Germany accounts for around 15% of Europe’s $2 trillion a year retail market. At a GDP of $2.25 trillion and a population of about 80 million people, Germany is by far the biggest retail market in Europe. However, the market is highly competitive with razor thin profit margins and a low growth rate. While consumers spent about 40% of their disposable income in retail stores 10 years ago, this number went down to only 30% in 2003.
In January 1998, Wal-Mart acquired 21 Wertkauf hypermarkets in Germany. Later that same year, the company acquired 74 units of the Interspar hypermarket chain. Wal-Mart has since invested in the remodeling of these stores and today operates 92 Supercenters in Germany.
Wal-Mart Germany employs more than 14,000 associates across the country.
Wal-Mart’s attempt to apply the proven U.S. success formula to the German market turned out to be problematic. The company’s operating loss is estimated to be Euro 100 million ($ 125 Million) per year. Also, sales were decreasing by 2% in 2003.
Wal-Mart is insistent to offer its merchandise at the cheapest price. Customers who find the products at a cheaper price will get the difference reimbursed. Wal-Mart Germany’s CEO Kay Hafner comments: “We are offering the cheapest prices in town”. When Wal-Mart first opened in 1998, the company was so adamant about establishing the reputation of being a price breaker that it lost 12 cents on every dollar sold. In order to avoid further dramatic losses of this kind, Wal-Mart offers its reimbursement guarantee now only for selected products. This did not go unnoticed by customers. A survey revealed that the majority of 85% of customers do not perceive Wal-Mart as offering the best deals.
Wal-Mart’s value proposition to offer “excellent customer service” has been plagued by a variety of regulatory and cultural obstacles. Germany’s restrictive shopping hour regulations (at a maximum stores can be open for 80 hours/week, Sunday and holiday openings are not permitted at all) prevent Wal-Mart from offering its customers the convenience and shopping comfort associated with 24/7 operations. The typical greeter was often perceived by German customers as an underpaid worker who does not add any value but costs money to be paid through higher prices. Also, German consumers are a lot less service oriented than their
American counterparts. A recent survey revealed that price and value is more important than
service and quality to 63% of Germans versus 18% of Americans.
With 60,000 different products, Wal-Mart offers a substantially better selection than its competitors in the low price segment of the market. Its biggest competitor in this segment, Aldi Group, only offers 600 different products. Aldi, which operates 3741 stores in Germany, combines ultra low prices (and margins) with high product quality, a very narrow assortment of about 600 products, and a no-frills self-service shopping environment that translates in the highest labor productivity of the industry.
At a typical Wal-Mart you will find a food section with fresh vegetables, meat, fish, frozen and packaged food, all being offered by friendly sales people. The labor force is well organized by unions. The unions’ initial enthusiasm prompted by Wal-Mart’s decision to hire more staff immediately after its entry in Germany to provide “excellent customer service” quickly faded away. As losses mounted, Wal-Mart tried to cut staff and close the most unprofitable locations to reduce its high personnel costs. However, due to Germany’s strict worker protection regulations, firing workers and closing stores is a complicated, time consuming, and very costly affair. The struggle with unions and regulators in turn had a negative impact on Wal-Mart’s image as an employer providing reasonable salaries and high job security. Now Wal-Mart has difficulties in finding workers for its central warehouse. This affects the goods deliveries to stores, where not much is seen of Wal-Mart’s famous logistics. As Jürgen Glaubnitz, one of WalMart’s union representatives put it: “The German workers do not like to be regarded as cheerleaders, but as personalities with their own ideas and rights”. It was probably not helpful for motivating its employees that Wal-Mart Germany’s first CEO Rob Tiarks, a U.S. citizen who
refused to learn the German language, expected his management and workers to adopt the same mystique and cult-like company culture inspired by its founder Sam Walton.
Admitting defeat, Wal-Mart sold its German business to rival Metro in late 2006. While the official sales price has not been disclosed, people familiar with the deal say Metro paid little more than the retail value of Wal-Mart’s inventory.
Sales, Productivity per unit of Sales Floor and Customer Satisfaction 2003
Answer the following four questions:
1. How does a global strategy differ from a multinational strategy? What are the potential advantages and disadvantages of a global versus multinational strategy? Which strategy did Wal-Mart follow?
2. What factors accounted for Wal-Mart’s failure in Germany?
3. If you were Wal-Mart, what would you have done differently to address the factors identified in #2 above?
4. In addition to the information provided in the case, what broad categories should a company consider when operating in more than one country? What specific dimensions would you analyze within each of these?
