Wal-Marts German Misadventure - Case Study Example

Wal-Mart's German Misadventure 1. Wal-Mart Started its global operations in the early 1990s when it opened its first international store in Mexico. Analyze the reasons for Wal-Mart's decision to go global. Wal-Mart remained a domestic company till 1991 and focused mainly on markets in the United States. When the company decided to expand its operations to a global level it had several options to select from the countries around the world (Gupta, Govindarajan & Wang 2008 p.30). The first solid move towards foreign expansion took place in 1991 with a fifty-fifty collaboration with Mexico’s leading retailer Cifra, to operate wholesale clubs under the brand name Club Aurrera (Gupta, Govindarajan & Wang 2008 p.58). The introduction of Wal-Mart stores in association with Cifra S.A. was combined with the opening of Sam’s Club outlets and Wal-Mart discount stores in several cities of Mexico (Grant & Newpert 2003 p.74) Wal-Mart announced its decision to go global in the early 1990’s and The reason to look for international markets were due to the stiff competition from Target and K-mart that adopted aggressive expansion policies and grabbed the market share of Wal-Mart and the realization of the top management of Wal-Mart that greater opportunities are available overseas to tap the potential retail markets (Wal-Mart's German Misadventure). Competition from rivals like Costco and Target in America forced Wal-Mart to give importance to its global expansion strategy (Brunn, 2006 p.11). Wal-Mart expanded its business to most regions of the US towards the end of the 1980’s and was short of new territory to expand. This is one of the main reasons why David Glass, successor of Sam Walton, was looking for opportunities in overseas markets (Grant & Newpert 2003 p.74). After the implementation of a joint venture in Mexico in 1991, Wal-Mart was keen to make a global presence aggressively. The overseas stores of Wal-Mart was 1 percent in 1993 and the same grew to a whopping 43 percent in the year 2007 (Gupta, Govindarajan & Wang 2008 p.57) Wal-Mart had created a successful business system to remain competent in the American market. The company had to expand to survive and the international market was a significant potential. Expansion was important because the company had to register increase in profits and sales to meet the expectations of the capital market. The emerging markets around the world had low disposable income that offered huge opportunity for the success of discount retailing. Wal-Mart had the added advantage of leveraging two main resources developed for the American operations. The company could exploit the extensive buying power with huge domestic suppliers like Nestle, Pfizer, Hallmark, Revlon, Kellogg and 3M to buy good in a cost effect manner for non-American stores(Govindarajan & Gupta 1999). Wal-Mart acquired an extraordinary share of the American consumer market in almost all categories. After the beginning of the super center concept in 1988, Wal-Mart emerged as the nation’s top seller of foods. The 104 stores of Wal-Mart accounted for one third of the total food sales in the United States. Wal-Mart emerged as the number one retailer of clothing and was the top seller of home furnishings than other companies. Wal-Mart was also the number one seller of music and toys. It accounted for one third market share for household staples like diapers, toothpaste and shampoo. Wal-Mart was driving out small competitors and started to devour other supermarket chains (Mitchell 2007 p.13) Wal-Mart was also keen to expand the sale of consumer electronic goods. There was no end to the variety of goods and services that the company wanted to sell and conquer. Wal-Mart even included health clinics to several stores. Wal-Mart has included gas stations in around fifteen hundred stores. The business press has reported from time to time of Wal-Mart’s capacity to further expand its operation in the United States. “How Big Can It Get” is a popular quote that queries the largeness of Wal-Mart and the continuing expansion policies. Lee Scott, the then CEO of Wal-Mart opines that super centers are closely located to aggressively maintain the content of the share holders and keep the share price buoyant and the company has to grow to move in pace with the expectations of the shareholders. As a retailer, the company is aimed to boost sales in the existing stores and continually open new stores to acquire new market share. However, close to half of the revenue is generated by chain stores through improved sales in established stores (Mitchell 2007 p.14) Stores opened for a year or more contributed one third of the total revenue of Wal-Mart. The balance revenue is generated from the opening of new stores. The increase in sales at Wal-Mart’s established stores amounted to one third of its added revenue. It was required for the company to engage in relentless construction to maintain the growth rate. Therefore, Wal-Mart has adopted the policy to expand the floor area by at an average 8-10 percent annually. This strategy requires Wal-Mart to build 50 million square feet or above store space annually. In these circumstances, the obvious question arises about the implementation of the strategy or the location of stores. Urban neighborhoods are areas which big box retailers target as a potential source of sales growth. Generally, inner city is under saturated and it is the last choice though big retailers are short of finding new opportunities in other locations. If they find spacious locations, big box retailers choose to implement their standard concept in city neighborhoods. Though Wal-Mart and its competitors are considered as national chain stores, these retailers are in fact international chains. The quest of Wal-Mart to register continued growth rate has led to its decision to go global (Mitchell 2007 p.15) The globalisation strategy of the