• Critically evaluate, using concepts learnt in this course and the chapter, the decisions about target markets, and the sequence of those target markets, for Byron Bay Cookie.
• Using the concepts from the assigned chapter, reflect on what went wrong in Wal-Mart’s attempt to globalize its value proposition through expansion in Germany.

Walmart can boast that it has more than 8,500 stores in 15 countries, under 55 different names, that it’s the largest private employer in the United States, the largest in Mexico (as Walmex), and the third largest in Canada. In fact, it’s the biggest private employer in the whole world. It has 108 stores in China alone, and operates another 100 Chinese outlets under the name of Trust-Mart.

Still, for all of Walmart’s conspicuous success, the retailing giant, after having set up shop in Germany in 1997, was forced to withdraw from the country in 2006, abandoning Germany’s lucrative $370 billion retail market. Even though this happened five years ago, the German debacle still reverberates. It’s still being discussed. After all, as anyone who’s been paying attention can tell you, Walmart rarely fails in these endeavors.

Because America and Europe share similar cultural and political antecedents, one might naturally assume that an American enterprise would have a better chance of succeeding in Europe than in Asia. But the German smackdown proved that’s not always the case. Indeed, while the nominal Communist regime of the People’s Republic of China embraced Walmart’s corporate philosophy, the Germans rejected it.

After nine years of trying to make a go of it, Wal-Mart sold its 85 stores to German rival Metro in 2006.  Wal-Mart paid dearly for its about-face. The company took a $1 billion hit to quit the market, while 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.

When Wal-Mart decided to expand in 1996, its managers saw Germany as a promising market. Europe’s largest market is home to 82 million – far more than in England, France and Italy which each have a population of 60 million. Germany enjoys a healthy pro capita income, so consumer spending is robust. The country has good transport infrastructure, which is good when stocks need to be replenished. Given these excellent conditions, Wal-Mart must have thought success was guaranteed.

It wasn’t to be. Its German venture ended disastrously, with the retreat costing the company $1 billion.

Just why did Wal-Mart Germany end so badly in Germany? The answer is simple but banal, and can be encapsulated by a line once sung by David Bowie: “This is not America.”

Management’s mistake was to implement a successful U.S. business formula in Germany without paying any attention to local idiosyncrasies.

“The problem was the company’s business philosophy, which had always worked so well,” wrote Frankfurt’s Börsenzeitung in what pretty much amounted to an obituary. “It’s people-centered – but that doesn’t actually work when the people aren’t American.”

The problems added up. The company gave the job of masterminding Wal-Mart Germany to an American who didn’t speak a word of German. This should surely have been indispensable to finding out what the German salespersons would need to know about local shopping habits.

Another problem was that Wal-Mart initially bought up a chain of 21 stores, then another 74, which included sites previous owners had failed to make profitable.

The authorities also kept a close eye on Wal-Mart. Anti-trust lawyers banned its practice of luring consumers with price-dumping, while Germany’s stringent laws governing opening hours meant stores couldn’t stay open too long. German labor law prevented the easy-come, easy-go hiring and firing common in the U.S., and the unions and the public alike were outraged by what Germans saw as an absurd ban on flirting in the workplace. All in all, Wal-Mart operated what the newspaper Handelsblatt described as a “bizarre company culture.”

The retreat was 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.   Germans also feared they would have to pay extra for the service, forcing Wal-Mart to re-assign its bag-packers.

Though no one can say precisely why the venture failed, there’s been no shortage of explanations.  One is that Germany was too “green” for a slash-and-burn outfit like Walmart, with its plastic bags and plastic junk. Another is that Walmart couldn’t hack the pro-labor union culture of Germany. The company encountered difficulties in dealing with the union leadership at its German stores.  Another is that Germany is anti-American when it comes to name-brand retailers (even though Dunkin’ Donuts and Starbucks are popular there). Another is that German consumers prefer small neighborhood stores rather than impersonal chain (even though Aldi, a discount supermarket chain, is successful).

