Why Failed Wal-Mart In Germany

Wal-Marts Strategy in Germany and Why It Failed

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Lee Scott, Wal-Mart Inc.s current CEO recently admitted in the German business weekly
Wirtschaftswoche (2001) that the company had messed more things up in Germany than it had
managed to do right !ndeed, an endless string o" ama#ing management blunders ha$e plagued Wal-
Marts German operation "rom the $ery start E$en worse, we hold that the company has so "ar not
succeeded to "ully remedy any o" them
Wal-Marts principal mistakes on the German market may be summari#ed as "ollows%
& ' "undamentally "lawed entry(by(ac)uisition strategy,
& a management by *hubris and clash o" cultures+(approach to labor relations,
& a blatant "ailure to deli$er on its legendary *we sell "or less , always*, *e$eryday low prices+ and
*e-cellent ser$ice+ $alue proposition, and
& bad publicity due to its repeated in"ringement o" some important German laws and regulations
Flawed entry-by-acquisition strategy
's mentioned abo$e, Wal-Mart entered the German market through two consecuti$e ac)uisitions
.hile its "irst mo$e , the 1//0 takeo$er o" the 21 Wert!a"f stores , was indeed a shrewd one, gi$en
that company1s e-cellent earnings (2 per cent o" sales), its competiti$e locations, and its $ery capable
management, Wal-Marts 1//3 "ollow(up deal with Spar "or 04 hypermarkets was widely 5udged an ill(
in"ormed, ill(ad$ised act, "or se$eral reasons%
& Spar is considered to be the weakest player on the German market due to its mostly run(down
stores, $ery heterogeneous in si#e and "ormat, with the ma5ority o" them located in less well(o"" inner(
city residential areas 6ot only did this result , "or Spar be"ore and Wal-Mart a"ter the ac)uisition , in
one o" the industries1 lowest turno$er per s) meter o" "loor area (7able 8), higher logistics costs and
lower returns E$en worse, Wal-Mart has been unable until today to upgrade most o" these stores and
to implement a uni"orm design to build brand recognition
& 6e$ertheless Wal-Mart was willing to pay Spar 9:80 million "or the transaction
, which was maybe the best deal throughout Spars troubled history as, two years earlier, Spar had
ac)uired 28 o" these stores "or as little as 93: million:4
.orst o" it all, through the e-tremely costly transaction Wal-Mart did not e$enpurchase real estate but
has only bought itsel" subtenant status at most o" these locations !t is $ery likely then that the
company will be "orced to gi$e up a number o" them as soon as the leases will e-pire
& E$er since, Wal-Mart has been in "ruitless talks with competitors Metro and#lo$"s in order to
e-pand its "ar("lung store network substantially (around 30 per cent o" the German population ha$e no
Wal-Mart store in their $icinity)::
.ith organic growth close to being a mission impossible "or hypermarket operators due to stringent
planning and #oning regulations, the company, as a result, still lacks the si#e necessary to e-tract
signi"icant price concessions "rom suppliers and to reduce its currently $ery high logistics costs
'ccording to German retail e-perts, "or a company to "ully e-ploit economies o" scale in "ood retailing
a minimum annual turno$er o" around 900 billion is de rigeur , a critical mass which is 2: times
higher than Wal-Mart #erman%s actual sales:8
Table 6: Productivity Per Unit of Sales Floor
an! "om#any Sales in $ % s&' meter
1 'ldi Group 0,:00
2 ;ewe Group :,3:0
2 Globus 4,2:0
4 <chwar# Group 4,/00
: =etro 4,000
8 Edeka Group 2,800
0 7engelmann Group 2,800
3 .al(=art 2,:00
/ <par Gropu 2,000
Source: &'M#/()I (2001, p1:)
Management by hubris and clash of cultures
=any companies1 ambitions to position themsel$es (pro"itably) in "oreign markets or to establish
themsel$es as *global players+ ha$e been thwarted by their inability to "ully understand and to adapt
to the speci"ic conditions o" doing business in other countries, e-posing their pro"ound lack o"
intercultural competence and management skills 7his obser$ation is e$en more true i" "oreign
markets had been entered through mergers or ac)uisitions 7he di""iculties o" making mergers work
are well(known to corporate leaders, the a""ected sta"", management theorists and management
consultancies:0 7he "ormidable challenge o" post(merger integration is "urther complicated
signi"icantly i" it must be taken up in an international en$ironment, with all issues "re)uently being
compounded by a lack o" language and culture bridging skills >ailure to accomplish this task
satis"actorily, howe$er, ine$itably results in mutual distrust, disillusionment, demoti$ation and the
e-odus o" high potentials as well as o" *old hand+ sta"" , with the welldocumented negati$e impact on
the merged companies? competiti$eness, pro"its and shareholder $alue
7his is e-actly what happened to Wal-Mart #erman% 7o begin with, it appointed "our CEOs during its
