Walmart’s Exit from Germany
Abstract
Walmart is considered to be one of the largest big box stores in the world. It is an American based, international retailer. Walmart has become the largest retail in the world which has had a major impact on many communities. While they have branched out to numerous countries, there are still some that are not welcoming to this big retailer. This paper will discuss Walmart’s impact on communities as well as the countries that they cannot enter.
Walmart was established in 1962 and founded by Sam Walton.
They are home to physically large retail establishments that hold approximately 120,000 products in each store. The average store is around 107,000 square feet. The products consist of apparel for men, women's and kids, along with household items, automotive, health and beauty, pet, and lawn and garden. They cover all bases for low costs. They are considered the largest retail with the United States and globally by revenue that is estimated at $500 billion dollars US according to Fortune Global 500 list in 2018. They are also considered the largest private employer in the world, employing approximately 2.3 million people.
Sam Walton’s desires to expand the stores grew with the addition of new technologies to retail. He experimented with new store formats with the introduction to Sam’s Club and Walmart super centers. His main goal was to offer low costs and value to his customers. This set the standard for the company that still exists today. This commitment and values that help individuals and businesses is what earned him the Presidential Medal of Freedom that was awarded to him in 1992 by the late President George H. W. Bush.
Walmart size alone had a major impact on the United States economy. By 2005, almost half of Americans lived within a 5 mile radius of a Walmart of Sam’s Club, and 88 percent lived within a 15 mile radius. Walmart’s competition had to compete for employees. They were the leader in supply-chain, information technology as well as private label brands. Walmart wanted to be known as the “one stop shop”. The advantage that Walmart has on other retailers is the production function. They have mastered the relationship between inputs and outputs. They are more efficient with logistics, distribution, inventory control, transportation and their overall computer networking system. Walmart even operates the world’s largest private satellite communications network, established in 1987. By using a two-way voice and one-way video communication, it linked up all operating units of the company and its headquarters.
While Walmart is focused on technology and staying ahead of its competition, they also focus on other areas of the business like transportation and information. Walmart utilizes their own trucks with coordinating their travel time to make sure they are utilizing the shortest distances. It is important to the business success to have the shortest distance traveled. They also have a delivery service to assist their customer’s online purchases. Another important are of the supply chain is information. This includes collecting information from end users, linking them up with the proper resources. They are able to process this through linked computers through the largest satellite system to execute information globally.
Walmart has also interacted with all different levels of government. Walmart has participated in the forming of the Central American Free Trade Agreement. It has lobbied for open trade deals to be formed with ease. They have also been involved with state and local governments. There are many regulations that they have been involved with such as wage and benefit policies, zoning and infrastructure development. By the year 1998, Walmart hired their first Washington lobbyist forming the Political Action Committee which contributed large amounts of money to political and national campaigns.
From a global perspective, Walmart’s sales exceed the sales of Carrefour located in France, Home Depot located in the US and Metro located in Germany, combined. Walmart currently operates or owns a majority stake in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom. His first venture out of the country was to Mexico.
Walmart is the largest retailer and employer in the world. The massive American multinational retail corporation employs approximately two million people and has a presence in 15 countries under 55 different names. Serious concerns surrounded some of Walmart’s ventures outside the United States – operations failed in South Korea and Germany. However, the vast majority of the corporation’s international projects and acquisitions have now proven highly successful.
Today, Walmart has a total of 4,625 stores in the United States, a number dwarfed by the corporation’s international operations. There are 6,148 Walmart stores away from U.S. shores, with the majority concentrated in Mexico – America’s southern neighbor has a total of 2,353 Walmart stores. In Mexico, Walmart operates as Walmex. In the United Kingdom, it is run as Asda, while in Japan, Walmart falls under the Seiyu brand.
As stated on the Walmart website, they are trying to collaborate with other countries to transform the system on which we all rely. The main focus is on opportunity, sustainability, and community. These areas can help improve the businesses bottom line as well as creating a shared value within the society. Walmart’s global responsibility is the importance of true integration within the business. They want to establish collaboration with suppliers, industry partners and key stakeholders.
Although Walmart is the leading retail in the world, they are no stranger to controversy. In September 2005, a senior Walmart lawyer received an alarming email from a former executive at the company’s largest foreign subsidiary, Walmart de Mexico (NY Times 2012). This email demonstrated that executives have taken part in a campaign of bribery in order to win over the market. They were looking to dominate the Mexican territory. The main focus of the bribes pertained to building permits. They were looking to advance their growth as fast as possible.