Another fatal flaw was that Germany’s retail market is already saturated with discounters such as Aldi and Lidl, meaning that any new arrival inevitably finds itself in the midst of a cutthroat price war. Germany has the cheapest groceries in Europe. Moreover, real incomes have barely grown in recent years, which has dampened consumer spending. Retailers are vying for customers by cutting back profit margins. In the foods sector, the yield returns in Germany are less than 2 percent, often even only at 1.5 percent. Against this backdrop, presenting German consumers with unfamiliar U.S. brands was doomed to failure.

With just 95 outlets, Wal-Mart also remained too small. Originally, it had wanted to build 50 superstores as quickly as possible, but while Germany has one-third of the population of the U.S., it doesn’t have one-third of its surface area. It is only about as big as Oregon – and consequently, every square foot is either developed, or about to be. German planning law therefore has a lot of obstacles when someone wants to construct stores on the Wal-Mart scale. So instead of increasing its number of stores, Wal-Mart actually had to close a few down – some of which were taken over by Wal-Mart’s rivals once its leases ran out.

But the full extent of Germany’s strategic retaliation against Wal-Mart only became clear when the local competition – primarily the Metro Group – snatched a number of chains up for sale from under Wal-Mart’s nose. The bottom line: the American company had to abandon its expansion plans.

Paradoxically, the U.S. giant ended up terminally dwarfed in Germany. Experts estimated that a turnover of ?8 billion ($10 billion) would have been needed to reduce each store’s logistics costs to a sensible size, but Wal-Mart barely managed to scrape together a turnover of ?2 billion ($2.5 billion), a result expected to get even worse. One consequence was less competitive prices than those of their rivals.

These weren’t management’s only mistakes. Germany is a country that loves stability, even on the executive floor. Chaotic leadership and frequent personnel changes make a frivolous impression and suggest company problems. “American management methods are often primitive,” said Aldi’s former CEO Dieter Brandes in the weekly magazine Stern. “It’s all about budgets, not customers. When the figures look bad, no one looks for the roots of the problem; they just replace the CEO.”

And soon enough, Wal-Mart did indeed replace its CEO in Germany – with a Brit. Unfortunately, cultural differences between Britain and Germany are even greater than those between the U.S. and Germany. Based as he was in England, he too failed to grasp what makes German consumers tick, and after a few months at the helm, he too had to go. The German who took over had plenty of experience with kiosks and gas stations, but not with superstores.

Wal-Mart’s German failure could be summed up by a German proverb – translated, it means: “A nightmarish end is better than a nightmare that doesn’t end.”

OUTNUMBERED. 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.

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Wal-Mart tried to respond with low prices coupled with more US-style customer service. Used to the most basic of shops, German shoppers shied away, fearing the US company would have to cover extra personnel costs by charging higher prices.

At least six other chains were driven out of Germany by slow sales and low margins in early 2000s. Gap Inc., Laura Ashley Holdings Plc, Marks & Spencer Group Plc, HMV Group Plc, Kingfisher Plc and Gruppo Coin SpA all had to fled.

The foreign companies found growth elusive in an economy that barely expanded during the 2000s. Growth of the retail market, worth about 390 billion euros ($496 billion), was no more than 1 percent, held back by near-record unemployment and stagnant wages.  One analyst stated, “German consumers are really watching their money…The market is all about hard discounters.”

As well as facing stiff competition from Metro and another German rival, Aldi, Wal-Mart has been challenged by weak consumer spending and a rigid labor market.

“Continental European systems are the polar opposite to those Wal-Mart is used to,” said Maurizio Zollo, an M&A specialist at French-based business school Insead. “The company’s strategic formula is based on a very powerful logistics machine, but also on huge intention to cut workforce and employment costs. The problem is that the formula works very well in certain contexts, but it needs to be adapted very strongly in places like Germany and France.”

Philippe Haspeslagh, director of Insead’s strategic issues in mergers and acquisitions, said that the position of Wal-Mart in Germany from the beginning had been too small. “If Wal-Mart had wanted to really make it in Germany, they would have had to buy something much bigger,” he said, referring to the two small retail operations that it bought to gain entry into the market in 1998. “Taking a German traditional retailer in a weak position has proven just too hard a nut to crack.”

