Many companies’ ambitions to position themselves (profitably) in foreign markets or to establish themselves as “global players” have been thwarted by their inability to fully understand and to adapt to the specific conditions of doing business in other countries, exposing their profound lack of intercultural competence and management skills. This is exactly what happened to Wal-Mart Germany. To begin with, it appointed four CEOs during its first four years of operation.
The first was Rob Tiarks, a US citizen and a Wal-Mart, Inc. senior vice president who had previously supervised around 200 US Supercenters from the company headquarters in Bentonville, Arkansas. Not only did he not speak any German. Due to his unwillingness to learn the language – a view shared by most of the other US managers that were redeployed to Germany to assist him –, English was soon decreed as the official company language at the management level.
What is more, he displayed an astounding degree of ignorance with regard to the manifold complexities and the legal and institutional framework of the German retail market, ignoring any strategic advice presented to him by former Wertkauf executives – thereby encouraging the top three of them to leave within six months. After Wal-Mart’s 1998 acquisition of UK retailer ASDA, Tiarks was replaced by Englishman Allan Leighton.
In terms of his specific market knowledge as well as linguistically as inexperienced as Tiarks, he preferred to head the company from his Leeds, UK, office and was replaced as little as six month later by Volker Barth. 59 The first German ever to be entrusted with the top job, and one of the few remaining ex-Wertkauf managers still aboard, he too failed to integrate Spar – a rather loose organization of largely independent regional units – into Wertkauf – formerly a highly centralized owner-controlled firm – and to blend their vastly different corporate cultures with Wal-Mart’s.
Since May 1st, 2001, Kay Hafner, supported by a group of native Germans, has been at the company’s helm. However, the jury is still out as to whether he is indeed the badly needed integrator. 60 According to headhunters Wal-Mart Germany’s is widely considered to be a very unattractive employer, with around one third of its executives – from store managers upwards – actively seeking job offers from other companies. The nderlying causes are said to include widespread dissatisfaction with their relatively low pay, Wal-Mart’s practice to transfer store managers after one or two years, and the (allegedly) “low American quality standards” of most merchandise currently in store. 61 Others complained about the company’s frugal internal regulations for business trips, in particular the decree that executives have to share rooms – a rule unheard of in any other major German or European company (and, in our view, unenforceable were it ever imposed).
In the US, Wal-Mart is a strictly non-union employer; only 12 of its more than one million US employees – workers in the meat department of its Jacksonville, Texas, store – are known to be union members. 62 In Germany, like in most other parts of Continental Europe however, unions, despite decreasing membership, still wield enormous influence – both in the political sphere and on the shop floor. The unions’ enthusiasm, prompted by Wal-Mart’s decision to hire more staff immediately after its entry in Germany to provide “excellent customer service”, quickly faded away.
Soon faced with rapidly mounting losses, Wal-Mart’s management resorted to staff cuts and closures to reduce its above-average personnel costs. Due to strict worker protection regulations, however, making surplus workers redundant can be a complicated, lengthy and costly affair in Germany – a cumbersome fact of life for its German competitors, but, obviously, terra incognita for Wal-Mart Germany’s (mostly) American executives.
What is more, the company refused to formally acknowledge the outcome of the sector-specific centralized wage-bargaining process (which is the standard procedure for determining wages in Germany) ver. di, the relevant union, and the retailers’ employers’ association had agreed upon. Although it voluntarily paid its staff 0. 5 per cent on top of the general raise, to the company’s management complete surprise, ver. di retaliated by organizing walkouts at 30 stores throughout the country – resulting not only in lost sales but in bad publicity for “union-bashing” Wal-Mart. 3 As will be discussed in more detail below, the ver. di–Wal-Mart controversy is escalating after the union sued the company for breaching Germany’s financial information disclosure regulations. Neither “everyday low prices” nor “excellent service” Traditionally, Wal-Mart has inflicted a full-scale price war on incumbents on every single market it has so far entered in order to credibly communicate its legendary “every day low price”-pledge to local consumers.
While extremely successful almost everywhere else, this strategy badly backfired in Germany – largely due to the afore-mentioned ignorance, lack of experience, and hubris of Wal-Mart Germany’s original top management team led by Rob Tiarks: • To his complete surprise, all affected German competitors, first and foremost Aldi – which throughout its existence successfully defended its position as Germany’s undisputed cost and price leader – Lidl, Rewe and Edeka, not only matched all of Wal-Mart’s price cuts.
