Wal-Mart Case Study
- 1. Wal-Mart’s German Expansion 1 Wal-Mart’s German Expansion Case Study
- 2. Wal-Mart’s German Expansion 2 There comes a point when further expansion and innovation is necessary for a business to remain relevant and progressive in its industry. As once articulated by Abraham Maslow, creator of Maslow’s Hierarchy of Needs, “You will either step forward into growth or you will step back into safety.” Established in 1991, Wal-Mart’s international division had its sights set on rapid expansion to strengthen its hold on the retail industry. In its first international partnership with Cifra S.A. in Mexico, Wal-Mart’s venture began with 2 stores and grew to 131 locations by 1997. By 2003, Wal-Mart’s Mexican division had a total of 597 stores, which included discount stores, supercenters, and Sam’s Clubs.1 The successes that the Mexican market offered to Wal-Mart's international division, as it became a powerhouse leader in retail, provided the corporation with the confidence to keep moving forward in new overseas ventures. Wal-Mart set out to establish its presence in a new international market every year, from Puerto Rico in 1992 to Japan in 2002. The corporation implemented the ideals exemplified in its mission statement, “We save people money so they can live better,” into these new international branches.(“Wal-Mart Corporate: Our Story”) In order to follow this motto, Wal-Mart’s focus in these countries revolved around successful practices and core competencies including its “Every Day Low Price” strategy, strong inventory control, and interactive personnel to form a positive shopping experience for every customer. With this strong vision of brand image, Wal-Mart conducted smooth transitions into the retail industries of Mexico, Brazil, and Canada. The acquisition of existing prosperous retail chains in these countries were a cornerstone of Wal-Mart’s worldwide expansion. These numerous valiant efforts across the globe were destined to lead to a failure for Wal-Mart if it did not administer precise precautions and research into the targeted markets. In 1997, Wal-Mart made the decision to expand into the German retail market with the acquisition of two retail chains, Wertkauf and Interspar. Unlike Wal-Mart’s previous international expansions, it 1 Information w ithin this paragraph is found in Trumbull and Gay.
- 3. Wal-Mart’s German Expansion 3 faced many difficulties when attempting to gain dominance in Germany. As a successful international corporation, Wal-Mart’s lack of strategic preparation ultimately cost it the German market. Without an in-depth understanding of German culture and inappropriate implementation of American standards, the corporate practices of this retail giant proved unsuccessful. The company had initiated mass international growth within a brief time period, which ultimately lead to the lack of an effective, in depth analysis of its procurements throughout Germany. Wal-Mart overlooked several attributes that were detrimental to achieving the same prosperity displayed in previous endeavors. This is exemplified by Wal- Mart’s acquisition of struggling, lower tier retailers to establish presence in Germany. Wertkauf and Interspar were acquired for a total of $1.6 billion. Although Wertkauf was a profitable company, Interspar was financially unprofitable and together the companies only held 3% of the retail market in Germany (Trumbull and Gay, 5). The Interspar stores created a further burden for Wal-Mart, as its stores were in poor repair and placed in destitute inner- city locations. Remodeling was necessary after acquisition to create a better store image, and for these stores to meet the quality brand name held by Wal-Mart. These two troubled and unprofitable companies did not serve as desirable launching points for Wal-Mart’s business efforts to take over the German market. Prior to Wal-Mart’s acquisition of the retailer Wertkauf in 1997, there were many different factors impacting the health of the German market. Although the German market was thought to be one of the more desirable and successful markets, in reality it was going through a troublesome economic period. The most notable cause of the ailing market was the German reunification in 1990. The merging of East and West Germany led to several economic problems, specifically the economic growth rate and unemployment. During the mid-1990s the economy produced a less attractive growth rate of 1.5% of GDP, in