After Walmart conducted their own investigation, they discovered that there was bribe payments made totaling 24 million dollars. Also during this investigation they uncovered that some of the top executives at Walmart de Mexico, were very involved in covering up these bribes. An FBI agent who was part of the investigation stated that laws between the United States and Mexico have definitely been broken. After the Justice Department was notified about these actions, Walmart felt they did not break any laws pertaining to the Securities and Exchange Commissions. During this investigation, it came across that Walmart executives were more for damage control then the actual ethical issues including the legal ramifications. The expansion in Mexico was a very important aspect to the global growth of the company. This controversy did however have an impact on Walmart's market value. Shares fell to around 5% in the US and down to 12% in Mexico. The feds stated that they will probably end up with a fine due to the lack of evidence for criminal charges.
While issue with Mexico turned out to be OK for this large corporation, there expansion to other markets globally did not seem to bring up any issues. When expanding to other countries there is always the local laws that can raise some issues. You can run into issue with the local market dynamics which make good supply chain strategies close to impossible to navigate. Walmart has incorporated local managers and executives that have a good understanding on how to market to the local consumers. Each location should carry products that the local market would consume. Another important aspect of branching out would be to secure the right location. This could key in entering a foreign market and becoming successful.
Walmart successfully entered into the Canadian market in 1994 with the acquisition of Woolco Discount stores, part of the American corporation Woolworth. They purchased 120 stores out the 142 that existed. Being that Walmart purchased already existing Woolco stores, it saved time and money by not having to establish a presence in this market. There next venture in Canada was in 2011 when they acquired Target Canada totaling 39 stores, which at the time were occupied by Zellers.
China was another market that worked well for Walmart. Most companies that are looking to expand, usually target China. China has a very fast growing economy. They are one of the top economies in the world. Walmart utilized China for offshore outsourcing with major production and assembly. Although Walmart does not have any manufacturing plants, they do utilize suppliers. They do not have any direct control over the production process.
Walmart has made strategic moves with entering Mexico, Canada, and China. It has shown how well Walmart can adapt to different markets and cultures. Walmart utilized a joint venture with Mexico’s most successful retailer named CIFRA to help the process of understanding this market. Walmart was smart in choosing these retailers that had a strong presence in these communities. They already had a strong market base which helped the potential of Walmart's further expansion. It has more than 8,500 stores in 15 different countries. They operate under 55 different store names. They are considered the largest private employer in the United States and Mexico.
While Walmart has had a lot of success entering many different countries, there are still some that they have not been able to enter. Germany, Russia, South Korea and Japan have been issue form them. Walmart has not been able to figure out the right formula for success in these countries. These markets were not open to their low prices, large lots of merchandise, or their lack of knowledge of their shopping behaviors. Walmart had an office set up in Moscow with hopes to merge with several grocery store chains. They stated they no longer desired to build an operation in Russia from scratch. They still remain open and hopeful to acquisition possibilities. It has let caution thwart its ambitions in Russia, and will find profits harder to come by if it delays getting a foothold in the vast market catering to 140 million people. Fearful of getting hamstrung by Russia’s complicated and time-consuming bureaucracy, the world number one retailer has been outmaneuvered by its European peers - Auchan AUCH.UL and Metro MEOG.DE have become the third and fourth biggest food retailers in the $300 billion-plus market (Kiselyova, M 2012).
When of Walmart struggles was entering the German market. They entered into Germany in 1997. They did this by acquiring the failing German retail chain named Wertkauf and Interspar. They were in very poor locations with very low standards. At that time, the leading retailers in the German market was the Metro Group and the Rewe Group. In Germany, the profit margins for retail companies were very low, with the average growth rate at .3% annually. Walmart came up with the strategy was to enter the market and refurbish stores. They wanted to improve the appearance and the cost basis. They did a complete change to the supply chain systems which integrated new scanning systems, a more centralized distribution, and quality service. This made Walmart a force in Germany. Unfortunately Germany had land use restrictions which has caused many foreign retailers to fail entering this market. They also established limited store hours, certain price regulations and very strict zoning requirements. Another big issue was the influence of Unions.
Germany designed the zoning regulations with the idea of protecting traditional retailers. They made the process for big retailers very difficult with prohibiting big construction of stores. Even in approved areas, the approval process seemed to be endless. In order for this to happen, you would have to have a building use plan, comprehensive development concept, and abide by all legal concerns. This became very problematic for big retailers like Walmart who were trying to enter the market. The construction is prohibited within an 800 square meter from locations that are not designed for retail space. These laws are more severe than those implemented in Great Britain. However, the development of shopping centers were permitted regardless of these stringent zoning laws. Germany feels that these laws go hand in hand with their cultures shopping behaviors. Germans usually walk long distances to do their shopping.
The other problems that Walmart encountered was the union. Germany service sector union is the largest union in the entire world. They filed a lawsuit against Walmart claiming they failed to release their year end figures. They felt that they were doing this to negotiate wages which resulted in a salary increase of .5% over the retail sectors levels. This was only the beginning of their struggles in Germany.
