Wal-Mart entered the German market in 1998 expecting to successfully transform i
ID: 421501 • Letter: W
Question
Wal-Mart entered the German market in 1998 expecting to successfully transform its American approach into European success. However, Wal-Mart found that overcoming cultural differences was a barrier to exporting its approach into this key European market. After close to an estimated $1 billion in losses, Wal-Mart has packed up and sold off its stores to Düsseldorf-based Metro, a firm with an understanding of the German culture.
1. Based on this information and further research what were some of the problems Wal-Mart faced?
Explanation / Answer
Wal-Marts faced various problems at the time of withdrawal from Germany: These problems were related with market structure, business model, cultural and communication, politics and regulation and product/service failure.
I would like to discuss all these problems in detail:.
Wal-Mart did not build their own stores but took over 21 existing “Wertkauf” supermarkets that had a totally different business model. The stores themselves were very small and had a limited range of goods. A related problem is that these stores were located far apart, which resulted in high logistical costs.
When entering a new market, it is important to anticipate competitors’ reactions. In Germany, Wal-Mart’s biggest competitor, Düsseldorf-based Metro, wanted to expand their stores; at the same time, Metro wanted to prevent Wal-Mart from executing their expansion plans . Many times, a product has to be deleted because the competition is too strong.
Wal-Mart is very successful in the United States with the strategy of “Every day low prices,” and also in many other countries.
In Germany, there is extreme competition in the retail food sector. Therefore, the German customer is quite accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart’s strategy of offering low prices did not create sufficient competitive advantage.
2. Problems faced by Walmart due to differences in mode of Culture and communication
It is important to consider cultural factors at the time of introduction of new product. In Walmart case, corporate culture played a key role. Wal-Mart’s top executives decided to operate the German locations from their offices in the United Kingdom. Thus, Wal-Mart’s “corporate language” was English. However, many of the older Wal-Mart managers in Germany do not speak English. As a result, there were often breakdowns in communication. Some managers of the acquired stores did not stay on after the Wal-Mart acquisition. Key business connections were lost. As a result, several key suppliers (e.g. Adidas, Samsonite, Nike) declined to work as suppliers for Wal-Mart. Wal-Mart did not just lose important suppliers; they also lost an important part of their range of goods The situation could have been improved by retaining and communicating effectively with the German managers who had know-how about the local market .
3. Problems faced due to Politics and regulation of Germany
Politics and regulation management was also an important factor in case of Walmart failure. The managers of Wal-Mart were not sufficiently familiar with the laws and regulations in Germany, as they violated them several times. One of Wal-Mart’s fundamental principles is to stay union free. However, in Germany, unions have a powerful position. Through collective bargaining and related tactics, they can have a strong influence on political decision making. Ver.di is a German union in the service sector. With 2.4 million members, it is one of the largest independent, trade unions in the world .
According to the German Commercial Code, all incorporated companies are obligated to publish a financial statement, including a profit and loss statement. Due to the fact that Wal-Mart refused to publish their financial statements for the years 1999 and 2000, Ver.di sued in a court of law. Wal-Mart was sentenced to pay a fine. The coverage of this law suit in the German press led to a negative public image for Wal-Mart.
After the expansion strategy failed due to the lack of suitable store locations, Wal-Mart began a price war to drive small competitors out of business. The intention was to take over the stores of the insolvent supermarket chains and convert them into Wal-Mart stores. One part of the price war was to introduce a private label called “Smart Brand” and sell most of these products below manufacturing costs. The reaction of many competitors was to decrease their prices, which led to a profit setback for the entire industry. However, the Federal Cartel Office interceded and stopped the price war because there is a law in Germany that enjoins companies from selling goods below manufacturing costs on a continuing basis (Knorr and Arndt 2003).
4.Problems faced due to Product/ service failure
Wal-Mart planned to introduce a sophisticated customer service program which threatened many of its competitors because German discount supermarket chains often do not provide good customer service. Therefore, good customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart’s customer service program was called the “ten foot rule”. Every ten feet, a service employee offered some help to the customer (Knorr and Arndt 2003). However, the customer reaction was rather negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They do not necessarily expect to talk with employees.
Therefore, the “ten foot rule” was perceived as rather annoying and did not result in a reputation for providing good customer service.
Wal-Mart also imported the idea of placing a “greeter” at the entrance to the store. Again, German customers were not used to this custom, and they did not adopt this “service” with any enthusiasm.
Conclusion of Wal-Mart Mini-case
On the basis of above situations, it is visible that Wal-Mart tried to apply its US success formula in an unmodified manner to the German market. As a result, they didn’t have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. Also, there were some instances of product or service failure. The final outcome was that Wal-Mart had to abandon its offerings in Germany.
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