chain store is combined with an appetite to seize foreign local markets and grab a dominant share of the market even while dealing with fundamental necessities like grocery, building supplies and clothing. David Glass comments that the priority of Wal-Mart is to first dominate North America, then South America and expand towards Asia and Europe. Wal-Mart now operates in these four continents with fifteen hundred or more outlets out of United States and obtains one fifth of sales revenue from the international division. The CEO of Wal-Mart International, John Menzer explains that only 37 percent of the global economy is in the United States and the balance 63 percent is located around the world. Therefore, the company estimated that if Wal-Mart engages in serious global operations it would fetch the company revenue that is twice than that of the United States. The saturation of home markets is another reason for the company to go global. In Mexico, Wal-Mart is the largest retailer with a wide margin employing more than hundred thousand employees in 633 stores (Mitchell 2007 p.16). Wal-Mart International could register rapid growth and gain consumer acceptance from its international operations that had its beginning in Mexico. Customers around the world have been able to experience the Wal-Mart philosophy, “Every Day Low Price” (Luo 2002 p.308) The international entry strategy of Wal-Mart has proved correct in most of the nations. Customers around the world appreciate low pricing, good service and great selection upon which the Wal-Mart store is based. The success of Wal-Mart has enabled it to continue its expansion abroad and tends to grow larger, making the company to focus aggressively on its strategic expansion policy. The slow or rather stagnant growth of the retail sector in the United States is forcing retailers like Wal-Mart to venture into booming economies in Latin America, Middle East and the Pacific Rim. The selection of location also has equal importance while going global. Mexico was the first choice for Wal-Mart to expand internationally in the region due to the potentially lucrative marketplace. Mexico had the 11th largest population in the world (Luo 2002 p.314) and stood 13th in terms of GDP among world economies. The long term market potential of Mexico was positive due to the large untapped medium size town where 38 percent of the population with an average age of 19 years resided. Stable political system, stable economic growth, trade liberalization, etc were some of the other reasons beneficial in the long run that attracted Wal-Mart to Mexico (Luo 2002 p.315). The peculiar characteristics of European markets led Wal-Mart to consider it as a less attractive destination for the first point of global entry. The retail market in Europe was mature with well experienced competitors that offer similar formats of Wal-Mart retailing that neutralized the Wal-Mart advantage. The basic ideology of Wal-Mart was to clone the Corporate DNA into the foreign markets and the company was successful in operating stores in the American style in Canada with dramatic results (Govindarajan & Gupta 1999). The expansion strategy of Wal-Mart is highly diversified and employs a combination of entry methods to enter markets in different nations. While some of the offshore stores are owned by Wal-Mart, others are set up as joint ventures. For example, Wal-Mart has tied up with Lojas Americana in Brazil and with Shenzhen International Trust and Investment Company in China. In Indonesia, Wal-Mart stores are operated through franchise agreements. The company has a wholly owned subsidiary in Canada after acquiring the local supermarket chain Woolco instead of operating through a local partner (Luo 2002 p.16) Wal-Mart International has been able to capitalize foreign markets where the domestic players do not have the capacity to compete with the international retailer and offers opportunity for acquisition or joint venture at a reasonable price (Quelch, J.A. & Deshpandé, R 2004 p.303). 2. When Wal-Mart announced that it would be entering the German markets, analyst were surprised. Usually, the cultural affinity between the U.S and UK led American companies to target the UK first, before launching onto the European continent. Do you think Wal0Mart's decsion to enter the German market was correct? Justify your stand. Consolidate The decision of Wal-Mart to enter Europe by making its first point of entry through Germany was a wrong decision. Cultural differences and consumer behaviour are the two main factors that differentiate the consumption patterns and consumer response of German customers who do place much importance to customer relationship. Wal-Mart is the largest retailer in the world with plans to expand globally and register new highs of international growth. Europe is a potential market for Wal-Mart to merge and set up ventures through acquisitions in Germany. Though there were immense opportunities for the retailer due to the high level of sale in the food sector, Wal-Mart could not make an impact and be successfully as basically envisaged due to the complexity in acquiring targeted German chain stores build upon specific nature of ownership (Fernie & Arnold. 2002 pp.92-102). The global variable success of Wal-Mart is based on the corporate policies drafted from America through which the retailer has achieved monopoly for three decades in America. The global expansion stride however has been a tougher phase for the company. Other American multinationals have become successful globally by adapting to the local markets according to local habit or by formulating products that suit local requirements. Neither of these strategies was followed by Wal-Mart while penetrating into a new foreign market (Brunn 2006 p.12). Wal-Mart has paid attention only to store popular local goods and the attempt to adapt to local market has been inadequate. Wal-Mart was forced to close its store in Germany due to union problems and restrictive union laws (Brunn 2006p.13). The growth of Wal-Mart in America is attributed to an exclusive organizational culture and acceptability from customers due to the low price, community support store and service. However, Wal-Mart could not offer competitive advantage in the UK and other European markets like Germany since there were other well placed efficient supply chains (Fernie & Arnold. 