- 4. Wal-Mart’s German Expansion 4 comparison to the estimated 3.6% growth rate in the 1970s and 1980s, (Ahearn, 2). In addition to the downturn in growth rate, an increasing unemployment rate led to further difficulties in the market. According to Raymond J. Ahearn and Paul Belkin, “Unemployment has ratcheted upward since 1970, from virtually full employment to a situation where in some years 10% of the population is out of work and another 4% can’t find work but are in government programs” (2). From 1997 to 2000 the German economy did not see a positive growth in employment, with an average growth rate of -0.525% from 1997 to 2000. The consumer retail market was not performing at an optimal level and, in turn, family incomes and lifestyles were impacted. In 1996 the average employee income in the retail sector was $24,050 for full time floor staff and $37,050 for full time management, while in 2001 these figures decreased to $19,880 and $30,970, respectively. This amounted to a decline of 17.33% for floor staff and 16.41% for management within a six year span (Trumbull and Gay).2 The economic importance of these market factors were overlooked by Wal-Mart with regards to how they would affect the expansion at hand. Upon entrance into the German market, Wal-Mart had a strong financial footing within the US as well as its international sectors. During fiscal year 1996, the company showed a 13% increase in sales, 2.1% of which were attributed to international stores. With strong control of inventory levels and efficient management, Wal-Mart was able to show a stronger inventory turnover which attributed to the jump in sales. During 1997, the turnover ratio for Wal-Mart reached 5.16. For any retail market, low inventory levels also depend on strong relationships with suppliers and loyal customers to allow products to quickly move in and promptly be resold. Wal-Mart’s intention to expand further internationally was based on the ability for operating cash flows to fund expansion. During the fiscal year of 1997, Wal- Mart acquired $5.9 billion in cash flow from operations, a $3.5 billion increase from 1996. 2 Much of the information in this paragraph is derived fromExhibit 11 of Trumbull and Gay
- 5. Wal-Mart’s German Expansion 5 With this increased availability of cash flow, Wal-Mart estimated capital expenditures of 1998 could reach close to $3 billion (Wal-Mart), with the excess used to pay off short term debts. Operating under a current ratio of 1.6 and a debt to equity ratio of 1.22%, Wal-mart maintained stable liquidity to pay off short term finances. Wal-mart was also operating with return on equity of 19.2% and a return on assets of 7.9%. It appeared that Wal-Mart had the financial ability to continue operations and further and expansion.3 In Germany, Wal-Mart was faced with strong competitors Aldi and Metro AG. Though Aldi stores were generally smaller than Wal-Mart’s, Aldi’s 4000 markets held close to 19% share of the market, closely followed by Metro AG as another leading competitor (Wal-Mart: Struggling in Germany). Metro AG had strengthened its market share with the acquisition of the European operations of the Makro Group in 1998. With this acquisition Metro AG gained a 60% share in 86 C&C stores in the UK, the Netherlands,Belgium, Spain, Portugal, Greece, Poland, the Czech Republic and Morocco, as well as the 40% stake held by Makro in the operations of Metro Holding AG in Denmark, Austria, France, Italy, Hungary and Turkey (Metro AG, 21). During the time of Wal-Mart’s entrance, food retail markets were only yielding returns of 2% (How Well Does Wal-Mart Travel). This size of return created a stiff competition level to gain and maintain customers. Most retailers, including Aldi and Metro, cut back profit margin levels close to .09% in order to remain competitive in the market. This created a significant change for Wal-Mart, as it was used to annual profit margins close to 3% or $0.03 of profit (per sale dollar) (Wal-Mart Annual Report). Many stores in the German market were family owned and run with less focus on customer service and shareholder return, which allowed them to keep prices competitively low causing difficulty for Wal-Mart. 3 Financial Information w ithin these paragraphs found in Wal-Mart's AnnualReport for 1997.
