Wal-Mart Price Wars in Germany - Research Paper Example

Wal-Mart Price Wars in Germany Name Instructor’s Name Course Name and Code Date Executive Summary Wal-Mart is a mega American retailer chain that has its operations globally. Sam Walton founded the company in 1992 and since then it has tremendously expanded into the global arena. The company huge success is largely attributed to its Every Day Low Price strategy, which allows the company to sell its products below their cost. Upon its entry in the Germany retail market, the company experienced difficulties in operations due to the fact that retail market environment in Germany is extremely different from the home market. With regard to this fact, the company has been involved in price wars something that is prohibited by law in Germany. This paper seeks to discuss Wal-Mart price wars in Germany; for instance, the legal and ethical analysis of price wars is discussed. Similarly, the strategic and/or market analysis, alternatives/solutions together with their implementations are also given. Background Wal-Mart is a mega retailer that operates globally; it was founded in 1962 by Sam Walton in Bentonville, Arkansas. This mega retailer started with $700,000 in its first year of operation, which significantly scaled up in the following years of operation (Caligiuri 76). The company has continually grown up to the current times; while other retailers struggled with inflation and recession, Wal-Mart maintained its growth trend. In the 1980s, the company started to diversify its operations, which on the other hand propelled its expansion (Carroll and Buchholtz 62). In 1997, Wal-Mart diversified its operations into the German retail market through acquisition of Wertkauf chain stores. The success of Wal-Mart in the US is singularly hinged on its pricing strategy, which encourages low pricing, which on the other hand guarantee inventory control as well as efficient distribution. Wal-Mart’s Every Day Low Price Strategy According to the study performed by UBS in 2002, it was discovered that Wal-Mart had achieved 12% lower prices on average as compared to its competitors (Knorr and Arndt 76). For instance, the company was able to implement this strategy by focusing on developing a sophisticated logistics system powered by heavy IT investments, having an efficient distribution system particularly by building retailing stores closer to the distribution centers together with using RFID technology; and lastly, by being an non-union employer. Wal-Mart Globalization Wal-Mart international operations were first exhibited in 1991 when the company opened stores in Mexico through joint venture. Later on, Wal-Mart proceeded to Brazil, Argentina, China, Germany, Korea, UK, and Japan. By 2003, Wal-Mart had approximately over 1,288 international stores with its overall sales growth accumulating to 18.8% (Caligiuri 88). This success mainly resulted from the company’s successful implementation of its supply chain management technology together with its ability to provide customers commodities at prices 7% lower than competitors. German Market and Retailing Industry German is regarded as the largest economy in Europe comprising of approximately 15% of the Europe’s annual retail market. Wal-Mart entered the Germany Market by acquiring Werkauf chain and Interspar Chain in 1997. These two chains comprised of less than 3% of the total retail market. The country’s retail market annual growth rates averaged 0.3% in 1990s and the profit margins in the country were very low as compared to other European countries. Wal-Mart’s initial strategy in Germany was to refurbish the acquired stores improving their appearance as well as maintain price leadership through cost leadership. Due to this strategy, the company overhauled the supply chain systems; incorporated new scanning systems, developed centralized distribution, and above all created a high quality customer service. This strategy exposed the company to fierce price wars in the German retail market (Caligiuri 112). The Goldman Sachs report established that, Wal-Mart was in prime position to implement its US marketing strategies to gain efficiency and thus propel the German retail market that was largely underdeveloped. However, the land use restrictions that were implemented in the country exposed the company to failure. Accordingly, limited store hours, price regulations and stringent zoning regulations together with the strength of unions were other factors that could immensely affect Wal-Mart operations in this foreign territory. This paper seeks to discuss Wal-Mart price wars in German; in this regard, the discussion will focus on the legal implication of price wars, the ethical concerns, strategic/marketing analysis, and above all alternatives or solutions available for the company (Knorr and Arndt 113). Legal Analysis Wal-Mart’s below-cost pricing strategy largely undermines and violates competition as well as German’s anti-trust laws. In accordance with this, the federal Cartel Office has severally accused Wal-Mart together with other large supermarket chains in the country for selling goods below their cost price and thus ordered these chain stores to raise their prices. Constitutionally, German law prohibits selling products below their cost price because the practice impacts small business negatively (Caligiuri 79). In the same line of argument, price wars among the established companies would automatically ruin or destroy independent shops, which will on the other hand leave customers with fewer options together with inflated prices. Consequently, below pricing strategy ruin independent competitors as well as reduce competition in the long run. Ethical Analysis Ethically, it is dictated that marketing decisions and efforts must meet as well as suit the needs and requirements of customers, business partners, and suppliers. Price wars, selective advertising, and deceptive marketing are some of unethical marketing behaviors that have a negative effect on the organization’s overall relationships (Caligiuri 91). It has also been established that, customers prefer buying commodities from ethical companies; ethics in itself is a selling point rather a corporate image component. Low product pricing is an anti-competition practice that gives the organization with low price marketing strategy an upper hand over its competitors. For instance, in such context, customers are baited with low product or service prices. Pricing ethics is considered a form of fraud; a commercial contract that is promised to one party only for the sake of appearance. In this regard, predatory pricing which Wal-Mart engages in through its Every Day Low Price strategy was mainly designed to lock out its competitors from competitors from the market, create barriers to entry for potential new competitors (Knorr and Arndt 12). In this regard, this Wal-Mart