2000 pp.416-432). The expansion strategy of Wal-Mart International is to replicate their store formats in foreign countries which have been a successful method in the United States. The format of Wal-Mart store even includes the standardized layout of stores with the “everyday low price” theme and its policy of technological integration and management of suppliers. The strategy has been successful in Canada, Mexico and the UK but it has had its own problems. Wal-Mart had a difficult situation in Germany while venturing to expand its marks. Wal-Mart purchased two local German chains, Interspar and Wetkauf in the late 1990’s for $1.6 billion. Wal-Mart had to face many problems in Germany. One of the problems was price controls that restricted retailers from selling products at less than the cost price. Zoning controls and rigid labor laws restricted Wal-Mart from setting up typical jumbo outlets. Wal-Mart was not willing to compete with local competitors that were content with fewer profit margins. The strategy of chain store owners, usually wealthy families, was long term shareholder based rather than short term profit. Due to these reasons, Wal-Mart lost its money from the beginning of its arrival in Germany (Steers & Nardon 2005 p.203) Wal-Mart adopts an aggressive approach while entering new markets. It takes a stand to change the market consumption trend instead of adapting to the existing consumption methods. This is as a result of the difference in the cultural values of the organization. Culture has an impact on the nature of the organization and its operational strategies which reflects in the mastery or harmony of the company with the new environment. The culture of United States is oriented in the mastery style and emphasizes to control the new environment. The cultural characteristics of the company influence the overall global expansion strategies and outcomes. Cultural difference is a serious factor because the culture of company influences its decision to make a profit in the long term or short term. Wal-Mart is a firm that tends to emphasise short term growth (Steers & Nardon 2005 p.204). Wal-Mart does not have the willingness to impose a local image and acquire local expertise while operating overseas. Despite this factor, Wal-Mart has registered continuous growth globally. Critics view that Wal-Mart poses a “headquarters know best” attitude and lacks adequate international business experience among its top management even when they have more than 1300 stores overseas. Critics point out that Wal-Mart relies on the American approach and requires introducing local products in foreign stores. The approach of the store is the reason why Wal-Mart is held liable for abusing local suppliers in foreign markets. For example, it was difficult for Wal-Mart to explain specific concepts to employees in Japan and could not convince Japanese customers about the high quality of products. Though Wal-Mart believes that expansion into foreign market will earn impressive returns in the future, it lags behind its competitors and its foray into nation’s like Germany has resulted in big losses. In Germany, Wal-Mart stepped into the market without analyzing and understanding the nature of German shoppers, pervasive role of unions and government regulations and the competitive landscape. (Mcfarlin & Sweeney 2008 p.291). The competitiveness of Wal-Mart played the spoil spot because German regulators ordered the retailers to increase the price of household staples. It was a strange set back for the retailer giant that woo customers through better selection, lower price and friendly store keepers. The increase in price was demanded by German regulators because Wal-Mart invoked price war that led other German chain stores to sell goods lesser than the wholesale cost. The price war began when Wal-Mart promoted price rollbacks that made retailers like Aldi and Metro A.G. to reduce their price when consumers in Germany were stingy to spend money. The decision of Wal-Mart to enter the European markets through Germany proved wrong when it lost money from its German operations partly in start up cost and due to stiff competition. The major problem of Wal-Mart was the inability to acquire adequate stores to repeat the Wal-Mart efficiency. The efforts of Wal-Mart to acquire the Germany’s largest retailer, Metro went futile due to the decision of its shareholders to abstain from selling the company. Big retailers in Germany was under the pressure of price competition and the unwillingness of consumers to spend lavishly that resulted in depressed profits and flat sales. Wal-Mart was accused by the German cartel office for predatory pricing. Customers enjoy temporary marginal gains while medium and small companies experience damage and lasting negative effects. The accusation clearly highlights the contrast between the American and German notions of competition. Wal-Mart failed in Germany because the law was not suitable for an American approach. German law is keen to protect small shop keepers throughout the thousands of town in the county. German shopkeepers are unhappy with the federal law that prohibits stores from keeping open after eight in the night during weekdays and complete closure of stores during Sundays. The American operational modalities of Wal-Mart were not feasible in Germany because the law prohibits a range of rebate and discount plans. The law allows stores to display promotional offers, but does not allow companies to offer discount