Wal-Mart's German Misadventure
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Case Code: BSTR082 Case Length: 13 Pages Period: 1990 - 2003 Pub Date: 2003 Teaching Note: Available |
Price: Rs.400 Organization: Wal-Mart Industry: Retailing, Countries : Germany Themes: International Marketing |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Business Segments
Wal-Mart had two types of divisions - Retail divisions and Specialty divisions. Retail divisions were further classified into - Wal-Mart Stores, Sam's Clubs, Neighborhood Market, International and walmart.com (Refer Table I). The specialty division was divided into - Tire & Lube Express, Wal-Mart Optical, Wal-Mart Pharmacy, Wal-Mart Vacations and Wal-Mart's Used Fixture Auctions (Refer Table II)...
Wal-Mart's International Operations
In early 1990s, Wal-Mart announced that it would go global. It wanted to look for international markets for the following reasons:
- Wal-Mart was facing stiff competition from K-mart and Target, which adopted aggressive expansion strategies and started eating into Wal-Mart's market share.
- Wal-Mart also realized that the US population represented only 4% of the world's population and confining itself to the US market would mean missing the opportunity to tap potentially vast market elsewhere...
Wal-Mart in Germany
Most American companies entering Europe started with the UK due to the similarities between the US and the UK in culture, language and legal environment. Wal-Mart, however, decided to enter Germany first. Analysts were critical of this decision as the German retailing industry was experiencing slow growth rates and retailers were indulging in price wars which eroded margins badly. Additionally, Germany had high labour costs, high real estate prices and a very inflexible business environment (Refer Exhibit I)...
Entry Strategy Gone Wrong?
Wal-Mart expanded its presence into Germany through acquisitions. It acquired the 21-hypermarket stores of Wertkauf in 1997. The Wertkauf stores offered both food and general merchandise to the customers. Wal-Mart sources said that Wertkauf stores would provide the necessary footage in the German market. However, as Wertkauf covered only southwestern Germany, it failed to provide the required market penetration to Wal-Mart in Germany. In 1998, Wal-Mart acquired Interspar's 74 hypermarket stores to raise the total number of Wal-Mart stores in Germany to 95. With the acquisition of Interspar's stores, Wal-Mart became the fourth largest hypermarket retailer in Germany....
Problems in Operating Environment
Soon after acquiring the stores, Wal-Mart hurried through with their renovation and put its brandname on them to make sure its EDLP message went across. But it was unable to cash in on its EDLP selling point, chiefly because of the strong competition from German retailers (Refer Exhibit II). Whenever Wal-Mart lowered its prices on commodities, German retailers such as Aldi, Lidl, Rewe and Edeka also lowered their prices to keep their customers, so Wal-Mart found it difficult to get a foothold...
Problems in External Environment
Wal-Mart faced several problems on the legal front as well. It was accused of breaching various German laws. The company was accused of having violated Section (IV) (2) of 'Act Against Restraints of Competition' - (Gesetz gegen Wettbewerbsbeschrankungen or GWB) and Section 335a of the 'Commercial Act' (Handelsgesetzbuch or HGB). Section (IV) (2) of GWB forbids companies 'with superior market power in relation to small and medium-sized competitors' from lowering their prices and engaging in price wars with small companies. Such large companies were allowed to lower prices only after providing justification for the lower prices...
Cultural Mismatch
Apart from the operational and regulatory problems, Wal-Mart also faced cultural problems in Germany. It found it difficult to integrate the two companies (Wertkauf and Interspar), which it had acquired. The companies had completely different work cultures; while Interspar had decentralized operations with independent regional units, Wertkauf was highly centralized with the head office making all decisions. Addtionally, Wal-Mart found it difficult to integrate the two companies' cultures with its own...
Future Prospects
Even after five years of entering the German market, Wal-Mart had not made a significant impact in the German retail industry. Wal-Mart reported losses over all the four years upto 2002 in its German operations (Refer Table V). It was reported that between 1999-2002 Wal-Mart's sales declined by 5% on average. Increasing costs also pushed up losses for the company. Wal-Mart sources indicated that personnel costs accounted for around 17% of sales; these high costs prompted Wal-Mart to freeze new recruitment...
Exhibits
Exhibit I: A Note on the Retailing Industry in Germany
Exhibit II: Profiles of German Retailers
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