Walmart's Failed Expansion in Germany: Lessons Learned Case Study

Walmart's Failed Expansion in Germany: Lessons Learned Case Study

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Introduction : International Strategies for Global Business: Entry Modes and Country Case Studies 

In the current era, the companies have adopted the internationalization and globalization strategies to expand their business operations across the borders. The companies are investing in other countries through utilizing the effective entry mode so that they can increase their market share all over the world and can gain tremendous cusses. This report is based on the case study of Walmart and its expansion in Germany. The company could not successfully operate in Germany due to some factors which became the reason for its failed attempt of expansion in Germany. Walmart is an American MNC operating a chain of discounted departmental stores, grocery stores, and hypermarkets. Walmart expanded its operations in Europe through Germany in the year 1997 through the acquisition of the Wertkauf stores and Spar Handel. All stores of these companies were changed into Walmart stores. This report will include the discussion on the entry strategy, reasons for failure as well as the lessons learned from such failure.

Analysis of Relevant Factors Leading the choice of Walmart to Operate in Germany

PEST Analysis

This analysis is presented to give an overview of the external environment and associated risks for the expansion in Germany at the time of entering into such a country. It is given below:

• Political: The policies in Germany were not that much in favor of a giant player entering into the market. There were allowed the lowest hours allowed to work in a week in the whole world. The policies were also stringent in regards to the price cut as retailers were not allowed to make sales on the prices lower to cost. The licensingprocedure to enter into the market was also critical (Lopes, et. al., 2016).
• Economic: Germany is considered as the largest retail market in Europe. The industry is low margin and highly competitive for the supermarket or grocery stores. The company Walmart took the chance to enter into Germany because of its market size but the things did not work out in favor of the company (Chang and Hu, 2020).
• Social: The people residing in Germany are quite conscious of the prices in regards to the retailing industry. The people in Germany were more worried about the prices rather than the services and quality. There was a huge cultural difference between the US and Germany (Hardaker, 2018).
• Technological: The technological factors were completely in favor of Germany as the latest technologiesare used by German retailers. The firms in Germany were well equipped with highly skilled employees, network coordination as well as technological logistic application.

Porter's Analysis for the retail industry in Germany

• Competitors: The market of Germany was quite competitive and the majority of market share was held by the top players in the industries. Top 5 companies were holding a share of 63% in the market. Very few retailers were able to generate healthy returns on their capital and investment.
• Customer bargaining power: The customers in the German market were very conscious of the prices leading to high bargaining power over the retailers. There was no cost in switching over the retailer and the products were available with all the competitors (Michelson, et. al., 2017).
• Bargaining power of suppliers: The retailing power of the suppliers was high due to their good relationships with key market players. The suppliers had the preference of choosing retailers offering them a largevolume. The suppliers in Germany were enjoying higher bargaining power at that time (Autio, 2017).
• The threat of Substitutes: For retailers, there was little threat of substitutes instead of the growth of online retailing.
• Entry Barriers: It was quite a difficult task for any retailer to enter into the German market because of the tough political climate as well as the policies.

Following are some reasons which lead Walmart to expand its operations in Germany:

• The rigidness in the United State's market was increasing as the retail market was saturating there without many opportunities for growth. The company needed to enter into the international market.
• The population in the UK was not increasing with a good rate which led the company to take the decision to expand business in other countries.
• The entry barriers in the US retail industry were low which were allowing other companies to enter the market.
• The company wanted to replicate its US success in other countries like Germany through using its strengths (Lopes, et. al., 2016).

Entry strategy used by Walmart

The entry strategy chosen by the company to enter in German market was through acquisitions. The company acquired 2 business units named as Wertkauf and Interspar from Spar Handels. In December 1997, the company acquired 21 renowned stores of Wertkauf chain, and one year later, it also acquired 74 hypermarkets from Spar Handels (Galdino, et. al., 2019).

Advantages of Acquisition

There are several benefits of acquisition strategy as it was very easy for Walmart to enter into the foreign market and get the market share rapidly. The company just converted the already existing stores of the acquired companies into the Walmart stores. The company also got all the assets and required resources in no time (Lee, et. al., 2020).

Disadvantagesof Acquisition

There are certain disadvantages to adopting the acquisition strategy for international expansion. The biggest disadvantage for Walmart was the clash between the cultures of these 2 countries. There is a huge difference in the US and Germany's culture which created the management issues for Walmart's Germany operations. Another major drawback identified was the high costs involved in the acquisition of the stores of other companies (Patton, 2016).

Factors leading to failure of Walmart in Germany

The operations of the Walmart in German market could not be successful due to several reasons. Following are the principal reasons or factors leading the company to failure in Germany:

Inappropriate acquisition strategy

The company entered into the German market through acquisition strategy which turned out to be inappropriate for its success in such a market. The second acquisition of Spar Handel made by the company was completely inappropriate and flawed. Before making such an acquisition, Walmart did not make the proper analysis which led to the blunder for the company. The locations of such stores were not good and there was no uniformity found in the internal operations of the company. In a hurry to make expansion, Walmart made the wrong decision by paying more than the worth of Spar.

