Case 5-1
Walmart: An Anatomy of Failure in the German Market
When the retail giant Walmart entered the German market, it made every conceivable mistake, looking
past the country's restrictive polices on store hours and new development, difficult economic conditions, unfavorable demographics, and intense price competition and entered the country with great
con-fidence stemming from its past success in the United States. First, it bought 21 profitable, largeformat Wertkauf stores in 1997, followed by 74 Interspar stores that were smaller and unprofitable, and
it had a difficult time coordinating business with the two chains.
Walmart’s greatest challenge was that it did not understand the German market, the consumer culture,
and the employee culture.
The Retailing Market and Competition
When Walmart entered Germany in 1997, success was nearly impossible: Retail sales growth was
stagnant, and profit margins in German retailing, especially in the food businesses, were lower
compared with other European countries; Walmart’s net margins were less than 1 percent. Walmart
encountered fierce competition: Frugal Germans already had a number of well-established alternatives.
Among competi-tors were: Aldi and Lidl, the privately owned discounters; Globus; Real (Metro), the
country's largest listed retailer; Kaufland, Lidl's sister operation, which competed directly with Walmart's
hypermarkets; and Toon (Rewe Group).
All of these competitors had efficient if drab out-of-town sites and offered economies of scale. Furthermore, these competitors had greater geographic penetration in Germany, which enabled them to
adopt "zone pricing" tactics to match Walmart prices in areas where it was a key competitor. In the
ensuing battle over prices, all the retailers suffered. At the end of the day, price pressure was so intense
that Walmart's formula of clear price leadership did not work.
Regulations
The German regulatory environment was demanding. Until 1996, opening hours were restricted to 6 ᴩ.ᴍ. on weekdays and 2 ᴩ.ᴍ. on one Saturday each month. These restrictions have been lifted since then
to allow an additional 10 hours per week, including Saturday opening until 4 ᴩ.ᴍ. Other regulations
prohib-ited loss leader pricing—that is, pricing a product under cost to draw traffic into the store. More
im-portantly, German law dealt a blow to Walmart’s signature pricing strategy, everyday low pricing
(EDLP). Under German law, an item must be sold at the same reduced level for 2 months to be classified
as EDLP.
The Customer
Walmart believed that the German market was similar to that of its home state in the United States,
Arkansas, and the German consumer would, similarly, desire low prices but excellent customer ser-vice.
Walmart's strategy for Germany was to improve in-store appearance and ambience and emulate its U.S.
and Canadian success by achieving price leadership through cost leadership. It would also deliver high
quality customer service and act as a "market spoiler" on the service attribute. Walmart offered free
shop-ping bags in a market where consumers were used to paying for bags, bag packing service,
maximum al-lowed opening hours, credit card acceptance, baby trolleys and hospitality, especially
greeters at the store entrance. The retailer was attempting to break customer perceptions in Germany
away from their narrow focus on price as main the attribute for store choice—all the while advertising
low pricing.
Walmart fully misunderstood Germans, who like to bargain hunt on their own, without cheerful
assistants to hover around. Moreover, customers also failed to see what all the fuss was about because
Walmart's low-price message played in a very low-price marketplace. To illustrate, most German discounters make Walmart look downright luxurious. Germany's so-called "hard discounters" tear open
ship-ping cartons, set them on the floor and let consumers pick out the products. Discounting means no
frills-open boxes and just bare fluorescent bulbs. And consumers in Germany like a bargain and are used
to hunting for one.
They also have not taken kindly to the smiley face logo or traditional greeters, as homey charm does not
work well in a country that leans more toward staunch traditionalism. In general, Germans are not quick
adopters, as they tend to have set habits. It is difficult to get them to switch retailers if they do not
consider themselves to be underserved. The typical German consumer is also loyal to national manufacturers' brands, buys on price, and pays cash. A retailer accepting credit cards is not particularly attractive to Germans, who do not have the benefit of the loyalty programs that credit cards offer in the
United States.
It should be mentioned, however, that some of Walmart’s efforts elicited positive response from
German consumers. The retailer adapted to local tastes, adding fresh carp at Easter, and consumers responded well. Walmart also launched singles shopping events on Friday nights. Walmart workers
greeted customers with a glass of sparkling wine and freshly shucked oysters, took their photo, and
tacked it on a singles bulletin board, along with their age, interests, and the qualities sought in a
prospective partner. Walmart stated that about 30 couples found each other at a singles shopping night,
and its employees were fighting to work Friday evening shifts.
Employees
From the beginning, German employees were somewhat antagonistic toward Walmart’s practices. First,
when Wertkauf's Karlsruhe headquarters closed in favor of Interspar's, some talented people re-signed.
And Walmart bought the Interspar chain after committing to retain 200 hand-picked employees, many
of whom were poorly trained, prompting consumers to complain about inferior service. In general, the
employees resisted the company's customer-service culture and stood stone-faced as exuberant U.S.
managers did the company cheer.
Even more problematic was that Walmart managed its international operations from its home office in
the United States, rather than delegating decision-making and buying functions to the local Walmart
team. In fact, Walmart’s person in charge in Germany spoke no German and insisted that his managers
work in English. The next in charge, an Englishman, ran the show from England.
Employees were in uproar when they learned that Walmart’s ethics code included a ban on relationships at work and a hotline for employees to report on colleagues' violations of the rules. The clause
infuriated workers' councils in Germany and prompted a lawsuit. A German labor court ruled that parts
of the U.S. retailer's ethics code contravened German law.
Walmart also encountered other cultural problems, clashing with Ver.di, Germany's service work-ers'
union on other issues and refusing to participate in national wage negotiations.
The End of Walmart’s German Venture
Walmart conceded to failure after nearly a decade of courting Germany, leaving the German mar-ket in
2006. It was an expensive lesson for the retail giant, who sold its stores to Metro—the end result for
Walmart was a $1 billion pretax loss. German retailer Metro Group AG said its acquisition of Walmart
Stores Inc.'s stores helped almost double the company's net profit in 2006. Metro had 66.7 billion euros
($81.64 billion) in annual sales in 2011, and it is one of the world's largest retailers; it operates about
2,400 stores in 30 countries in a mix of department stores, wholesale stores that sell to other
businesses, con-sumer electronics stores, and supercenters under its Real and Extra brands. It closed 15
of Walmart’s stores and converted 22 into Real stores, which are Walmart-style supercenters.
Walmart may be right to forget about Europe. It has a growing joint venture in China, though there is a
threat that its 30,000 employees may be unionized, while, in India, it has a procurement operation and
big plans, although foreign investors cannot own supermarkets. And the company is doing better than
ever in its North American markets: United States, Canada, and Mexico.