wal-mart case study

Wal-Mart’s German Expansion

1


Case Study


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

faced many difficulties when attempting to gain dominance in Germany. As a successful

1 Information within this paragraph is found in Trumbull and Gay.

2


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

comparison to the estimated 3.6% growth rate in the 1970s and 1980s, (Ahearn, 2). In

3


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.

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

2 Much of the information in this paragraph is derived from Exhibit 11 of Trumbull and Gay

4


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.

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

3 Financial Information within these paragraphs found in Wal-Mart's Annual Report for 1997.

5


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 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

6


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

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

7


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

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

8


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

to sit on large quantities of inventory. Wal-Mart eventually addressed some of its distribution

9


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

except with justification. This was put in place in order to prevent large companies from

10


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 to spy on fellow workers (and report any misconduct), but prohibited

11


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

for a supermarket which they were familiar with. Rather than selling tradition German brands

12


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

should have consulted and/or partnered with German businessmen who had extensive

13


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

represent the corporation and generate brand equity by saying phrases such as, “I love

14


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 could have been kept,

while unfavorable products could have been replaced by familiar German products. Gradual

15


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

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

16


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.

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

17


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

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.

18


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.

Works Cited

"Annual Report 1997." Metro AG (n.d.): n. pag. Metro Group. Metro AG, 31 Dec. 1997.

Web. 10 Oct. 2014.

19


Ahearn, Raymond J., and Paul Belkin. The German Economy and U.S.-German

Economic Relations. Rep. no. R40961. Congressional Research Service, 27 Jan.

2014. Web. Oct.-Nov. 2014.

Dawson, Mike. "Why Wal-Mart Failed in Germany." Lebensmittel Zeitung. DVF Media

Group, 20 Aug. 2009. Web. 28 Oct. 2014.

Ewing, Jack. "Wal-Mart: Struggling in Germany." Businessweek. Bloomberg L.P., 10

Apr. 2005. Web. 28 Oct. 2014.

Gerhard, Ulrike, and Barbara Hahn. "Wal-Mart and Aldi: Two Retail Giants in

Germany - Springer." Wal-Mart and Aldi: Two Retail Giants in Germany -

Springer. GEOJournal, 13 Nov. 2014. Web. 13 Nov. 2014.

Govindarajan, Vijay, and Anil K. Gupta. "Taking Wal-Mart Global: Lessons From

Retailing's Giant." Strategy+business 1999. Strategy+business. PWC Strategy&

Inc., 19 June 2002. Web. 5 Nov. 2014.

"How Big Can It Grow?" The Economist. The Economist Newspaper, 17 Apr. 2004.

Web. 13 Nov. 2014.

"How Well Does Wal-Mart Travel?" Bloomberg Business Week. Bloomberg, 02 Sept.

2001. Web. 13 Nov. 2014.

"In Germany, Wal-Mart Is Struggling." The Seattle Times. Seattle Times Company, 29

Oct. 2000. Web. 12 Oct. 2014.

Knorr, Andreas, and Andreas Arndt. Why Did Wal-Mart Fail in Germany. Institute for

World Economics and International Management. Universität Bremen, June

2003. Web. 28 Oct. 2014.

Landler, Mark. "Wal-Mart Gives up Germany- Business- International Herald

Tribune." The New York Times. New York Times, 28 July 2006. Web. 10 Oct. 2014.

Landler, Mark, and Michael Barbaro. "Wal-Mart Finds That Its Formula Doesn’t Fit

20


Every Culture." The New York Times. The New York Times, 01 Aug. 2006.

Web. 23 Oct. 2014.

Macaray, David. "Why Did Walmart Leave Germany?" The Huffington Post.

TheHuffingtonPost.com, 29 Aug. 2011. Web. 23 Oct. 2014.

Mitchell, Stacy. "German High Court Convicts Wal-Mart of Predatory Pricing." Institute for

Local SelfReliance. N.p., 1 Feb. 2003. Web. 13 Nov. 2014.

Schaefer, Louisa. "World's Biggest Retailer Wal-Mart Closes Up Shop in Germany."

Deutsche Welle. N.p., 28 July 2006. Web. 22 Oct. 2014.

Shurrab, Hafez. Wal-Mart's German Misadventure. Mälardalen University, Aug. 2014.

Web. 28 Oct. 2014.

"Test Marketing." MyICS. Institute of Consumer Studies, 11 June 2012. Web. 5 Nov.

2014.

Tidey, Dominic. "What Wal-Mart has Taught us about Expansion into Europe." British

American Trade and Investment Magazine. The EuRApean, Apr.

2012. Web. 10 Oct. 2014.

Trumbull, J. Gunnar, and Louisa Gay. "Wal-Mart in Europe." Harvard Business

School Case 704-027, Apr. 2004. (Revised July 2004.)

Voyle, Susanna. "Mixed Fortunes in Britain and Germany," Financial Times, London, 7

Jan. 2003.

"Walmart Annual Reports." Walmart Annual Reports. Wal-Mart, n.d. Web. Oct-Nov.

2014.

"Walmart Corporate: Our Story." Walmart Corporate: Our Story. Wal-Mart Stores,

Inc., 2014. Web. Oct.-Nov. 2014.

"Wal-Mart's Newest Accent Is German." Bloomberg Business Week. Ed. Douglas

Harbrecht. Bloomberg, 18 Dec. 1997. Web. Oct-Nov. 2014.

21


Walter, Ekaterina. "40 Eye-Opening Customer Service Quotes." Forbes. Forbes

Magazine, 4 Mar. 2014. Web. 13 Nov. 2014.

22

wal-mart case study

Documents