- 6. Wal-Mart’s German Expansion 6 Due to the fact that industry averages were lower than what Wal-Mart was accustomed to, it was important for Wal-Mart to hire knowledgeable managers to ease its entrance into Germany. When hiring, especially in an international setting, it is important to remember that the foundation a company lays is the key to its success. An expansion as large scale as Wal-Mart into Germany required a strong foundation guided by leadership and management. Wal-Mart made a detrimental decision regarding management when the company appointed Ronald Tiarks as head of the German sector. Once a Wal-Mart Senior Vice President in Arkansas, Tiarks oversaw 200 US Supercenters and spoke only rudimentary German. With little background in the German retail market, let alone the German language, Tiarks managed the division in an extremely inefficient way. Any merge into a foreign country requires the expanding company to overcome language barriers in order to communicate with customers it now seeks to serve. One of Ronald Tiarks’ first orders of business involved changing the official company language of Wal-Mart from German to English. This made his job substantially easier, but confused the previous managers, employees, and customers by disrupting their usual workplace dynamic. The decision became a major problem for the three long-standing managers of WertKauf with whom Ron Tiarks was required to collaborate, as they struggled to adjust. Tiarks essentially rid himself of these three managers, Richard Reinshagen, Torsten Alfes and Thilo Keitel, in favor of American managers. Reinshagen, Alfes, and Keitel were veterans in the German market and could have eased Wal-Mart’s entrance into Germany with their insight, had Ron Tiarks not pushed them away. His decision to hire American managers only reaffirmed the American Wal-Mart philosophy and ideology, instead of attempting to adapt Wal-Mart to fit the German consumer’s needs. Not only did the change in official language anger Wertkauf’s previous managers, but also its German employees. This change, “…negatively influenced the morals of the German employees, not because of their bad
- 7. Wal-Mart’s German Expansion 7 English, but because they felt like outsiders” (Shurrab, 3). German employees quickly became demotivated because they had no say in the way they interacted with their customers. These employees lacked the motivation to carry out their job with the enthusiasm that they once had when they felt comfortable in their work environment. While German employees had trouble adapting to the new official language, Wal- Mart struggled with German labor unions. With no legal minimum wage, it became customary in the German culture that unions and companies work closely together to create pleasant and fair working conditions. Under the management of Ron Tiarks, the American- based company was unwilling to continue this relationship. The labor organizations in Germany proved to be much different than that of the United States and other countries that Wal-Mart had previously expanded into. Typically a non-union employer, Wal-Mart quickly became entrapped in a lawsuit with labor unions because it failed to research these organizations influence in the German retail market. Jack Ewing stated that, “German companies are used to dealing with workers' councils, which are easy to organize under German law. Some even say the co-determination system improves communication with employees” (Ewing). Wal-Mart entered Germany without the knowledge of the powerful co- determination system and management continually failed to adhere to labor organization rules, landing the retailer in dispute. Ver.di, a relatively large labor union of around 2,000,000 members, made up 25% of Wal-Mart’s German workforce. Previously, Wal-Mart rejected labor unions in a direct effort to keep wages and labor costs down. Ver.di filed a lawsuit against the company for not releasing year-end figures, which were crucial to Ver.di’s attempts to negotiate wages for its workers. Also, Ver.di complained that Wal-Mart did not sufficiently notify the union of store closings (Ewing). When this lawsuit and fine failed to alter the management of Wal-Mart’s workforce, it was a clear sign to Germans that Wal-Mart had no intentions of creating a healthy relationship within its workforce. Continued resistance
- 8. Wal-Mart’s German Expansion 8 by Wal-Mart to join HDE, Germany’s retail employers association, and agree upon the negotiated salary only confirmed to employees, potential customers, and German citizens that Wal-Mart was an outsider in the German market. Although Tiarks and his management team eventually conceded to a higher salary than that of HDE, the apparent lack of interest in integrating with German labor organizations created a public image distasteful to both employees and customers. As many Wertkauf employees were already frustrated with the change of language, Wal-Mart’s failure to comply with labor unions put it over the edge. The result was almost disastrous; many German Wertkauf employees resigned, leaving Wal-Mart, and Ron Tiarks, with little support from the German market. Tiarks previously explained that Wal-Mart, “decided to enter Germany because it is a large and stable market with high average income,” exemplifying his ignorance towards German retail competition and local growth (Dawson). Tiarks’ only strength was found in his commitment to achieving his goal, which was to “introduce the Wal-Mart philosophy to Germany” (Dawson). By drastically cutting prices only to have them matched, and even undercut, by competition, and never concerning himself with the legal and institutional framework of the German market, Tiarks stuck to the American standards. In Mexico, Wal- Mart’s success with management ultimately helped it achieve market success. Sam Walton, Wal-Mart’s founder, originally worked alongside Jeronimo Arango, one of Cifra S.A.’s founders, to expand into Mexico with knowledge of the market. Tufic Salem, an analyst at Credit Suisse First Boston in Mexico City explained that, “the management stayed and (the managers) knew the market very well,” citing that the taking of Cifra, “gave them a critical mass to build from” (Landler and Barbaro). Had Wal-Mart reviewed its previous expansion into Mexico, it may have hired the German leads differently. Wal-Mart’s success in the US is based around the ability to avoid the bullwhip effect through long term relations with suppliers, operating efficiency, and its commitment to Every
