Tuesday, August 15, 2006

Trans-cultural Business Failure: Wal-Mart Exits Germany

In August 2006 Wal-Mart, the worlds largest retailer, announced that it was exiting operations in Germany. Bentonville based retail giant announced it was selling all the 85 of its hypermarkets to Metro (German retail giant). This marks the end of Wal-Mart’s German adventure which began in 1997 with the acquisition of Wertkauf.

I have lived in USA where I shopped, studied and observed Wal-Mart’s business operations. And the news came to me as no surprise. Back in 2003 I had posted a presentation on why Wal-Mart will find it tough to succeed in India. The recent news validated my observation that Wal-Mart’s cultural insensitivity led to its failure in Germany. (The same mistake is being repeated by Wal-Mart in Korea, Japan, China and Mexico)

History of Wal-Mart in Germany

Wal-Mart started with an aggressive global expansion strategy. In 1997, Wal-Mart bought Wertkauf, a leading retail chain. Later it acquired Interspar in 1998. Wal-Mart wanted to jump-start its European presence. In UK, Wal-Mart purchased ASDA, and started talks to buy the German retailing giant Metro. ( Wal-Mart could not acquire Metro - as Metro board rejected the idea. ASDA was acquired by Wal-Mart and is the second largest retailer in the U.K)

Wal-Mart’s Mistakes

The fundamental problem with Wal-Mart’s global expansion plans lies with its core advantages - a fully owned distribution network, standardized store layouts, warm & welcoming employees who greet customers, and standardized ERP systems. These factors enabled Wal-Mart to succeed in United States - but these factors can become a major disadvantage while operating abroad.

Firstly, Wal-Mart is not experienced in the game of acquisitions and mergers. Wal-Mart was built ground up in the USA and Canada. The lack of managerial skills needed to bring out the related synergy between itself and Wertkauf led to employee frustration. Moreover, the top management refused to acknowledge the differences in customer behavior in Germany when compared to its US customers, and the top management failed to listen to the feedback from its employees.

Wal-Mart stores are designed for customers who are willing to spend lot of time shopping. But in Germany, the shopping hours are shorter: Shops close by 5 PM on weekdays, and no shopping on Sundays. This meant that customers don’t have the habit of spending lots of time in a store - wandering around for the things they need. Coupled with this problem, German customers do not like to be assisted by Wal-Mart’s friendly store assistants. Germans prefer to do their own search for bargains.

Wal-Mart got its store merchandising wrong: Germans like to see the advertised discount products upfront - without having to ask the store assistant. This implies that the discount products must be placed at the eye level. Instead Wal-Mart chose to use its US style merchandise display strategy - where premium priced products are kept at eye level and discount products are kept at higher shelf or in the bottom racks. This irritated the German shoppers. Wal-Mart also got its store inventory wrong, Wal-Mart stocked its store with clothes, hardware, electronics and other non-food products were given much bigger floor space than food products, as a result more than 50% of the revenue was from non-food products. But other German retailers stock more of food products. For example for Metro, food products constitute more than 75% of the revenue.

Wal-Mart also failed to achieve the required economies of scale. To implement its US style hypermarkets, Wal-Mart invested in a robust distribution system with three warehouses and logistics centers - this implied higher cost. To be efficient Wal-Mart needed about 400+ stores, but it had only 85 stores.

The biggest mistake of Wal-Mart was to ignore the local culture, local buying habits and impose an American boss on its German operations. The first head of German operations was an expat from the USA - who did not understand Germany or its culture and insisted that all business operations be carried out in English language. I have not met him in person or even interacted with him - but from what I hear and understand, it is clear to me that the cultural insensitivity started right at the top.

Closing Thoughts

Cross-border, Cross-cultural business is a challenge even for the biggest companies. Companies have to be sensitive to the local cultures and tailor their offerings to local market. To localize their offerings, companies must carry out cultural assessment before acquisitions, maintain an ongoing cultural assessment of its foreign operations. This will help companies measure the effectiveness of its localization efforts and make adequate changes in local strategy & tactics.

The Wal-Mart example tells us that even the biggest of the companies are not immune to failures. Companies need to understand the local culture in order to capitalize on the local market.

The lessons learned from Wal-Mart’s experience in Germany, Korea and Japan can be applied by other retailers who are planning on expanding in India & China. Large retail chains such as Tesco, Metro, Carrefour, Home Depot, etc., have to be very careful when they plan to invest in countries outside their home markets. Indian market offers tremendous opportunities for these organized retailers - but it also comes with tremendous challenges. Indian consumers have deep rooted cultural biases which must be understood and overcome in order to succeed in India.

Also See:

Keep Overseas Staff Focused on the Right Goals
Cultural Assessment - Prerequisite for successful Mergers
Promoting Organizational Change Through Communication


pradeep said...

excellent article. very insightful. you inspire me to start blogging.

pradeep said...

forgot to mention.. ur blog goes into my favourites..

princess kali said...

thanks for all the great info. i am a business management student and your blog always helps me to give my papers a nice twist. keep up the good work!

ayesha said...

Good stuff, topics are wide and well written, thanks for your help! albeit received indirectly...

chobitz_news said...

Good article, but stores in Germany do noct close at 5 p.m., it's between 7 and 10 p.m. depending on the store...

rohit said...

hey arun i tired contacting you on orkut but could not, your work is really nice I am doin my dissertation on indian retail sector in food an opportunity for foreign investment.

rohit said...

hi this is really good can u please give me your contact number I really need to speak to you, or your email id, my id is RC548@mdx.ac.uk

namita joshi said...

Lovely article....I wish if I can get your reply on nami.mba@gmail.com.I am doing MBA in India.Thanks.

Midhun jose said...

Excellent Insights provided, You have taken each and every minute Cross-Cultural aspects into consideration. This will be a great help for all students and those who have any interest on International Business.

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mahipal said...

Dude i am about to write a long ass paper on Wal-Mart and its failures in germany.You made my job easier bro..

radhakrishna said...

excellent friend

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