Why Walmart Failed in Germany

Date: May 29, 2014

To: Doug McMillon, CEO of Walmart

From: Katherine E. Cowan, International Business Expert

Subject: Re-entering German Market

In 2006, Wal-Mart was forced to exit the German market because its market entry was flawed. It attempted to replicate the US model in Germany and it failed due to several major cross-cultural differences. By making several adaptive changes to Wal-Mart’s business model it is possible to successfully re-enter the German Market.

The problems of Wal-Mart in Germany can be seen as wide-ranging. When considering entering a very developed and competitive foreign market like Germany, in order to be sustainable it is essential to establish an immediate market share that is large enough to gain acceptance in the consumer's mind and to benefit from economies of scale. Before re-entering the German retail market, Wal-Mart needs to recognize the importance of fully understanding the culture, expectations of shoppers, competition, regulatory bodies, and the strength of unions.

Upon re-entering the market, it is be essential for Wal-Mart to exercise a successful acquisition strategy. Wal-Mart originally entered the German market by acquiring unprofitable retail chains that made up a very small share of the German Market. The stores were in poor repair and in poor location. These stores were placed on the edge of towns requiring towns and lacked proper transport.  Roughly 30% of all households in Germany do not own a car. Therefore rely on transporting bought goods by foot, bicycle, or public transport. Taking all this into account, it makes more sense to focus only on acquiring chains inside the city, not outside. At the very least the property needs to be easily reached by public transport and be close enough to a large residential area. Due to the strict zoning regulations, building a large super center in more densely populated areas would be near impossible. That being said, when re-entering the market it will be absolutely crucial that Wal-Mart acquires a chain that already has a stable share of the market and have stores that located in areas that are easily reached by the majority of the public.

Understanding cultural differences, and being able to adapt to them is crucial for Wal-Mart’s success on re-entering the German market. For instance, Germans are less service oriented and more environmentally conscious. Therefore, Wal-Mart should do everything possible to encourage the use of reusable bags and minimize the waste of plastic bags, and allow customer bag goods like they are already accustomed to doing. Implementing a more prominent self-checkout system, similar to the kind of self-checkouts we already see in many Wal-Mart stores would add more value to potential customers as well as better appeal to their cultural values. The idea is to abandon The U.S. style of service and provide service that is more culturally appropriate.

In Germany wage costs are amongst the highest in the world. Before increasing store personnel, Wal-Mart needs to be conscious that it’s entering a country where labor costs far surpass that of the United States. German worker’s unions have more power than in many other countries, and they are strongly opposed to reducing costs by lowering employee’s wages and social benefits. The extra services that are provided Wal-Mart, such as the bagging of bought goods and greeters, aren’t as valued in the German market. Because there is less value placed on service, it is wise to reduce the required number of staff. By reducing the required number staff, Wal-Mart would also be able to cut the losses that would inevitably be incurred due to the higher wages and benefits that are required and regulated by the unions and German law.