Walmart's Failed Entry Into Germany: Were Cultural Gaffes to Blame? Case

Background

Walmart entered the German retail market in early 1997 (Jui, 2011) through the acquisition of the German supermarket chain, Wertkauf. While the free-market capitalist model of the United States had allowed for rapid expansion of Walmart there, the restrictions in Germany played a crucial role in regulating how quickly the company could expand there. Walmart's U.S. successes did not automatically follow in Germany and the company had to make several adjustments to survive, for the time that it did. By 1988, Walmart had become the most successful retailer in the United States, which encouraged the company to open stores internationally and by 2019 Walmart had 12,000 stores in 27 countries (Cheddar, 2019).

Data 1. Total Sales/Revenue for Walmart, 2014

-Present Click here to view the online version of this case for optimal experience of interactive data embeds. However, not all of Walmart's overseas expansions have been successful. Walmart's 1997 acquisition of Wertkauf and Interspar, with 95 stores, was a huge risk for the company. The business environment in Europe, and in Germany in particular, was considered restrictive given the labor laws, restricted hours for shopping, zoning laws, and high unemployment.

Data 2. Incidents of Part-Time Unemployment, United States and Germany

Click here to view the online version of this case for optimal experience of interactive data embeds.

Data 3.Ease of Doing Business, United States and Germany

Click here to view the online version of this case for optimal experience of interactive data embeds. Analysis shows that retail growth in Germany during that period was just about 0.3%, an abysmal rate of return for a retailer. Walmart never announced the actual losses during its venture in Germany, but the company is estimated to have lost in the region of USD 200 million to 300 million per year during its German misadventure (Nizam, 2016). SAGE Sabithulla Khan 2020 SAGE Business Cases Page 3 of 6 Walmart's Failed Entry Into Germany: Were Cultural Gaffes to Blame? In 2006, Walmart withdrew from the German market, with estimated losses of around USD 1 billion. The company was unable to handle "Germany's particularly competitive, low-margin high street environment, where more established operators ran similarly large discount warehouses for products such as clothes and household goods" (Clark, 2006). Walmart's problems were compounded by accusations of predatory pricing practices and poor working conditions, which alienated Walmart in the minds of the German public.

Walmart: Too Casual for Germany?

Some of the issues with Walmart in Germany seemed to do more with Walmart as a product of U.S. success. Its organizational culture was to blame, as much as its ignorance of German culture. In this context, organizational behavior (OB) is key to understanding why Walmart failed (McShane & Glinow; 2015). OB refers to the way that individuals relate to an organization and to the environment around it, and to how the said organization relates to the individual and the environment, in turn. This study can be useful in understanding how behaviors are impacted and how issues such as motivation can be managed for success. Part of Walmart's failure in its entry into Germany can be explained by its weak international strategy, which did not consider the cultural differences between Germany and Southern hospitality, seen as a cultural trait in the United States (Knorr & Arndt, 2012). This error would have profound consequences for Walmart, given that understanding national cultural norms is vital for the survival of international businesses (Leung et al., 2005). Walmart prides itself on having a casual, friendly atmosphere in its stores, typified by having staff at the entrance, who are there to greet customers as they arrive. This practice, however, was perceived by Germans as being "flirty" and unprofessional (Cheddar, 2019). Other examples of cultural gaffes include Walmart employees bagging items for customers, whereas Germans are used to bagging their own items and prefer this (Landler, 2006). Cashiers were also ordered to always smile at customers, which in Germany was perceived as strange, by both customers and employees. These organizational issues could have been foreseen had there been a closer cultural analysis of the way that Germans like to shop. Walmart attempted "to apply the company's proven U.S. success formula in an unmodified manner to the German market" and thus failed to consider the differences in labor laws between the United States and Germany (Knorr & Arndt, 2012). The German retail sector relies on skilled and semi-skilled workers, a quarter of whom belong to a union, which are a central tenet of Germany labor laws. By contrast, Walmart has regulations on its books that restrict unions. Germany's stronger labor laws proved a huge source of conflict for Walmart. The German high court struck down Walmart's code of conduct, which included a proviso that its employees could not flirt in the workplace (DW, 2005). Walmart faced high employee turnover due to its employment practices being outside German cultural norms, and it was also forced to agree to salary increases that were 0.5% over retail sector levels, after wage negotiations with German union Ver.Di (Jui, 2011).