The hours of operations were greatly limited. In Germany, the allowed stores to remain open until 6:30pm weekdays and 8:00pm on Saturdays. On Sundays, the stores were to remain closed unless certain approvals through the government. This approval was limited to essential products like pharmaceuticals. With these restriction, most retail companies were not last. Walmart has been very successful with having the right suppliers. It experienced a lot of difficulties with dealing with local suppliers. They were not able to gain control over the bargaining power to buy and sell at lower prices. Even though they implemented a centralized distribution system, they experienced extremely high back orders.
Germany contributes 15% of sales in the $2 trillion a year retail market that makes up Europe as a whole. Their retail market is currently in a state of crisis. On average, consumers are spending 30 percent of their available income with retailers, down from 40 percent only ten years ago, because households shift an ever increasing share of their expenditure into areas such as housing, tourism, and communications (Knorr, A. 2003). The German retail sector relies on it’s unionized skilled laborers, with a decline of employees, the industry is hurting.
Walmart's failure to maintain a presence in the German market was due to a flawed entry by acquisition, restricted labor relations, failure to be able to sell at lower costs, and bad publicity. Walmart has been able to set a standard within the retail industry worldwide, unfortunately this did not transfer over to the German market. These issues are not the only reason why Walmart was unsuccessful in the German Market. Walmart needed to adjust its business practices to fit into this foreign market. There has been many other companies who have also failed to enter this market successfully. Some big named company’s like Ikea, Ebay and Amazon are amongst the unsuccessful. Although these companies struggled with Germany’s market, they offered something that Walmart did not. Ikea offered a shopping experience with food and child care services. H&M offered narrow aisles with bright patterns that attracted the young shopper. Walmart did not have a particular brand recognition that would attract the German consumer.
Walmart tried to change the German consumers perception. The average German consumer was use to shopping in several different stores opposed to a one stop shop. One stop shopping could of revolutionized their habits. Instead of making German consumers appreciate the customer service orientation of Walmart, it made them think about how much they had topay for things they did not really want-namely greeters, the aisle help, and the baggers (Kaelberer 2017). The American way of spending to them seemed to be wasteful. They were never able to achieve the low price mentality they were aiming for in the German market.
There is the misconception that the German retail market is inefficient and lacked smart consumption. They do offer low pricing and cheap merchandise. As a result, the German market profit margins remain very low. This is why many retailers benefit from the economies scale being profitable. Foreign competitors entering the market can find it difficult for entry barriers into a saturated market. If entering a large scale, it would make sense to to build a supply chain network, but few manage to do that at that magnitude. You could possible incur losses and time.
One major problem that remained consistent with Walmart's operation in Germany was management. There was a rapid succession of CEO’s during the eight years Walmart was part of the country. Ron Tiark was the first CEO in position. He had a very limited understanding of the German language. Instead of utilized German Uerkauf and Spar management, he made the decision to let them go. He decided bringing in American management would be the best way to go. After being with the company for 16 months, Tairk and Walmart decided to part ways. Following Tairk was a British manager by the name of Allan Leighton. He joined Walmart shortly after the acquisition of Asda. Asda was a British retailer. He also, was a CEO hired without having the understanding of the German language. Due to this, he made the decision to run the company based out of Leeds, England. He would make periodical appearances over the course of his employment. His departure came after 10 months of employment and followed other short lived CEO’s. This turnover and lack of interest in the German culture proved that they were not focusing on the skilled and educated German talents. Instead of looking to the staff at Wertkauf and Spar, they made the decision to let go the upper management. They could of assisted in the legal framework and the cultural complexities that was brought forward in this market. Walmart instead made English the official language of their stores in Germany which excluded a wide range of employee and future employees. This was conveyed by lack of expertise due to their lack of English.
Germany’s rigid market restrictions is what influences their staying power. This can be an outcome of company strategy along with understanding the existing market conditions. Walmart did however get the understanding of globalization with constraints by government parties. Walmart should of considered franchising with another retailer or created a joint venture with a local partner instead of making the acquisition they did. This might have led to longevity within the country. It does however, represent questions regarding globalization.
To understand Walmart’s failure entering the German market, you have to understand that it was not a mismanaged approach. It was not solely due to the German consumer and their shopping habits, or the flawed acquisition. It was based on what Walmart had to offer Germany and how Germany conducted their retail market place. There is having the understand of the political, social, and cultural aspects of it. In other markets that Walmart has entered, their strengths and production might not translate to another market setting.
Germany’s unionization tends to have extremely high rates in which exceeds the United States. Although high, their manufacturing sector appears to be higher. Walmart’s failure to understand the relationship between their workers, employees and their union is by far more important. Germany runs a private regulatory system that is governed by trade associations and state supported unions. This puts many limitations for companies and unions for the autonomy of companies.