- 9. Wal-Mart’s German Expansion 9 Day Low Prices. With the Wertkauf and Interspar stores positioned in undesirable locations on the outskirts of the city, one being nearby several sex shops, remodeling was unavoidable in order to bring the acquired stores to the Wal-Mart brand image (Landler and Barbaro). However, stores were overly remodeled beyond the standard that most Germans expected of retail stores and, in turn, Wal-Mart incurred an excessive $200 million loss (How Well Does Wal-Mart Travel). Wal-Mart had to spend an exorbitant amount of capital repairing and implementing new scanning systems into the stores. In order to supply the German stores, Wal-Mart decided on a centralized distribution center strategy, with only two warehouses to supply all of its stores. This strategy was drastically different than the one that it followed in the United States, which ensured that every retail store is within a day’s drive from a distribution center. This lack of infrastructure with regards to distribution center locations led to trouble when Wal-Mart attempted to set up supplier relationships. Unfortunately for Wal- Mart, the lack of relationships with German suppliers, along with its small percentage of control over the market, meant that it would not achieve the same bargain deals as competitors were receiving. This lead to overall higher prices than the competition, and less customer draw to move inventory. Wal-Mart also sought to have its suppliers deliver products to the warehouses first, and then Wal-Mart drivers would distribute products to the stores. However, this was significantly different than the other German retail chains and led to a lack of communication between Wal-Mart and its suppliers in Germany. Many of the German suppliers would deliver goods to the individual stores instead of the distribution center. Orders were continuously lost or late, leading to an out-of-supply rate of up to 20%, compared to the industry average of 7%.Since Wal-Mart was constantly having difficulties with the suppliers, it would be difficult to counteract the bullwhip effect. Wal-Mart typically orders in large quantities, but because the company was having trouble with product turnover, it was forced
- 10. Wal-Mart’s German Expansion 10 to sit on large quantities of inventory. Wal-Mart eventually addressed some of its distribution inefficiencies in August 2001, when it hired Alli Distributors to handle the dry food division. This allowed the struggling retail giant to focus more on non-food product distribution. In addition to conflict with suppliers, Wal-Mart failed to take into account Germany’s strict zoning regulation system. This system only allowed Wal-Mart to open two new stores within the first four years, while it was unsuccessful in trying to enlarge its existing stores. The 1977 law that enacted strict planning and zoning regulations to protect traditional retailers prohibited the construction of stores greater than 800 meters squared to exceed designated retail areas (Trumbull and Gay, 6). This meant that large store development was restricted to the town or city center, with the objective of having the retail sector close to the consumer and working areas of the city. Opening a large retail store outside the urban area was possible only through multiple steps, and it could take several years for a new building to get approved. First, the city or town would have to create a “building use plan” that would present a development concept. This concept would take into account environmental effects and ensure that no private legal conflicts would exist, such as competing directly with local stores. This plan would then need to be approved by both the local town or city council and then the regional planning boards. The German government created these zoning regulations to ensure that large retail businesses did not pull customers outside of the cities and towns because this would leave old buildings and monuments vacant. In another attempt to protect the historic and small business industry in the German economy, the government implemented strict preventative measures against price setting. Wal-Mart faced initial obstacles when its ability to create ‘Every Day Low Prices’ was counteracted by the German Rebate Law. This law prohibited retailers from cutting prices below 5% of competitors. Selling products below cost had been disputed in Germany for years. In 1998, a new amendment to Germany’s Cartel Law made selling below cost illegal