"irst "our years o" operation 7he "irst was *o$ +iar!s, a @< citi#en and a Wal-Mart, Inc. senior $ice
president who had pre$iously super$ised around 200 @< <upercenters "rom the company
head)uarters in Aenton$ille, 'rkansas 6ot only did he not speak any German Bue to his
unwillingness to learn the language , a $iew shared by most o" the other @< managers that were
redeployed to Germany to assist him ,, English was soon decreed as the o""icial company language
at the management le$el
.hat is more, he displayed an astounding degree o" ignorance with regard to the mani"old
comple-ities and the legal and institutional "ramework o" the German retail market (see below),
ignoring any strategic ad$ice presented to him by "ormer Wert!a"f e-ecuti$es , thereby encouraging
the top three o" them to lea$e within si- months:3 '"ter Wal-Marts 1//3 ac)uisition o" @C retailer
-S.-, +iar!s was replaced by Englishman
-llan Lei/hton !n terms o" his speci"ic market knowledge as well as linguistically as ine-perienced as
+iar!s, he pre"erred to head the company "rom his Deeds, @C, o""ice and was replaced as little as si-
month later by 0ol!er 1arth:/ 7he "irst German e$er to be entrusted with the top 5ob, and one o" the
"ew remaining e-(Wert!a"f managers still aboard, he too "ailed to integrate Spar , a rather loose
organi#ation o" largely independent regional units , into Wert!a"f , "ormerly a highly centrali#ed
owner(controlled "irm , and to blend their $astly di""erent corporate cultures with Wal-Marts.
<ince =ay 1st, 2001, &a% )afner, supported by a group o" nati$e Germans, has been at the
company1s helm Eowe$er, the 5ury is still out as to whether he is indeed the badly needed
integrator80 'ccording to headhunters Wal-Mart #erman%s is widely considered to be a $ery
unattracti$e employer, with around one third o" its e-ecuti$es , "rom store managers upwards ,
acti$ely seeking 5ob o""ers "rom other companies 7he underlying causes are said to include
widespread dissatis"action with their relati$ely low pay, Wal-Marts practice to trans"er store managers
a"ter one or two years, and the (allegedly) *low 'merican )uality standards+ o" most merchandise
currently in store81 Others complained about the company1s "rugal internal regulations "or business
trips, in particular the decree that e-ecuti$es ha$e to share rooms , a rule unheard o" in any other
ma5or German or European company (and, in our $iew, unen"orceable were it e$er imposed)
!n the @<, Wal-Mart is a strictly non(union employerF only 12 o" its more than one million @<
employees , workers in the meat department o" its Gackson$ille, 7e-as, store , are known to be
union members82 !n Germany, like in most other parts o" Continental Europe howe$er, unions,
despite decreasing membership, still wield enormous in"luence , both in the political sphere and on
the shop "loor 7he unions1 enthusiasm, prompted by Wal-Marts decision to hire more sta""
immediately a"ter its entry in Germany to pro$ide *e-cellent customer ser$ice+, )uickly "aded away
<oon "aced with rapidly mounting losses, Wal-Marts management resorted to sta"" cuts and closures
to reduce its abo$e(a$erage personnel costs Bue to strict worker protection regulations, howe$er,
making surplus workers redundant can be a complicated, lengthy and costly a""air in Germany , a
cumbersome "act o" li"e "or its German competitors, but, ob$iously, terra inco/nita "or Wal-Mart
#erman%s (mostly) 'merican e-ecuti$es .hat is more, the company re"used to "ormally
acknowledge the outcome o" the sector(speci"ic centrali#ed wage(bargaining process (which is the
standard procedure "or determining wages in Germany) 2er.di, the rele$ant union, and the retailers1
employers1 association had agreed upon 'lthough it $oluntarily paid its sta"" 0: per cent on top o"
the general raise, to the company1s management complete surprise, 2er.di retaliated by organi#ing
walkouts at 20 stores throughout the country , resulting not only in lost sales but in badpublicity "or
*union(bashing+ Wal-Mart82 's will be discussed in more detail below, the 2er.di3Wal-Mart
contro$ersy is escalating a"ter the union sued the company "or breaching Germany1s "inancial
in"ormation disclosure regulations
' "inal anecdote pro$es Wal-Marts initial hubris with respect to its suppliers% !ts minor role and lack o"
buyer1s power on the German market notwithstanding , or simply being unaware o" it ,, the
company1s chie" e-ecuti$es demanded unlimited access without prior announcement to the "actory
"loors o" their suppliers, including most o" Germany1s best(known and most $aluable consumer
brands, "or on(site )uality inspections
7o nobody1s surprise , Wal-Marts leaders1 ob$iously e-cepted ,, howe$er, the $ast ma5ority o" them
did not "eel the (commercial) need to oblige84
Neither e!eryday low "rices nor e#cellent ser!ice
7raditionally, Wal-Mart has in"licted a "ull(scale price war on incumbents on e$ery single market it has
