Wal-Mart's German Retreat
Want to know how not to do business in Germany? Just ask Wal-Mart. After nine years of trying to make a go of it, the Bentonville (Ark.)-based retailer said July 28 that it will sell its 85 stores to German rival Metro.
Wal-Mart (WMT) will pay dearly for its about-face, which comes amid declining market share at its Asda stores in Britain and follows its retreat from South Korea two months ago. The company is taking a $1 billion hit to quit the market, while a source familiar with the deal said Metro paid as much as $100 million less for the Wal-Mart stores than the value of the real estate, unsold merchandise, and other physical assets.
The retreat is hardly surprising given Wal-Mart's numerous missteps in Germany. Perhaps its most glaring was misjudging the German consumer and business culture. For instance, German Wal-Marts adopted the U.S. custom of bagging groceries, which many German consumers find distasteful because they tend not to like strangers handling their food.
It also imported its U.S.-style company ethic, which includes strongly discouraging interoffice romances. Many employees found the code intrusive. The company also had repeated clashes with unions. "Wal-Mart was not very humble when they went in," says Bryan Roberts, an analyst at Planet Retail, an industry research firm. "They wanted to impose their own culture."
Just as important was Wal-Mart's apparent underestimation of the competition and its miscalculation of the market. Wal-Mart may be the king of low prices in the U.S., but it was often undercut in Germany by local rivals such as Aldi and Lidl. One reason for that may have been that Wal-Mart never had enough stores in Germany to effectively compete. Aldi has some 4,000 stores, giving it a big advantage in logistics and advertising.
CHANGE OF PLANS.
Wal-Mart also spent many years renovating the few stores it did have and adjusting its business model to Germany, though the company declined to say how much it spent. In the end, to work efficiently, Wal-Mart would have had to invest massively to acquire more sites.
In the end, it chose to pull out. Wal-Mart, which has 2,700 stores in 14 countries outside the U.S., and global sales of $312 billion last year, says it now plans to concentrate on markets such as Latin America, Asia, and new markets where it can get a higher return.
Has the retailer learned from the German fiasco? Analysts expect to see it taking a more arm's length approach to management of international operations in the future and to be increasingly open to working with local partners. That should help Wal-Mart better tailor its stores to local tastes and avoid stocking goods that are common in the U.S., but with little appeal to shoppers outside the U.S.
Wal-Mart's not about to beat a retreat on its global ambitions. But its success means it has got to be more careful about how it addresses cultural differences—across the board.