Wal-Mart’s business model, which has been increasingly criticised even in the US, involves driving down the prices of groceries and other general merchandise through putting pressure on suppliers and keeping out unions.

But in Germany, where domestic “value retailers” already dominate the grocery market, it found customers were turned off by the early designs of its stores, by a too-narrow range of produce, and by the famous “greeters”, who welcome shoppers to the store and are instructed to smile when within a certain distance of a customer. It also became embroiled in labour disputes that led to strikes.

Robert Buchanan, a retail analyst at the US brokerage AG Edwards, said he was pleased Wal-Mart had decided to cut its losses. “They sent a lot of expats over who didn’t know the German market, so it makes sense to focus on countries where they have had more success,” he said.

Wal-Mart bought into Germany in 1998, but its vice-chairman, Michael Duke, said the German market was already highly competitive and Wal-Mart had proved unable to generate the economies of scale it needed to drive prices below those of competitors. The company also blamed high unemployment and weak consumer spending in Germany for making the market even harder to crack.

US Model not effective here

Andreas Knorr and Andreas Arndt of the University of Bremen didn’t mince words in their study called “Why did Wal-Mart Fail in Germany?”

The authors wrote: “Wal-Mart’s attempt to apply the company’s proven US success formula in an unmodified manner to the German market turned out to be nothing short of a fiasco.”

One example of that might be that Wal-Mart’s American managers pressured German executives to enforce American-style management practices in the workplace. Employees were forbidden, for instance, from dating colleagues in positions of influence. Workers were also told not to flirt with one another.

A German court ruled last year against the company’s attempt to introduce a telephone hotline for employees to inform on their colleagues.

High labor costs may have been a big hurdle for Wal-Mart Germany, as well as workers who tried to resist management’s demands which they felt were unjust.

One Wal-Mart employee told the newsmagazine Der Spiegel that management had threatened to close certain stores if staff did not agree to work to working longer hours than their contracts foresaw and did not permit video surveillance of their work.

Wal-Mart Germany has had several run-ins with the trade union ver.di, which represents retail store workers.

Understanding the locals

Besides running up against German labor law and tradition, analysts say Wal-Mart also misfired when it came to knowing the market they were attempting to crack.

American styles don’t always translate well

“We made mistakes,” said Wal-Mart Germany’s CEO David Wild in an interview with the Welt am Sonntag newspaper. “Many of our (product) buyers in Germany were Americans. Some real goof-ups occurred as a result.”

“Like, did you know that American pillowcases are a different size than German ones are?” he asked. Wal-Mart Germany ended up with a huge pile of pillowcases they couldn’t sell to German customers.

“If you want to be successful in a foreign market, you have to know what your customers want. That’s the most important lesson,” Wild said, who is from England. “It does not good to force a business model onto another country’s market just because it works well somewhere else.”

Germany’s discount retail market is turning out to be a tough one to crack for some of the world’s biggest companies. Homegrown discount retailers offer very low prices. German shoppers are frugal and demanding. And regulations restrict store hours and other retailing basics. Wal-Mart’s biggest global competitor,  Carrefour SA of France, operates in 29 countries, but has steered clear of Germany.

Some other companies have begun adjusting their formulas in an effort to make headway in the German retail market. Consumer-goods companies such as Unilever, which has headquarters in Rotterdam and London and makes such brands as Dove soap and Ben & Jerry’s ice cream, have traditionally been wary of working closely with German discounters. They worried that the no-frills stores cast a negative light on their brands.

But over the last several years, Unilever and Nestle have begun making a concerted effort to work with the discounters. They have tried to exploit the fact that discounters are searching for new ways to get shoppers to spend more, a perpetual problem in Germany, where the economy has struggled because people aren’t spending.