- 11. Wal-Mart’s German Expansion 11 except with justification. This was put in place in order to prevent large companies from putting small retailers out of business. In June of 2000, Wal-Mart and several of its German competitors, such as Aldi and Lidl, were found guilty of breaking this new law in a pricing scandal for selling goods such as milk, sugar, and vegetable oil below cost. After several appeals, Germany’s highest court ruled that Wal-Mart’s pricing strategy undermined the competition and violated German antitrust laws. German officials feared that the country’s three largest food retailers would create a price war that, “...would decimate independent shops, ultimately leaving consumers with fewer options and higher prices” (Mitchell). This not only prompted a reevaluation of Wal-Mart’s pricing strategy, but also negatively impacted Wal-Mart’s reputation and finances. In addition to pricing restrictions, Wal-Mart also faced German regulations regarding store hours. German stores were typically open only 64.5 hours a week, making them the shortest opening hours in all of Europe. The Store Closing Law was designed to protect the German workers from being manipulated into working excessive hours, and to protect the traditional retailers from the larger chains that were able to keep stores open longer and offer lower prices. A study that was conducted between 1996 and 1999 found that 64% of German consumers did not desire longer store hours. Slowly, store hours were being liberalized, with the most recent change in June 2003 which extended Saturday store hours until 8pm. Wal- Mart consistently pushed for longer store hours, however, many of the labor union contracts limited employees to working no later than 6:30 pm. According to one German Wal-Mart employee, management would threaten to “close down certain stores if the staff did not agree to working longer hours than their contracts foresaw and did not permit video surveillance of their work”(Schaefer). Although there was no demand for it, Wal-Mart pushed for longer store hours that did not match the German culture, and its competitors recognized this misalignment. Wal-Mart’s ethics code was also very questionable which “required employees
- 12. Wal-Mart’s German Expansion 12 to spy on fellow workers (and report any misconduct), but prohibited any sexual intimacy among employees.” The ethics code was eventually struck down by a German court in 2005 (Ewing). Wal-Mart’s constant attempts to force longer labor hours not only increased the cost to do business, but also created unhappy employees and tampered with the positive brand identity of Wal-Mart. The Wal-Mart Corporation changed the face of retail, trailblazing a new customer experience that set it apart from its competitors. The retail giant focused on the ideals of helping customers and communities save money and live better, and it in turn takes this vision into consideration in all corporate marketing actions. Customer needs and expectations, however, were greatly overlooked when deciding how to approach customer service in the German market. As a lower context culture, Germans required less interactivity between employees and customers, and were used to a more unfriendly retail environment. When Wal-Mart introduced its friendly, forthcoming service, Germans were taken back by it. Customers became skeptical of the service they were receiving after being welcomed by a traditional Wal-Mart greeter. At checkout, customers also faced practices they were not accustomed to such as employees providing bags and bagging groceries at no additional charge. Many customers were perturbed that strangers touched the goods they had purchased, and placed them in unrecyclable plastic bags that their environmentally-friendly culture did not support. Cashiers were often overly enthusiastic and their use of excessive smiles were frequently misinterpreted as advancements towards customers.. Wal-Mart struggled to maintain German customers were not accustomed to the size and standards of supercenters and, in turn, assumed stores of this appearance and level of service must coincide with higher prices. This consumer perception did not align with Wal-Mart’s actual pricing strategy. Customer loyalty encompassed a large part of the German culture. When desired products were not found in a local butcher shop or specialized store, customers often headed
- 13. Wal-Mart’s German Expansion 13 for a supermarket which they were familiar with. Rather than selling tradition German brands customers recognized, Wal-Mart instead sold American products consumers were not accustomed to. The vast range of American products were not tested in the new market to see if they were as popular as in the US. German’s preferred more fresh items, such as meat from a butcher, and instead were only offered pre-packaged beef. German consumers continued to focus on supporting domestic retailers instead of altering their shopping experience to accommodate American Wal-Mart standards. While customer loyalty was a giant implementation hurdle for Wal-Mart to overcome, the cultural differences between retail in the United States and retail in Germany proved to be even more problematic. By promoting the Wal-Mart name, the company was unable to gain credibility and reliability under already established stores. Customers who might have once preferred their local Wertkauf store were at once thrown through a loop when the Wal-Mart name appeared. If Wal-Mart had understood the concept of German customer loyalty, it would have gradually acclimated customers to its strategies and procedures. With strong competitors Aldi, Lidl and Metro taking up a large percentage of the German market, Wal- Mart was left scrounging for customers. Wal-Mart’s attempts to positively differentiate its stores from the domestic competition were not seen in the desired light that the business had hoped, as consumers gravitated towards their reliable German retailers. Sam Walton stated that, “The goal as a company is to have customer service that is not just the best but legendary” (Walter). This aggressive marketing strategy was positively viewed in the United States but was simply not applicable in the prominent and proud culture of Germany. In retrospect, there are many actions that Wal-Mart should have taken in preparation for its entrance into Germany. Due to the fact that the corporation was expanding internationally so quickly led to the overlooking of many important cultural norms that Wal- Mart did not adapt to as we described above. Before moving into Germany, the company