Everyday Low Price Strategy Failure

The company was following the Everyday Low Price Strategy in most countries including its home country the US where it could achieve tremendous success with such tactics. However, in the market of Germany, such a strategy could not work as the competitors matched the price cut made by Walmart and it was not able to sell the products at cheaper prices than that. The company remained unsuccessful in the German market to achieve cost leadership as well as economies of scale. The company failed miserably here as the risk assessment and environmentalanalysis made by the company did not work well for it (Pokorny, et. al., 2019).

Cultural Integration Failure

As identified above, mergers and acquisitions generally fail due to the lack of cultural integration of the host country and home country. The same happened with Walmart which caused a major loss to the company. There were employees who left Walmart after such an acquisition process due to the trust with new management as well as the new employees. There was forced to use the English language as the official language in an organizationwhich also created the problems for employees (Galdino, et. al., 2019). There were lesser efforts made by the new manager to build effective relationships with the employees and the employees were also not satisfied by the payscale of the company was offering to them after such acquisition. It was quite difficult for Walmart to lay off the employees in German stores which it did with the US due to the strict laws and labor unions. This became a very big reason behind the failure of the company (Patton, 2016).

Infringement of German Laws and Regulations

Walmart in Germany was also accused of the repeated infringement of the German laws and regulations. The company was not able to operate in the German market as it infringed on the Commercial act as well as other laws frequently. The company was not willing to publish its financial data even after the heavy fines imposed on it. The company was facing plenty of challenges and issues in the strict legal environment of Germany which became a solid reason for the failure of the business operations in Germany for Walmart (Lee, et. al., 2020).

The company exited the German market in the year 2006 through selling its hypermarket chain in Germany at a huge loss of $1 Billion after miserable failing to operate its business units in the market. 85% of the German outlets of the company were offloaded by the company to a local rival named Metro (Schmid, et. al., 2018).

Recommendation

After the failure of the Giant supermarket chain Walmart in Germany, it has been identified that there were certain things or decisions that could have made to change such a picture of failure into the German market. Following are some of the recommendations on what could have done differently while entering into the German market:

• After analyzing the market situation of Germany, the decision of adopting the Everyday Low Prices Strategy was needed to change. The company could have used the different pricing strategies for its products which could be accepted by the business associations in Germany. It is not necessary that the standardization will work for the company. There could have been used as an adaptation strategy in order to make certain changes in the pricing strategies as per the German market (Pokorny, et. al., 2019).
• Another recommendation is that the company could have focused on its employees and cultural implications. There was a requirement of providing the training to the new employees. The events and functions could be held in order to increase the bond and relationship between the new management and the employees of the company. The employees could have retained by the company at such time (Michelson, et. al., 2017).
• There could be made an effective decision to enter into the European territory. The things could have been different if the appropriate analysis of the companies acquired was made. It is recommended to the company that proper analysis of the situation of the company should be made before investing it and the effective entry mode should be utilized as per the prevailing marketing situations in the home country (Patton, 2016).

Conclusion

This report has presented an extensive analysis of the reasons for the failure of Walmart operations in the German market. The report has presented the key factors leading the company to make an investment in Germany 8in the first place.The discussion on the acquisition market entry strategy used by the company has also been made. The benefits and the drawbacks of such a strategy were also discussed in the report. At the end of this report, the recommendations were also given that what could have done differently in the case of Walmart's expansion in the German market.

References

• Autio, E., 2017. Strategic entrepreneurial internationalization: A normative framework. Strategic Entrepreneurship Journal, 11(3), pp.211-227.
• Chang, Y. and Hu, J., 2020. Analysis on the Mode of Multinational Retail Enterprises Entering Chinese Market—Take Walmart, Carrefour and Metro as Examples. Modern Economy, 11(01), p.17.
• Galdino, K.M., Rezende, S.F.L. and Lamont, B.T., 2019. Market and internationalization knowledge in entrepreneurial internationalization processes. International Journal of Entrepreneurial Behavior & Research.
• Hardaker, S., 2018. Retail format competition: The case of grocery discount stores and why they haven't conquered the Chinese market (yet). Moravian Geographical Reports, 26(3), pp.220-227.
• Lee, J.Y., Jiménez, A. and Devinney, T.M., 2020. Learning in SME Internationalization: A New Perspective on Learning From Success versus Failure. Management International Review, pp.1-29.
• Lopes, J.C., Branco, A., Parejo, F. and Rangel, J.F., 2016. Determinants of success and failure in the internationalization of the cork business: a tale of two Iberian family firms. In Entrepreneurship, Business and Economics-Vol. 2(pp. 417-440). Springer, Cham.
• Michelson, H., Boucher, S., Cheng, X., Huang, J. and Jia, X., 2017. Connecting supermarkets and farms: The role of intermediaries in Walmart China's fresh produce supply chains. Renewable Agriculture and Food Systems, 33(1), pp.47-59.
• Patton, C.V., 2016. A Comprehensive Internationalization Challenge: Learning from Failure or, When Your Best Just Isn't Good Enough. International Research and Review, 6(1), pp.10-15.
• Pokorny, B., Sotirov, D.M., Kleinschmit, D. and Kanowski, P., 2019. Forests as a Global Commons: International governance and the role of Germany.
• Schmid, S., Dauth, T., Kotulla, T. and Orban, F., 2018. Aldi and Lidl: from Germany to the rest of the world. In Internationalization of Business(pp. 81-98). Springer, Cham.