Nestle has repackaged its candy brands and cappuccino flavors into mixed assortments to meet demand from the retailers for bigger packs. Consumer-goods companies are also coming up with less expensive varieties of some of their main brands to compete with store-brand items.

Wal-Mart Chief Executive Lee Scott warned that the stores it purchased in Germany “are difficult stores…. It is clearly a very challenging market for us that we have not figured out.”

Behind Rivals

Still, Wal-Mart has fallen behind some of its rivals in expanding globally. After it completes the sales of its German and South Korean operations later this year, it will operate in just 11 countries outside the U.S., compared with 29 for Carrefour and 30 for Metro, the world’s third-largest retailer by sales.

In addition, Wal-Mart is beginning to face aggressive German-style discounting on its home turf. Aldi Einkauf GmbH, a German retailer, has opened more than 700 stores in the U.S., and Eden Prairie, Minn.-based  SuperValu Inc.  SVU -0.40%     now has more than 1,200 small, no-frills Save-A-Lot stores in the U.S.

After Wal-Mart acquired two small, struggling German retail chains eight years ago, it ran up against several problems. It found itself being underpriced by local retailers called hard discounters, such as Aldi. German shoppers flock to these stores, which sell a limited selection — often 850 to 1,000 items, compared with 100,000 at Wal-Mart — and stock mainly their own store brands.

Some 80% of German consumers are about 20 minutes from an Aldi, according to Nestle’s research. The hard discounters account for about 40% of the German retail market, compared with Wal-Mart’s share of less than 2%, analysts say.

German shoppers are accustomed to buying merchandise strictly based on price, German retail consultants say. They are willing to buy laundry detergent at one store and then go to another to get a better price on paper towels. That behavior is called “basket splitting.” It is the antithesis of what American shoppers like: one-stop shopping. A big plank of Wal-Mart’s strategy in the U.S. and elsewhere is getting shoppers to turn to it for an increasingly wide array of goods.

Wal-Mart has said it made other mistakes as well. The two retailers it purchased were headquartered in different cities. It chose one city for the merged headquarters, prompting many executives from the other retailer to quit rather than relocate. Its German unit has had four presidents in eight years. It ran up against strong unions, as well as laws against selling goods at below cost, which made it difficult to lure shoppers with so-called loss leaders. Initially, Germany’s stringent operating laws required it to shutter stores by 6 p.m. on weekdays and 4 p.m. on Saturdays, although those restrictions eased a bit in recent years.

While there is probably some validity to all of these explanations, three additional cross-cultural idiosyncrasies have been identified as determining factors.

One issue was the chanting. Walmart employees are required to start their shifts by engaging in group chants and stretching exercises, a practice intended to build morale and instill loyalty. Fiendish as it sounds, Walmart employees are required to stand in formation and chant, “WALMART! WALMART! WALMART!” while performing synchronized group calisthenics.

Unfortunately, this form of corporate boosterism didn’t go over particularly well with the Germans. Maybe they found it embarrassing or silly; maybe they found it too regimented. Or maybe they found this oddly aggressive, mindless and exuberant exercise in group-think too reminiscent of other rallies….like one that occurred in Nuremberg several decades earlier.

Another issue was the smiling. Walmart requires its checkout people to flash smiles at customers after bagging their purchases. Plastic bags, plastic junk, plastic smiles. But because the German people don’t usually smile at total strangers, the spectacle of Walmart employees grinning like jackasses not only didn’t impress consumers, it unnerved them.

The third was the “ethics problem.” Back in 1997, Walmart not only required employees to spy on fellow workers (and report any misconduct), but prohibited sexual intimacy among its employees. Apparently, while the folks running the Bentonville, Arkansas-based company had no problem with screwing the environment, they couldn’t abide employees doing it to each other (alas, a German court struck down Walmart’s “ethics code” in 2005).

Whatever the specific reasons, the German market is now verboten to Walmart. Clearly, the failed experiment was a severe blow to the company’s pocketbook and pride. And while no one can predict where a company as aggressive and acquisitive as Walmart will turn up next, presumably, they will pick up the slack by opening a store in Libya.