so "ar entered in order to credibly communicate its legendary *e$ery day low price+(pledge to local
consumers .hile e-tremely success"ul almost e$erywhere else, this strategy badly back"ired in
Germany , largely due to the a"ore(mentioned ignorance, lack o" e-perience, and hubris o" Wal-Mart
#erman%s original top management team led by *o$ +iar!s%
& 7o his complete surprise, all a""ected German competitors, "irst and "oremost -ldi , which
throughout its e-istence success"ully de"ended its position as Germany1s undisputed cost and price
leader ,, Lidl, *ewe and (de!a, not only matched all o" Wal-Marts price cuts8: E$en worse, the
results o" se$eral independent sur$eys, commissioned by newspapers or conducted by Stift"n/
Warentest, a highly in"luential go$ernment(sponsored consumer protection agency, and the
#esellschaft f4r &ons"mforsch"n/ (G"C), Germany1s biggest market(research institute, demysti"ied
Wal-Marts "undamental $alue proposition *e$eryday low prices+ as a (largely) empty promise% 7hey
showed that Wal-Mart had not been able to systematically undercut -ldi and the other hard
discounters, and that, by contrast, its assortment was not e$en substantially cheaper then the
traditional retailers1 (*ewe, (de!a etc) o""erings88
& <o "ar Wal-Mart #erman% has not succeeded in deli$ering on the second part o" its $alue
proposition , *e-cellent customer ser$ice+ , either Ay contrast the company has repeatedly been
rated as only 5ust or e$en slightly below a$erage in terms o" o$erall consumer satis"action (7able 0) 80
!n our $iew, this is because Wal-Marts traditional @<(centered $iew o" customer ser$ice, enshrined in
some o" its "amousHnotorious basic belie"s and rules, is only partly compatible with thee-pectations o"
German consumers 7his is in particular true o" the "amous *ten"oot(rule+ (*three(meter(rule+ in metric
Germany) and the institution o" the *greeter+ (which, in the meantime, ha$e been largely abolished
a"ter shoppers unaware o" its key role in Wal-Marts ser$ice concept had repeatedly complained that
they had been harassed by strangers on store premises) .hile yielding little tangible economic
bene"its , German consumers ha$e been accustomed "or decades to shopping at sel"(ser$ice
"ormats without any sta"" assistance ,, the additional personnel re)uired to per"orm these ser$ices
e""iciently, are the cause why Wal-Marts labor costs (as a percentage o" total costs) continue to
remain abo$e the industry1s a$erage
& >inally, su""ice it to say that Germany1s restricti$e shopping hour regulations pre$ent Wal-Mart (as
well as any other Germany(based retailer, to be sure) "rom o""ering its customers the additional
con$enience and superior shopping com"ort associated with 24H0 operations
Table (: German etailers: )verall "ustomer Satisfaction an! "om#any Satisfaction Inde*
+,a*imum: -../
- 0ldi Grou# (1'23
4 Globus (-'24
1 5augland (-'.-
2 6id7 68'.8
3 9orma 6:'34
6 ,ar!t!auf 66'86
( Wal;,art 62'18
: ,etro 61'8(
8 Penny 61'14
-. eal 64'3.
Source: &'M#/()I (2001, p1:)
$e"eated Infringements of German %aws and $egulations
.ith the ensuing negati$e publicity, Wal-Mart stands accused o", or has already been tried and "ined
"or breaching se$eral important German laws and regulations, in particular & <ection 20(4) o" the +'ct
'gainst ;estraints o" Competition* (#eset5 /e/en Wett$ewer$s$eschr6n!"n/en or G.A) 7his
centerpiece o" German antitrust legislation bans all +undertakings with superior market power*83 "rom
selling a range o" goods +not merely occasionally below its cost price, unless there is an ob5ecti$e
5usti"ication "or this*,
& <ection 22:a o" the +Commercial 'ct* ()andels/eset5$"ch or EGA) !t re)uires all corporations to
disclose basic "inancial in"ormation including a balance sheet and an annual pro"it or loss statement
and, & in early Ganuary 2002, the recently amended +Obligatory Beposit ;egulation* !t stipulates that
retailers must pro$ide a deposit(re"und(system "or certain types o" plastic and metal be$erage
containers or, alternati$ely, to re"rain "rom selling any product bottled or canned in containers which
are co$ered by this piece o" legislation
Wal-Marts "ailure to comply with the pro$isions o" the German antitrust act may simply be considered
a "urther proo" o" its initial hubris with regard to the workings and intricacies o" the German retail
market8/ !ts unwillingness to publish key "inancial data , despite increasingly he"ty "ines le$ied
against the company, and more recently, also against .a2e Fer/"son, head o" Wal-Marts European
operations, &a% )afner (CEO Germany), and #ottfried )a"/ (C>O Germany) personally , is now
widely percei$ed by analysts and the media as a blunt attempt to pre$ent outsiders , including
shareholders , "rom taking a true and "air $iew o" the dire state o" Wal-Mart7s German business
acti$ities00,01
"onclusion and )utloo!