to consumers who enroll on special programs or loyalty policies. Despite government interference in the low pricing strategies of retailers, Wal-Mart was committed to reduce the cost of living of people in Germany while accepting the Government ruling against the sale of products below the purchase costs (Andrews, E.L. 2000). Though there are wide cultural differences between the Germans and Americans, Wal-Mart first entered the German markets instead of making an entry into Europe through the UK. Though Wal-Mart failed its operations in Germany it could do considerably well in UK. The failure of Wal-Mart in Germany is because it is not a well know brand. This was leveled in UK where it retained the brand name of Asda though it had acquired the chain store. Customers in Europe are quality conscious and therefore it is not easy to easily lure them with low prices. In Germany Wal-Mart did not succeed because it could not offer the low price offered by local players since it could not gain the economies of scale to compete in terms of price alone (Rugman 2005 p.81). 3. Even after five years of doing business in Germany, Wal-Mart had failed to make an impact on the German market and had been incurring losses year after year. Analyze the reasons for Wal-Mart's problems in the German market. Do you think the company would be able to improve its performance in Germany? The failure of Wal-Mart in Germany after ten years of attempt to gain a competitive advantage has lead to the idea of re-conceptualisation during international investment with a dynamic approach. Wal-Mart encountered problems in the German market because it did not examine the nature of the German market. The home country effect is crucial for a transnational corporation while distributing resources in a culturally different country like Germany. Wal-Mart did not consider this point, instead relied on the resources of autonomous action and network dominance which was a successful approach in the United States but a failed attempt in the German retailing environment (Christopherson 2007) The Wal-Mart cheer is a daily feature of its operations in the United States. But it did not work well in Germany due to cultural differences. Germans viewed the cheer factor as a ridiculous and refused to respond to the cheer. By the year 2006, there was clear picture of Wal-Mart failure in Germany with the ultimate decision to sell around 85 stores due to financial loss. The CEO of Wal-Mart in Germany acknowledged that they had made mistakes. Several products of Wal-Mart were American and not German. This has offered lessons to the retailer for its further global expansion (Larréché 2008). Wal-Mart was not successful in Germany with its one-in-all shopping offer due to the difference in shopping habits of consumers. It is a rare vulnerability for Wal-Mart since the core strategy is to impose American values into Germany. Wal-Mart has lost millions of dollars in Germany and the company has now decided not to operate with the brand name Wal-Mart in overseas markets, instead to continue with the local brand name of the acquired company as in the UK, where Wal-Mart is known with the previous name Asda. In further foray into international markets, Wal-Mart is conscious whether or not to impose the corporate American culture to non American employees. The response from German consumer paved way for Wal-Mart to stop its clerks from smiling at customers. Wal-Mart also scrapped its morning chant. It was very late when Wal-Mart instilled these changes into the German stores. Further, Wal-Mart did not establish good relations with labour unions in Germany and failed to understand the close relationship between the union and companies. Wal-Mart considered unions as communists. However, Wal-Mart was in good terms with the works council and changed employee policies according to their concerns. Wal-Mart had to face the wrath of employees in the acquired chains when one of the headquarters was shifted. Wal-Mart could have been successful in Germany if it used local management. Wal-Mart started its operations in Germany with American executive who had little idea about German consumers. For example, the store sold packaged meat while Germans prefer to buy it from the butcher. The shoes to sausage paradigm of Wal-Mart do not suit several non-American shoppers (Landler & Barbaro 2006). Wal-Mart is blamed for its reluctance adjusts its approach to the German customers. The ten food rule is another failed attempt of Wal-Mart to cheer up the German customers who look for efficiency rather than for customer relationship (Piercy 2002 p.36). In Germany, Wal-Mart had the option of concentrating on the sales growth of existing markets instead of further acquisitions. Wal-Mart could not survive in the German markets by instilling price wars because the competitors were happy with low margins (Betriebswirt 2007 p.72) The expansion policy of Wal-Mart was to break the structure of overseas markets in which they enter. The heterogeneous portfolio of stores acquired in Germany posed a problem for Wal-Mart to integrate the stores. The Every Day Low Price strategy in particular failed to succeed in Germany (Fernie, Hahn, Gerhard, Pioch, & Arnold 2006 pp: 247-266). The German Misadventure of Wal-Mart is due to its adamant strategies to impose consumption patterns on customers through bulk and loyalty programs to avail discounts and the wrong conceptualisation of the German market. Reference Andrews, E.L. 2000 Germany Says Wal-Mart Must Raise Prices Available: http://www.momandpopnyc.com/campaigns/walmart/articles/Predatory%20Pricing/Germany,%20NYT,%209.9.00.pdf. 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Sharpe, 2005 Wal-Mart's German Misadventure Available: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Business%20Strategy%20Wal-Mart%20German%20Misadventure.htm#Wal-Mart's%20International%20Operations. Accessed on May 20, 2009 Read More