attempts to
apply the company’s proven US success formula in an unmodified manner to the German
market, however, turned out to be nothing short of a fiasco.” (Knorr and Arndt, 2003, p.i).
Questions
1. What aspects of this case can be attributed to cultural differences between the USA
and Germany?
2. What aspects of this case can be attributed to specific institutional arrangements
and regulations in Germany?
3. What other explanations may be offered to explain Wal-Mart’s failure in
Germany?
Sources
Knorr, A. and Arndt, A. (2003), ‘Why did Wal-Mart fail in Germany’, Band 24, pp. 1-30,
Institute for World Economics and International Management, University of Bremen.
http://www.walmartstores.com
http://www.businessweek.com/magazine/content/05-15/b3928086-mz054.htm
http://dw-world.de/dw/article-0,2144,2112746.00.html
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http://dw-world.de/dw/article-0,2144,318142.00.html
http://dw-world.de/dw/article-0,2144,1519102.00.html
http://business-guardian.co.uk/story/0,,1832673,00.html
http://business.timesonline.co,uk/tol/business/industry-sectors/article694345.ece
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