Wal Marts German Misadventure

Published Date: 02 Nov 2017

1. Introduction

1.1 Abstract

This study focuses on the retailing giant Wal-Mart and its experience in Germany. This study explains in detail the reasons for Wal-Mart's decision to go global in the early 1990s, and its decision to enter the European market through Germany - the most difficult market in Europe. Besides that, it also discusses the various problems faced by Wal-Mart in Germany due to its lack of understanding of the German retailing and regulatory environment - entry strategy problems, problems in the operational environment, regulatory problems and cultural problems.

1.2 Background

Wal-Mart is the largest retailing company in the world as it is dominating the whole US retail market. In 1997, Wal-Mart has already felt the urge to transform the organization into a higher level and more competitive organization. Therefore, Wal-Mart has ventured into Germany’s market. The main reason for Wal-Mart’s losses was its insistency on doing things "the Wal-Mart way". This has apparently alienated Wal-Mart from the German market. However, Wal-Mart was making losses after 5 years of entering Germany. Wal-Mart mistake are they are too proud on their "Wal-Mart way", their failure to understand German culture and the shopping habits of Germans. They had not done the full research before entering a new market. They should also consider the point of views from those customers that they deal with. They should also hire researchers from Germany itself to fully understand the culture there. Don't be modest, but be realistic. Besides that, Wal-Mart should also be looking at the competitive German’s retail markets. Then, think about them in relation, if all your competitors provide high quality products then a high quality production process is not strength in the market, it is a necessity. Furthermore, Wal-Mart is building from scratch in markets that had already dominated by savvy local and foreign competitors. To attract consumers, Wal-Mart has been squeezing out cost in its supply chain and is crucial to Wal-Mart’s formula for everyday low pricing." It was opposition for German regulatory authorities for its pricing strategies, and also the German supplier’s distribution system. In the 1990s, not only Wal-Mart doing badly in Germany, many German retailers also faced losses in that particular period because of the flat economy and rising unemployment in Germany. Wal-Mart is apparently alienated with local suppliers and employees. Wal-Mart Germany’s strategy really show strenuous does not flatter, and the result clearly determines Wal-Mart Germany’s future will seem to be mutually wounded.

1.3 Aims and Objectives

This study aims to understand the nature and structure of German retailing industry including its size, scope, spread and unique characteristics. Highlight the implications of entry through acquisition in an overseas market and I don't think that Wal-Mart did their homework as well as they should have. Germany is Europe's most price-sensitive market. Wal-Mart underestimated the competition, the culture, the legislative environment."

At the end of the paper, the study aims to provide an insight to Wal-Mart on the critical items they need to look out on the Quality and Human Resource implications.

3.0 Analysis of why Wal-Mart experienced difficulty in the German market

3.1 Mistakes on Entry Strategy

Wal-Mart’s difficulties on the highly competitive German market can, after 5 years of extremely disappointing results, no longer are discarded as mere teething problems. Wal-Mart’s failure on the German market has been the inevitable result of its inability, it caused by an astounding degree of ignorance of key principles of internationalization strategies and intercultural management which is to select and implement an adequate entry and business strategy. Wal-Mart decided to build its initial presence in Germany through acquisitions. In December 1997, it took over the renowned 21-store Wertkauf chain, followed one year later by the acquisition of Interspar’s 74 hypermarket stores to raise the total number of Wal-Mart Stores in Germany to 95. In the wake of these transactions, Wal-Mart immediately became the country’s fourth biggest operator of hypermarkets. However, Wal-Mart also faced a major problem in trying to integrate the operations of the two companies, which is Wertkauf and Interspar. Even worse, with estimated accumulated losses, it is literally drowning in red ink. Beside that, though acquisitions may not have been the ideal route for Wal-Mart to take in Germany, the government was refusing new licenses for food chain and grocery retailing, so if it wanted to enter the German market, Wal-Mart had no choice to go in for acquisitions.

3.2 Mistakes in Operating Environment

Traditionally, Wal-Mart has inflicted a full-scale price war on incumbents on "every day low price" to pledge to local consumers. This strategy badly backfired in Germany, because Germany’s company seems to be the prey rather than the hunter. These approach largest affected German competitors, first and foremost are ALDI, which throughout its existence successfully defended its position as Germany’s undisputed cost and price leader not only matched all of Wal-Mart’s price cuts, and they had a strong relationship with consumers but Wal-Mart had not. Furthermore, Wal-Mart’s fundamental value proposition "everyday low prices" as a (largely) empty promise. Wal-Mart had not been able to systematically undercut ALDI and the other hard discounters, and that its assortment was not even substantially cheaper then the traditional retailers’ offerings. In additions, to reduce cost, Wal-Mart’s employee had low wages, it cause unsatisfied and the working conditions are unionization. Thus, Wal-Mart also misunderstands to its employee, it rain into trouble with German unions. Another problem that Wal-Mart faced is inventory problems. Wal-Mart had only one stockroom and it difficulties to hire employees with the low wages. The shortage of workers yes delayed the movement of goods leading to excessive stockpiling. In the other words, Wal-Mart does not show motivation to the employees.

3.3 Problems in External Environment

Wal-Malt faced several problems on German laws and regulations, which the company was accused of having violated in Section (IV) of "Act Against Restraints of Competition"--(Gesetz gegen Wettbewerbsbeschränkungen or GWB). This centerpiece of German antitrust legislation bans all undertakings with superior market powe from selling a range of goods not merely occasionally below its cost price, unless there is an objective justification for this "Section 335a of the "Commercial Act"--(Handelsgesetzbuch or HGB). It requires all corporations to disclose basic financial information including a balance sheet and an annual profit or loss statement. But Wal-Mart are hauled up for violating of this regulations by not publishing financial data.

3.4 Problems in Cultural Mismatch

Apart from the operational and regulatory problems, Wal-Mart also faced cultural problem in Germany. Wal-Mart found it difficult to integrate into Wertkauf and Interspar cultures which it had acquired. Beside that, Wal-Mart is aware that the language used in Germany is not mainly in English as the Americans do, and the top management did not show inclination to learn German. It made language barrier where Americans can’t communicate effectively with the workers. Furthermore, Wal-Mart’s famous Ten-Foot Rule was not implemented in Germany. While economic benefits, German consumers have been accustomed for decades to shopping at self-service formats without any staff assistance that made customers did not appreciated this service at all. Last but not least, Germany’s restrictive shopping hour regulations prevent Wal-Mart from offering its customers the additional convenience and superior shopping comfort associated with 24/7 operations.