pricing strategy is wholly unethical and unwarranted. Above all, the strategy is inconsistent with the German pricing regulations. Strategic / Marketing Analysis Wal-Mart decision to enter the German market was largely driven by the successful track record the company had enjoyed in the US, Mexico and the UK (Caligiuri 93). This served as the prerequisite in venturing into the Germany market through acquisition as the entry strategy. Accordingly, the company assumed that its country-dependent benefits would be easy to transfer supplier relationships together with consumer market knowledge. To the contrary, the company’s Germany based stores face shrinking margins which results into low profitability. This strongly affected the company’s strategy; for instance, Wal-Mart decided to respond to the aforementioned issues by: i. Continue expanding its Germany operations through acquisition/organic growth in order to gain economies of scale ii. Halt expansion but rather adjust its current assets to the Germany industry landscape iii. Divest its operations The analysis of the above options would have specific consequences; for instance, continued company expansion in the quest of gaining economies of scale would result into sunken costs. By entering the Germany retail industry, the company destroyed shareholder value and thus additional investment of capital in hope of turning around the prevailing scenario is not reasonable. The second option as mentioned above is keeping the company assets and adjusts according to the dynamics of the industry. This is unlikely due to the fact that the company competitors were using the same marketing strategy as Wal-Mart by adopting the RFID technology, purchasing new scanning systems, new logistics (Caligiuri 151). In this perspective, even if the company was to reduce its quality with regard to customer service together with scaling down store sizes to minimize operational costs, the company had no opportunity of making an extra dime. Lastly, divesting the company assets to its domestic retailers in order to reduce loses in Germany. This would have been considered the best option given the limited profitability coupled with stiff competition from the company competitors. Regardless of the perceived profitability by exiting the German market, the decision would result into a massive loss of approximately $1 billion. Alternatives/Solutions Wal-Mart is a company associated with setting standards in the retailing industry particularly in the US. Contrastingly, some standards cannot be easily or fully transferred to other international markets. For instance, the company’s venture into Germany resulted into failure due to the use of its traditional retailing principles (Caligiuri 22). In this regard, instead of using the same strategy of international market entry; acquisition, the company would have considered other options before entering the Germany retail industry: i. Greenfield investment ii. Licensing and franchising with retailers iii. Creating joint ventures with local partners Although this is an international market entry strategy, it would have exposed Wal-Mart to similar or more risk associated with acquisition strategy. Due to this reason, Greenfield investment should be ruled out. Licensing and franchising with local Germany retailers does not have the capacity of contributing value to the locals since Wal-Mart’s brand has been incapable of displaying itself as a strong perceived reputation among the German customers (Caligiuri 93). Launching joint ventures with local retailers is the only option that Wal-Mart would use, as it will give the company time to learn about Germany retail market and thus respond accordingly (Hartley 54). The company competitors learned from retailers from the US who empowered them to selectively start using new scanning systems upon Wal-Mart’s entry; for this reason, Wal-Mart would have also teamed up with local retailers in order to develop a German venture under a 50-50 terms of equity stake. For instance, Wal-Mart would bring massive experience and expertise with regard to integrating retailing efficiency while the Germany partner could provide the company with its local supplier and labor union relationship, the company brand would be recognized by customers for low prices, and above all, Wal-Mart would have been provided with local market and legal knowledge. Implementation Given the above joint venture scenario, it would have reduces the company’s risk profile while at the same time providing Wal-Mart with a platform on which to analyze and evaluate the German market that is significantly dissimilar to the UK market regardless of its close proximity (Caligiuri 77). The only risk associated with the joint venture is that Wal-Mart partners would learn the company core competencies and thus implement them beyond the joint venture agreement (Hammerich and Lewis 83). However, Wal-Mart is not obligated to give its Germany partners with its entire core competencies and thus it would be difficult for the partners to have a complete grasp of the company’s operations. For this reason, Wal-Mart would simply implement its operations technology into the store only to allow the partner to reap its benefits without copying it’s intellectually property. Conclusion Wal-Mart is an American retailer chain that has its operations across the world. The company’s operations have been successful mainly due to its Every Day Low Price strategy. The company’s expansion into Germany however, resulted into price wars. Accordingly, the company strategy was in contradiction with the Germany anti-trust laws. Due to this, the company was sued severally which prompted the highest court of the land; the Germany Supreme Court to rule against the company’s pricing strategy and advising it to raise product prices accordingly. This paper has expansively discussed Wal-Mart background, the legal analysis of Wal-Mart price wars in Germany, and the ethical concerns associated with price wars. Accordingly, the paper has discussed the strategic/marketing analysis and giving appropriate strategy that the company would have used to the Germany market. Works Cited Caligiuri, Paula. Cultural Agility: Building a Pipeline of Successful Global Professionals. New York: John Wiley & Sons, 2013. Print. Carroll, Archie, and Buchholtz, Ann. Business and Society: Ethics and Stakeholder Management, 7th Ed. London: Cengage Learning, 2008. Print. Hammerich, Kai, and Lewis Richard. Fish Can't See Water: How National Culture Can Make or Break Your Corporate Strategy. New York: John Wiley & Sons, 2013. Print. Hartley, Robert. Marketing Mistakes and Successes, 10th Ed. New York: John Wiley and Sons, 2011. Print. Knorr, Andreas, and Arndt Adreas. Why Did Wal-Mart Fail in Germany? Berlin: IWIM, Fachber. Wirtschaftswiss, 2003. Print. 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