International Retailing - Case Study Example

International Retailing Introduction .. 2 Wal-Mart and Germany .... 3 Complexities of the German Market .... 5 Conclusion .. 8 Bibliography .......... 10 Introduction Successful retailers in their home country have the advantage of the built in knowledge and experience they have from decades of expertise gathered and refined on consumer purchasing habits, trends, marketing techniques, competitors and market conditions. All of the foregoing are definitive advantages in crafting programs that make for successful operating. The international marketplace represents a different set of conditions and circumstances in that the cultures, habits, expectations and the manner in which the market operates has differing nuances. The foregoing foreign market stumble can beset even the world's largest and most successful retailer, Wal-Mart, which has suffered through a number of retailing gaffes on the international stage, On the 28th of July in 2006 Wal-Mart sold its 85 chain German outlets to Metro AG, which is a diversified cash and carry retail chain that has Germany's largest market share (Clark, 2006)1. 1997 marked the year that Wal-Mart entered Germany when it completed negotiations to acquire 21 outlets belonging to the Wertkauf hypermarket chain (Wal-Mart Facts.com, 2007)2. This was following by Wal-Mart acquiring 74 stores of the Interspar hypermarket chain that is a subsidiary of Spar Handels AG (Wal-Mart Facts.com, 2007)3. The preceding represented Wal-Mart's entry into the European market, using Germany as the launch point. Listening to customers represents one of the first and most important aspects in entering a foreign market as the nuances of consumers differs in their respective countries, thereby requiring adjustments in marketing, presentation, operational and other procedures. Wal-Mart's extraordinarily successful American operations that meshed leading edge marketing, a new approach to its corporate culture as well as organisational structures, resulting in the company being vaulted into the largest and most successful retailer in the world. The preceding success in the United States does not necessarily represent an effective, and or workable game plan in other markets. Given Wal-Mart's reputation and successes, the company only entered the international market in 1991 that pales in comparison to Carrefour, which has been retailing in foreign markets for in excess of thirty years (Incandela et al, 1999)4. The international market represents a different set of challenges, experiences as well as internal operating dictates that need to be understood and incorporated into a retailer's operational mode, a lesson that Wal-Mart learned in Germany. This study shall delve into Wal-Mart's entry into the German market to determine the reasons as to why it was not successful there. Wal-Mart and Germany Wal-Mart's lack of success in Germany is a classic example of using a business model that is not applicable in terms of the market it is applied in. A look into the facets that represented a contribution to the foregoing entails delving into the market entry strategies as well as operational tactics that were employed, with the foregoing compared with market entry and expansion theories as well as practices. Wal-Mart's entry into Germany represented the fact that it has the largest market in Europe as represented by its population, strong economic underpinnings, affluence of its citizens as well as the awareness of products made in the United States (United States Department of Agriculture, 2004)5. Germany ranks third internationally in terms of consumer food expenditures (United States Department of Agriculture, 2004)6. Critical recommendations as offered by the United States Department of Agriculture (2004)7 stated that retailers need to be willing to adapt their operations and marketing practices to the customs and nuances of the German market as well as being aware of packaging and products that appeal to the market. Wal-Mart did not follow either of the preceding recommendations in its German market entry as it sought to put into practice the same strategies and tactics it employed in Argentina, Korea, Japan and other foreign markets it had entered. The preceding meant that is applied its U.S. business model with the thinking that customer are customers, regardless of their locale, which of course is not the case. Studies that were conducted by Hennig-Thurau et al (2001)8 found that consumers from different countries go about and approach their decision making processes differently, therefore companies that desire to be successful need to be mindful that differences do exist, and uncover them. Hennig-Thurau et al (2001)9 added that an increased degree of success is achieved if companies first seek to understand the cultural nuances to target their approaches, marketing and allied operations to fit the customary modes in which business is done, modifying off these themes when and were appropriate. In order to better understand the points being made Brouthers and Brouthers (2001)10 tell us " as the cultural distance between home and host countries increases, managers tend to select joint venture modes of entry". Wal-Mart made the mistake of utilising American mangers in it German operations, leaving it exposed to decision making from executives who did not have a feel for German consumer needs and wants " as the cultural