Wal-Marts di""iculties on the highly competiti$e German market can, a"ter "i$e years o" e-tremely
disappointing results, no longer be discarded as mere teething problems
.idely percei$ed now as a mediocre retailer with no particular strengths and weaknesses, let alone
any particularly attracti$e and credible $alue proposition, Wal-Mart #erman% seems light(years away
"rom meeting the internal "inancial benchmarks set by Wal-Mart Inc.s Aenton$ille head)uarters% a
return on e)uity o" 10 per cent (10 per cent a"ter ta-) and the re)uirement that any in$estment must
ha$e been completely re"inanced by means o" the cash "low it generates a"ter a ma-imum period o"
1: years 's we ha$e tried to demonstrate, Wal-Mart1s "ailure on the German market has been the
ine$itable result o" its inability , caused by an astounding degree o" ignorance o" key principles o"
internationali#ation strategies and intercultural management , to select and implement an ade)uate
entry and business strategy !nstead o" shaking up the e-tremely competiti$e German retailing sector
with an inno$ati$e approach to doing business, as it has so con$incingly done in the @<', in
Germany the company seems to be the prey rather than the hunter Wal-Mart #erman%s "uture looks
bleak indeed
:4 <ee 81rian (2000)
:: Metro1s owers e$en sacked the company1s year(long CEO, (rich 9onradi, who was rumored to ha$e prepared a deal, to signal their unwillingness to
sell out to Wal-Mart 6e$ertheless Metros*eal and (:tra di$isions would nicely "it in with Wal-Marts <upercenter "ormat, while Metros CashICarry
out"its would per"ectly complement Wal-Marts <am1s Club membership warehouses
Eowe$er, Metro reacted to Wal-Marts entry not only by streamlining its (then) lossmaking (:tra and *eal subsidiaries !n addition, it ac)uired German
ri$als -ll!a"f and &rie/$a"m, thereby signi"icantly limiting Wal-Marts scope "or "uture e-pansion in attracti$e locations
:8 <ee 1er/mann (2000)
:0 <ee )ofstede/;e"i<en/8ha2%/Sanders (1//0)F &a%/Shelton (2000)F 1e!ier/1o/ard"s/8ldham
(2001)
:3 <ee 81rian (2000)F 1a"mann/#or/s (2001)
:/ <ee )irn (2002)
80 !t is being rumored that Wal-Mart Inc., helped by headhunters, is acti$ely seeking a successor "or
him due to Wal-Mart #erman%s continuously unsatis"actory per"ormance (Schlitt 2002, p 2/)
81 <ee Wen5el (2002b)
82 <ee 1er/mann (2000)
82 <ee #ehrmann (2001)
84 <ee 1er/mann (2000)
8: <ee Mana/er Ma/a5in (1///b% 42)
88 <ee Le$ensmittel5eit"n/ Internet edition (2002b)
80 >or a more recent sur$ey , with an e)ually disillusioning outcome "or Wal-Mart , see Wirtschaftswoche
(2002)
83 Aased upon section 1/ o" the act both the German Federal 9artel 8ffice and the courts de"ined Wal-Mart #erman% as an undertaking with superior
market power , despite its tiny share o" the German retail market but because o" the huge "inancial resources o" Wal-Mart Inc
8/ 's "or the *Obligatory Beposit ;egulation+, almost all retailers reported transition problems
00 <ee Financial +imes .e"tschland 8nline (dition (2002)F Mana/er Ma/a5in 8nline (dition (2002)
01 '"ter su""ering a series o" de"eats be"ore lower courts, in mid(=arch Wal-Mart #erman% took the case to the 1"ndes2erfass"n/s/ericht, the German
S"preme 9o"rt (*on!e/de 'aoli 2002)
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