- 14. Wal-Mart’s German Expansion 14 should have consulted and/or partnered with German businessmen who had extensive experience and knowledge about this unique retail market. It would have been in Wal-Mart’s best interest to research the different adjustments that it would have to make to its business plan due to culture. Extensive studies of how businesses had previously attempted to enter the German market, both successfully and unsuccessfully, would have benefited Wal-Mart’s entrance strategy. There is unlimited information that can be learned by simply looking to the past, and trying to decipher the mistakes of others in similar situations to one’s own intention. For one example, Woolworth’s, the largest supermarket/grocery store chain in Australia, extended its operations into Germany in 1926, and by the 1950’s it had become a household name worldwide. By simply taking the time to research Woolworth’s methods and opening communication with businessmen that aided in this international expansion, Wal-Mart could have gained valuable insight. There are several marketing strategies that could have led to a smoother transition into the German market. One possible tactic that could have benefited Wal-Mart, is the positive promotion of company strengths on several public mediums. Many German consumers were unaware of what the Wal-Mart brand encompassed, new locations should have created better brand awareness in the eyes of these new prospective customers. The company has many strengths that its direct competitors lack that could have established Wal-Mart as a more desirable brand. Through a simple Wal-Mart education day, the company could have stirred up buzz about the new supercenters and allowed customers to see why the brand was so desired elsewhere in the world. During this time, its German rivals did not have credit card payment options, free bags for goods purchased, improved store interiors, or friendly customer service. The promotion of each of these elements could have set Wal-Mart apart and generate new Wal-Mart customers. Another marketing tactic Wal-Mart could have employed was the use of endorsements and sponsorships. Hiring a German celebrity to
- 15. Wal-Mart’s German Expansion 15 represent the corporation and generate brand equity by saying phrases such as, “I love shopping at Wal-Mart,” could have stirred up greater consumer interest in exploring the Wal- Mart shopping experience. Sponsoring local festivals, events, etc. would have generated favorable attention for the corporation and displayed its name in a positive light. These marketing suggestions could have broadened Wal-Mart’s competitive advantage and increased brand credibility and image. The Wal-Mart store sizes and design were also not parallel with what was accepted in German culture. In other international ventures, Wal-Mart established a greater amount of discount stores rather than the large Supercenters. For example, in the UK Wal-Mart opened 248 discount stores and only ten supercenters, but in Germany zero discount stores were opened and instead 94 supercenters were opened. The European market was not accustomed to the supercenters and was not aligned with customer needs or demand. Wal-Mart’s supercenters were sized between 109,000 - 200,000 sq. ft, and in comparison its discount stores were only 40,000 - 125,000 sq. ft. Incorporating smaller stores may have created a more quaint environment welcoming German consumers into the Wal-Mart stores. Upon Wal-Mart’s entrance into Germany, field experiments through test marketing could have been another useful tactic in minimizing efforts to adapt to cultural norms. As stated by the Institute of Customer Services, “The results from a test marketing program can provide useful information regarding ‘go or no-go’ market decisions. Imagine a no-go market product is launched to the mass market without a test and if it fails, the cost to the business will be huge” (“Test Marketing”). Wal-Mart launched many of its popular American products to the German market and subsequently saw low inventory turnover compared to that of the US. Using test marketing, a test group of consumers would have been exposed to certain American products, so that Wal-Mart could observe how this test group reacted to them. American products viewed more favorably when compared to popular German products
- 16. Wal-Mart’s German Expansion 16 could have been kept, while unfavorable products could have been replaced by familiar German products. Gradual adjustment to American products within German Wal-Mart stores would have allowed customers to try to new products, while keeping the familiarity of household German items. Wal-Mart made the initial mistake of ordering large quantities of American products for its stores, and encountered trouble selling many of these items. These large order quantities induced the start of the bullwhip effect, which made a negative impact on Wal- Mart’s suppliers. Demand for products were mistakenly reported to companies as stronger than they were in reality. When pulling out of the market in 2006, Wal-Mart Germany’s CEO David Wild commented on its market research by stating, “We made mistakes. Many of our (product) buyers in Germany were Americans. Some real goof-ups occurred as a result. Like, did you know that American pillowcases are a different size than German ones are?” Wal- Mart ended up leaving Germany with a tremendous amount of pillowcases that it was not able to sell to the German market. Later, Wild said, “If you want to be successful in a foreign market, you have to know what your customers want. That's the most important lesson. It does no good to force a business model onto another country's market just because it works well somewhere else” (Schaefer). If Wal-Mart did proper market research into the German market, it would have improved its relationship with suppliers. Wal-Mart’s lack of communication and inconvenient distribution structure created a negative attitude with the German suppliers, resulting in higher overall prices consumers would have to pay at the Wal- Mart stores. The acquisition of profitable and reputable companies also could have given Wal- Mart an advantage when moving into the German market. Though Wertkauf did not have a significant market share, the company was still profitable and held a steady brand image within the market. Maintaining this brand image and continuing operations under the