Walmart has established an ethics code that has been successful with its employees in other locations. This code did not translate well with the German cultural practices. Walmart’s code prohibited intimate relationship between employees while being employed to the company. This rule was discouraged by the workers, unions and work councils. They felt that this violated consensual labor relations and their right to codetermination. Walmart was denied the use of this code due to violating the German labor laws.
As mentioned earlier, Germany has very strict zoning restrictions for the building of large stores.
Germany’s economy however is seeming to be improving. There has been a strong economic growth since 2006. It has projected to produce $4.2 trillion dollars by 2019 as measured by nominal gross domestic product. Germany currently is the forth largest economy along with United States at number one, followed by China and Japan. They have improved over the years and as a result they have steady economic growth and very low unemployment rates.
Germany’s economy is considered a free market economy with business services along with consumer goods. Germany’s government does however impose certain regulations to protect its citizens. One major benefit of the country is that the government provides health care insurance along with education benefits to all citizens. This of course is according to what you pay into the system based on your income. Your benefits provided are based off of your needs.
Germany’s economy has become the worlds leader in exporting of goods. It still struggles with a weak domestic demand. Germany’s new government will need to expand the path to reform. Germany has consistently scored high on rankings measuring their control of corruption as well. They recently set up a series of laws to enforce regulations on bribery and public voting.
Angela Merkel who is the current Chancellor became elected in 2005. She made promises during her campaign to lower the unemployment rate and to put in place reform. After the recession, Angela Merkel was able to successfully get the stimulus and tax cuts to pass. Germany’s budget deficit increased to 3.3. This was in violation of the EU 3 percent debt-to-GDP ratio. This was very similar to her measures in Greece, regarding their debt crisis. Due to the opposition, her resolutions were related to the expansion to the euro debt crisis.
Although during the recession unemployment rates were around 7.7 percent, Germany was able to decrease their rate to 3.8 by 2017. This was a great improvement after the years of struggle. Initially, the laws established made things difficult when it came to laying off workers or with lowering wages. Then the reunification of eastern and western Germany escalated unemployment after the fall of the Berlin Wall. This resulted in workers from the former Communist bloc entering into the mis.
Third, the culture supports saving for a rainy day rather than spending that would boost the economy.
Unemployment would have been worse in Germany were it not for reforms launched between 1998 through 2005. The government subsidized businesses to reduce working hours. That kept people employed during the recession, although only part-time.
While president of the EU in 2007, Merkel met with Russia’s President Vladimir Putin at his private country retreat, Bocharov Ruchey, in Sochi. Merkel and Putin enjoyed a relatively cordial relationship. That was thanks to Putin’s fluency in German and Merkel’s schooling in then-Communist Eastern Germany, which gives her a good command of Russian.
Merkel arrived just one week after Russia cut off gas supplies to Belarus, which carried the main pipeline to Europe. Merkel got assurances that Putin’s pipeline politics would not affect the EU's or Germany's energy supply. Russia does not want to jeopardize German foreign direct investment in Russia or bilateral trade. Putin also agreed to:
A new EU-Russia Partnership and Cooperation Agreement.
Acceleration of a gas pipeline construction to Germany under the Baltic Sea.
Construction of an oil pipeline leading to Russia's Pacific Coast, to avoid going through “transit countries” Ukraine, Belarus, and Poland.
Establishment of a gas reservoir in Germany, adding a new distribution center for Russian gas.
Conclusion
Many people believe that globalization implies that there is one format for all countries to follow. The situation between Walmart and Germany proves that that is not the case. Practices that work well within the United States might not convey to another country. Other countries have different social norms and procedures. Walmart was under the assumption that it has had a very successful business format that it should able to have the same success in other countries by implementing this format. They believed it was universally adaptable.
Walmart’s failure in Germany was not a reflection of failed efforts at gaining access to the market, rather it was several other components that were involved. The key to success for Walmart or any other company entering a new market would be to fit their business model to the particular market that they are entering.
Since the start of the company in 1962, Walmart has grown to be the leader in retail around the world. They have been a great example of expansion and survival in the international markets. They have learned how to overcome many obstacles and continue to grow. They figured out the right marketing strategies to gear towards the local markets. They have proven to have the advantage over their competitors. Their philosophy for “Every Day Low Prices” has been successful in all the markets they have entered into. The bottom line of their success is satisfying their customers needs in all social status’s. They offer a wide range of products utilizing a low cost strategy. They have attracted brand loyalty as well as continued purchasing. Walmart has been a corporation that has been able to survive a recession which many corporation were not as successful. Even with competitors like Kmart and Costco entering in the global market, Walmart was still able to maintain in the lead. I think Walmart still have many years to come.
References
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Walmart’s Exit From Germany. (2020, Mar 04). Retrieved from https://papersowl.com/examples/walmarts-exit-from-germany/