distance between home and host countries increases, managers tend to select joint venture modes of entry". Lord and Ranft (2000)11 also arrived at this same conclusion, stating that it is essential that foreign operations acquire managers that have distinct familiarity with the market, its nuances, habits, customs, traits as well as preferences. In a study conducted by Pan et al (1999)12 that delved into the factors driving profitability as well as market share in foreign markets, found that the order of entry into the market, and the market entry mode, the interaction as represented by the preceding, and relevant market as well as industry specific aspects, represent strategic foundations. In addition, Wal-Mart entered a seasoned market that was highly competitive, with a large number of discounters that all had distinct information as to German tastes, habits, preferences and related important aspects (Gain Report, 2003)13. Complexities of the German Market The highly seasoned and numerous discounters present in the German market are revealed by the following: Table 1 - German Retail Sector (Gain Report, 2003)14 Number of Stores 2001 Market Share 2001 Value of Sales (Billion Euros) Market Share 2001 Hypermarkets 2,380 3.5% 30.4 25.8% Discount Stores 13,180 19.3% 40.9 34.7% Supermarket 8,842 12.9% 30.1 25.5% Traditional Stores 43,950 64.3% 16.6 14.1% Total 68,352 100.0% 118 100.0% The above shows the heavy concentration of discounters that represented a formidable challenge and hurdle. In addition to the preceding, the German market is very intertwined in terms of stores and subsidiaries, and was in the process of consolidation as the varied retailers sought to strengthen their competitive positions (Gain Report, 2003)15. This highly charged competitive environment meant that profit margins were squeezed tightly, in fact more the case than in any other market Wal-Mart faced in Europe. The following provides a capsulisation of the important factors in understanding what the company faced: Table 3 German Market Advantage - Opportunity - Challenges (Gain Report, 2003)16 Advantages/Opportunities Challenges Germany's 82.4 million population and one of the highest per capita income levels Highly competitive market with stagnant retail sales growth The country is one of the world's Largest importers of food and beverages German (EU) import tariffs with regard to certain products are high The country has many established importers and a highly developed distribution system Retailers frequently charge high listing fees The German market is highly receptive to U.S. style foods and the American lifestyle Margins on food retailing is very thin As advised by Landler and Barbaro (2006)17, along with Brouthers and Brouthers (2001)18, and Hennig-Thurau et al (2001)19, the way in which a retailer enters a market as well as the market research and market understanding, consumer tastes, and conditions as determined before its entry, can and do often make a difference in terms of its success, and or failure. In addition to the preceding, pre-market research and fact finding needs to determine the strengths and weaknesses of rivals, respective market share, sales, locations and techniques Landler and Barbaro (2006)20. The preceding represents pre-market introduction aspects that Wal-Mart failed to accomplish before entering Germany. The company's approach to the German market rested on it thinking that the American business model represented something that could be exported. The locations that Wal-Mart acquired from Wertkauf and Spar Handels AG were poor in terms of the fact that were located in the competitive strongholds of their rivals (Napiersky, 2007)21. Compounding the preceding is that it, Wal-Mart, acquired stores from what are termed as lower ranking companies that did not have the consumer reputation of competitors, which when coupled with the better placed outlets of better rivals started the company off at a significant disadvantage in a market where consumers are very sophisticated, and the other firms were firmly entrenched as well as established (Napiersky, 2007)22. These acquired outlets represented a poor starting point that damaged Wal-Mart's reputation in the market from which it never recovered (NACS Online, 2006)23. The acquisition of the 95 stores from Wertkauf and Spar Handels AG made Wal-Mart the fourth largest retailer in the market, and that position rapidly faded to a 1.1 percent share of the market as its American business model lost customers (Knorr and Arndt, 2003)24. The stores and locations were a poor choice, but the foundation for failure lay in the use of Americans as the decision making brain trust who failed to understand the important cultural nuances in merchandising, presentation, marketing, and operations (Napiersky, 2007)25. Wal-Mart also faced stiff competition from Lidl as well as Aldi, in that they understood discounting in the German market, and countered Wal-Mart's every move as a result of their understanding of its modes of operation (Napiersky, 2007)26. Armed with an edge, the German retailers were able to out position as well as manoeuvre Wal-Mart further compounding their problems. In a study titled "Explaining the National Cultural Distance Paradox" the importance of understanding cultural differences in marketing and retailing operations was explained by Brouthers and Brouthers (2001)27, which was further detailed by Hennig-Thurau et al (2001)28 in their work "German Consumer Decision-Making Styles". Conclusion The nuances of the German market means that Wal-Mart should have conducted more extensive market research as well as thinking of operating under a joint venture arrangement whereby it would have been able to utilise the market expertise of German managers and or staffing that had a high degree of familiarity with the market as a means for decision making. The lack of expertise on the part of the company was compounded by its use of the American business model that did not fit the realities of the situation. One specific example is labour unions. The foregoing are considered by Germans as an important part of the democracy process, which Wal-Mart saw differently (Napiersky, 2007)29. Wal-Mart has historically, and in the case of its American business model, treated unions with indifference, a practice that did not sit well with German workers (Napiersky, 2007)30. Europeans think differently concerning unions and reject companies that have policies and or encourage " work rules that regulate their private lives" (Napiersky, 2007)31. The negative public media exposure from this Wal-Mart tactic discouraged consumers from shopping in its stores, something that easily could have been avoided with proper pre-market entry research. Thus, Wal-Mart's German market mistakes were a litany of errors that resulted from a failure to research and or understand the cultural aspects of the market. A faux pas is an unthinkable error in committing the long list of mistakes the company did, all of which could have been discovered via research. The importance of understanding and adhering to cultural aspects cannot be overstated, as the failure to recognise this area can alienate customers as well as employees, specially in a country like Germany where its national pride and identity are strong facets. The failure of Wal-Mart in Germany, and the underpinnings of that failure are facets rooted in basic international market entry dynamics. As far back as forty years, Farmer and Richman (1966, p. 95)32 stressed the importance of understanding the constraints inherent in differing markets with respect to " sociological, legal-political, and economic " aspects. Mourdoukoutas (1999, p. 47)33 terms the preceding as 'vision'. He advises "A sound vision creates mutual trust among the stakeholders of the corporation and a reputation with customers and suppliers", along with " public image, concern for quality, identity of customers and markets ". The foregoing is further eloborated by Maddox (1993, p. 35)34 who tells us that cultural research, and understanding represent one of the most important aspects in international business. Wal-Mart's reasons for failure in the German market are easily recognised and as shown above, correctable, although its entry into that market might not again be possible, the lessons learned will remain with the company nevertheless. Bibliography Brouthers, K., Brouthers, L. (2001) Explaining the National Cultural Distance Paradox. Vol. 32. Journal of International Business Studies Clark, A. (2006) Wal-Mart pulls out Germany. 28 July 2006. The Guardian Farmer, R., Richman, B. (1996) International Business Theory. Richard D. Irwin Publishers Gain Report (2003) Germany Retail Food Sector Report 2003. United States Department of Agriculture, Report #GM3002 Hennig-Thurau, T., Mitchell, V., Walsh, G. (2001) German Consumer Decision-Making. Vol. 35. Journal of Consumer Affairs Incandela, D., McLaughlin, K., Smith Shi, C. (1999) Retailers to the world. The McKinsey Quarterly Knorr, A., Arndt, A. (2003) Why did Wal-Mart Fail in Germany. Department of Economics and Business Studies, University of Bremen Landler, M., Barbaro, M. (2006) Wal-Mart Finds That its Formula Doesn't Fit Every Culture. 2 August 2006. Retrieved on 10 January 2009 from http://www.nytimes.com/2006/08/02/business/worldbusiness/02walmart.htmlei=5090&en=e05e99bb093724c5&ex=1312171200&partner=rssuserland&emc=rss&pagewanted=all Lord, M., Randft, A. (2000) Organizational Learning about New International Markets: Exploring the Internal Transfer of Local Market Knowledge. Vol. 31. Journal of International Business Studies Maddox, R. (1993) Cross-Cultural Problems in International Business: The Role of the Cultural Integration Function. Quorum Books Mourdoukoutas, P. (1999) The Global Corporation: The Decolonization of International Business. Quorum Books NACS Online (2006) Wal-Mart Admits Defeat, Pulls Out of Germany. 31 July 2006. Retrieved on 10 January 2009 from http://www.nacsonline.com/NR/exeres/0000711alpfizawytsgoyzgd/NewsPosting.aspNRMODE=Published&NRORIGINALURL=%2FNACS%2FNews%2FDaily_News_Archives%2FJuly2006%2Fnd0731065.htm&NRNODEGUID={1B6AC677-C894-4FA5-8852-6D58C4E01799}&NRQUERYTERMINATOR=1&cookie_test=1 Napiersky, U. (2007) Giant Lessons for Wal-Mart Behemoth. Echo International Pan, Y., Li, S., Tse, D. (1999) The Impact of Order and Mode of Market Entry on Profitability and Market Share. Vol. 30. Journal of International Business Studies United States Department of Agriculture (2004) A Guide to Exporting Food and Beverage Products to Germany. Retrieved on 10 January 2009 from http://www.fas.usda.gov/info/agexporter/1997/January%201997/germany.html Wal-Mart Facts.com (2007) Wal-Mart International Announces German Acquisition. 9 December 1998. Retrieved on 10 January 2009 from http://www.walmartfacts.com/articles/3482.aspx Read More