Data 4. Labor Tax and Contributions as a Percentage of Commercial Profits, 2005-Present Click here to view the online version of this case for optimal experience of interactive data embeds. These concessions were particularly damaging to Walmart given that its profit margins were at 1% while other retailers had 6-7% profit margins. As The New York Times reported, on its closure, "Wal-Mart never got traction in a market characterized by unrelenting price competition, well-established discounters and the cultural resistance of German shoppers to hypermarkets, sprawling stores where the fresh vegetables may be a few aisles away from the shirts or the lawn mowers" (Landler, 2006). The German market was neither ready nor appropriate for U.S. style supermarkets. Walmart had not examined how the buying habits of Germans might differ from those in the United States. Walmart's Germany CEO, David Wild, admitted that many of their product buyers were from the United States, resulting in huge errors. For example, U.S. and German pillowcases are different sizes, resulting in Walmart Germany stockpiling huge numbers of pillowcases that it could not sell (DW, 2005). Wild, while SAGE Sabithulla Khan 2020 SAGE Business Cases Page 4 of 6 Walmart's Failed Entry Into Germany: Were Cultural Gaffes to Blame? reflecting on Germany Walmart's mistakes, admitted that "if you want to be successful in a foreign market, you have to know what your customers want. That's the most important lesson... . It does no good to force a business model onto another country's market just because it works well somewhere else" (DW, 2005). German shoppers prefer discount non-branded items, hence the popularity there of discount supermarkets such as Lidl and Aldi. Yet Walmart did not place the discount items in positions of prominence, and food remained cheaper at German discount chains (Landler & Barbaro, 2006). Additionally, Germans are far more environmentally conscious than U.S. consumers and the excessive use of packaging in Walmart products produced great annoyance amongst customers (Macaray, 2011).

Pricing Issues

Given that Germans are among the most price conscious consumers, Walmart was entering an already saturated market, dominated by discount supermarkets Metro and Aldi (Landler, 2006). Walmart imported much of its clothing and other items from abroad, adding to the costs of these items. This inflated prices for the consumer, who didn't want to pay extra for imported items. Additionally, local discount retailers offered stiff competition. Under German law, smaller supermarkets could charge lower prices for consumer goods than the big box stores that Walmart owned (Cheddar, 2019). In 2000, Walmart was accused and convicted of "predatory pricing" and ordered to raise prices of basic commodities (Mitchell, 2003). German competition regulators found that that Walmart illegally sold products below wholesale prices in a price war against smaller local shops (Andrews, 2000).

Communications Gone Wrong?

Could Walmart's failures in Germany be seen through the lens of communication failures? Communication is made up of three parts: transmission, encoding, and interpreting. Did Walmart make the basic error of not understanding German values? Or perhaps the German market misinterpreted Walmart's values? There are four factors involved in good communication: first, the sender and receiver's ability to communicate through the communication channel; second, the extent to which both the sender and receiver share similar "codebooks" or repertoires of symbols, gestures, and idioms; third, the extent to which both parties share similar mental models concerning retail and consumerism; and finally, how effective the sender is at communicating the message appropriately (McShane & Glinow, 2015, p. 272). A mistake or mis-match in any of these four factors could have led to Walmart communicating the wrong message or, worse, the recipients perceiving it as condescending or fake. The latter appears to have been the problem, based on many analysts' observations that Walmart came across as too "American" or "fake" (Jui, 2011), and overtly friendlythis being a cultural trait that the Germans do not regard highly. The hyper-capitalist and persuasive style of communications that U.S. corporations tend to indulge in, placing the individual at the center of the world and subordinating the interest of others, is quite alien to the cultural norms and collective values that many Germans hold. Thus, a problem that Walmart's upper management most likely did not even know existed had reflected poorly on the company's organizational behavior.

Question :

Summary of the case study