Even worse, the results of several independent surveys, commissioned by newspapers or conducted by Stiftung Warentest, a highly influential government-sponsored consumer protection agency, and the Gesellschaft fur Konsumforschung (GfK), Germany’s biggest market-research institute, demystified Wal-Mart’s fundamental value proposition “everyday low prices” as a (largely) empty promise: They showed that Wal-Mart had not been able to systematically undercut Aldi and the other hard discounters, and that, by contrast, its assortment was not even substantially cheaper then the traditional retailers’ (Rewe, Edeka etc. offerings. • So far Wal-Mart Germany has not succeeded in delivering on the second part of its value proposition – “excellent customer service” – either. By contrast the company has repeatedly been rated as only just or even slightly below average in terms of overall consumer satisfaction (Table 7). 67 In our view, this is because Wal-Mart’s traditional US-centered view of customer service, enshrined in some of its famous/notorious basic beliefs and rules, is only partly compatible with the expectations of German consumers.
This is in particular true of the famous “tenfoot- rule” (“three-meter-rule” in metric Germany) and the institution of the “greeter” (which, in the meantime, have been largely abolished after shoppers unaware of its key role in Wal-Mart’s service concept had repeatedly complained that they had been harassed by strangers on store premises). While yielding little tangible conomic benefits – German consumers have been accustomed for decades to shopping at self-service formats without any staff assistance –, the additional personnel required to perform these services efficiently, are the cause why Wal-Mart’s labor costs (as a percentage of total costs) continue to remain above the industry’s average. Finally, suffice it to say that Germany’s restrictive shopping hour regulations prevent Wal-Mart (as well as any other Germany-based retailer, to be sure) from offering its customers the additional convenience and superior shopping comfort associated with 24/7 operations.
Repeated Infringements of German Laws and Regulations With the ensuing negative publicity, Wal-Mart stands accused of, or has already been tried and fined for breaching several important German laws and regulations, in particular • Section 20(4) of the ”Act Against Restraints of Competition“ (Gesetz gegen Wettbewerbsbeschrankungen or GWB). This centerpiece of German antitrust legislation bans all ”undertakings with superior market power“68 from selling a range of goods ”not merely occasionally below its cost price, unless there is an objective justification for this“, Section 335a of the ”Commercial Act“ (Handelsgesetzbuch or HGB). It requires all corporations to disclose basic financial information including a balance sheet and an annual profit or loss statement and, in early January 2003, the recently amended ”Obligatory Deposit Regulation“. It stipulates that retailers must provide a deposit-refund-system for certain types of plastic and metal beverage containers or, alternatively, to refrain from selling any product bottled or canned in containers which are covered by this piece of legislation.
Wal-Mart’s failure to comply with the provisions of the German antitrust act may simply be considered a further proof of its initial hubris with regard to the workings and intricacies of the German retail market. 69 Its unwillingness to publish key financial data – despite increasingly hefty fines levied against the company, and more recently, also against Dave
Ferguson, head of Wal-Mart’s European operations, Kay Hafner (CEO Germany), and Gottfried Haug (CFO Germany) personally – is now widely perceived by analysts and the media as a blunt attempt to prevent outsiders – including shareholders – from taking a true and fair view of the dire state of Wal-Mart‘s German business activities. 70,71 Conclusion and Outlook Wal-Mart’s difficulties on the highly competitive German market can, after five years of extremely disappointing results, no longer be discarded as mere teething problems.
Widely perceived now as a mediocre retailer with no particular strengths and weaknesses, let alone any particularly attractive and credible value proposition, Wal-Mart Germany seems light-years away from meeting the internal financial benchmarks set by Wal-Mart Inc. ’s Bentonville headquarters: a return on equity of 17 per cent (10 per cent after tax) and the requirement that any investment must have been completely refinanced by means of the cash flow it generates after a maximum period of 15 years.
As we have tried to demonstrate, Wal-Mart’s failure on the German market has been the inevitable result of its inability – caused by an astounding degree of ignorance of key principles of internationalization strategies and intercultural management – to select and implement an adequate entry and business strategy. Instead of shaking up the extremely competitive German retailing sector with an innovative approach to doing business, as it has so convincingly done in the USA, in Germany the company seems to be the prey rather than the hunter. Wal-Mart Germany’s future looks bleak indeed.