- 17. Wal-Mart’s German Expansion 17 Wertkauf name may have provided Wal-Mart with more leverage in maintaining and acquiring new customers. Customers would be more willing to shop at a name they recognize and trust then shop at a foreign retailer. With the knowledge from Germany, Wal-Mart succeeded with its entrance into the United Kingdom in 1999 by acquiring a leading retailer and continuing to operate under the ASDA name. “Considered the leader of the UK superstore segment, ASDA was already thriving in the UK, with an 8.4% market share at the time of acquisition. By FYE 2000, under new Wal-Mart Management, ASDA accounted for 35-40% of Wal-Mart’s international sales proving this strategy’s success” (Trumbull and Gay, 5). The strategy of keeping the original name on the front of the stores was widely accepted by the market in the UK. Consumers viewed the changes as positive company improvements rather than a total company takeover and a retail stranger in its place. Wal- Mart helped the chain to concentrate on offering low prices to customers and implemented other successful Wal-Mart practices into the brand including greeters at entrances and a company cheer preceding the procurement. This helped to improve ASDA’s solid stance in the retail market. “Prior to the deal, ASDA presented its goods for 7% (on average) less than its competitors; since Wal-Mart’s acquisition, its price margin over competitors increased to 13%, helping to advance ASDA’s total market share from 8.4% to 10.5%” (Voyle). In addition, Wal-Mart may have fared better in the German market if it entered with a joint venture as it had previously done in Mexico with Cifra S.A.. One of Wal-Mart’s major competitors, Costco, sought to maintain operating control and majority ownership of its international stores by creating joint ventures with local partners that understood the local retail climate, which proved to be successful. Although these varying options of entrance would have warranted more cooperation and funding, they may have provided a more profitable turnout for Wal-Mart Germany as a whole.
- 18. Wal-Mart’s German Expansion 18 The timing of any corporation’s entrance into a global market can either make or break its performance. Wal-Mart could have foregone detrimental losses and a tarnished reputation had it performed further market research into time relative economic factors before entering Germany. During the time of the company’s expansion, profit margins in Germany hovered around a consistently low 1-2%. With Wal-Mart’s reliance on rollback prices, and Germany’s pre-existing giant discount stores, the company could have foreseen trouble due to its already higher costs. Other time sensitive data included Germany’s -2.69 change in labor productivity growth within distributive trades, as well as a -1.16 change in the total market economy prior to Wal-Mart’s entrance (Trumbull and Gay). This negative change in productivity was a strong indicator of the resiliency Wal-Mart would face in this prospective market. In the mature retail sector of Germany, Wal-Mart would have needed to take market share away from an existing player, which is always an extremely difficult task. Metro AG was a leader in the German market and its operating profits were consistently increasing before 1996. At this time, Metro AG was a well-entrenched competitor ready to retaliate against new entrants like Wal-Mart, but the American company proceeded anyway (Govindarajan and Gupta). Wal-Mart made a vital strategic decision with its withdrawal from the German market in 2006. Between 1997 and 2006, the German retail market only experienced 5 years of positive annual retail growth. With a struggling economy, the market left little room for new entrance to capitalize on market shares. Within the first 5 years of Wal-Mart’s presence in Germany, Germany’s retail sector incurred negative growth percentages in the number of retail stores, even though population per retail unit was growing (Trumbull and Gay). During this time, Wal-Mart’s margin of safety, expressed through its current ratio, also dropped from 1.6 to .9, leaving the company with little liquidity leverage (Annual Report). Unable to gain a strong enough market share, Wal-Mart would have only incurred further losses by remaining
- 19. Wal-Mart’s German Expansion 19 in the market. Instead Wal-Mart made the positive decision to withdraw from Germany incurring a 1 billion dollar loss and selling the companies 85 stores to its competitor Metro AG. Though Wal-Mart’s expansion into Germany was unsuccessful, the practices implemented in Germany proved to be learning criteria for Wal-Marts future expansion ventures. Wal-Mart’s expansions into other regions such as the UK proved more victorious due to the lessons learned from the futile attempts of Wal-Mart Germany. Other companies, as well, now look at this failed endeavor as a cautionary framework for the importance of strategic preparation and research into the prospective market as key components of success in global expansion.
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