Walmart is a retail corporation that manages a chain of supermarkets, grocery stores, and discount stores located in the United States. The company was founded by Sam Walton and the brand has 11,368 stores in 27 countries and operating under 55 different names as in April 2019. The company has since then become one of the largest retailers in the world and also one of the largest corporations in the world with more than 2.2 million employees worldwide. Currently, the company’s headquarter is located in Bentonville, Arkansas, U.S.
Despite being a famous and predominant retailing brand, Walmart has some difficulties in penetrating in some major countries such as India, Russia, Germany, and South Korea. And the case of Walmart’s failure in Germany is a prominent example of the failure in internationalization in foreign countries.
Porter's five forces model will be used to analyze the German retail market
➢ Competitions in the industry
The German retail industry was not profitable when compared to retail industries in other European countries. The growth rates of the German retail market generated only 0,3% in the 1990s. Not many firms can generate enough profits and numerous companies filed for bankruptcy. About 10,000 retail stores filed for bankruptcy in 2017. Some of the leading firms prove to be predominant as 80% of the total retail sales was accounted for by the top five retailers. These points suggest that it is difficult for Walmart to operate in the German market.
➢ Power of customers
German customers are price conscious and were influenced by price than quality and German people enjoy the lowest grocery prices in Europe. Also, the products available at Walmart do exist in other retailer firms and they can buy products from whichever stores they want. Therefore, the power of customers in Germany is high and retail firms have to compete with each other at low prices.
➢ Power of suppliers
During their time in Germany, Walmart experienced difficulties when dealing with suppliers. The company wanted to cut costs and dealing directly with factories, deliver products directly to the stores, and bypass wholesalers. However, Walmart did not have the power to alter the existing distribution system and since in Germany, wholesalers still act as intermediaries between producers and distributors so they had to take extra costs to deal with intermediaries.
➢ Potential of new entrants
The German retail market was not friendly by the time Walmart entered it. Besides from restricted shopping hours, regulated zoning, they also had to face fierce competition from other successful local retailers. German laws favor smaller stores than big stores like Walmart as smaller stores can offer lower prices than Walmart. Therefore, entering the German market is difficult at the time of Walmart entered it.
➢ Threat of substitutes
There are other retail stores other than Walmart operate in the market such as Aldi or Lidl which can offer the same kinds of products at lower prices. As mentioned above, German people are very price-conscious, they have high buying power and they are free to choose to buy products at any store as they pleased.
There are various reasons why Walmart failed in Germany even though they are a reputable brand with experiences in operating in foreign countries. They had to sell their hypermarket chains in Germany after they lost about $1 billion in this market
➢ Bad entry strategy
The FDI entry choices can be categorized into three types: greenfield, acquisitions and joint ventures with acquisitions and joint ventures both provide access to resources through domestic firms. In 1997, Walmart entered the German market by acquiring Wetkauf and Interspar chains. The company using the acquisition entry strategy to enter the market as they purchase stores from the domestic store’s chain. However, according to they did not analyze and conduct research properly before making the acquisitions decision as the locations of the stores are not ideal and in Germany, people tend to utilize the public transportation systems which are more convenient so having to drive to the locations of Walmart seems to be unrealistic to expect from German people. Also, Walmart purchase two weak chain stores, as a result, they were placed in 11th in the overall German retail sales so Walmart enters the market in a weak position as they have to compete with other well-known retailers like Metro, Aldi, and Lidl.
➢ Severe competition with local retailers
In the U.S, Walmart is famous for its low prices products but in Germany, there are many well-known low-cost retail chains that have more advantages than Walmart as they already have gained the trust of customers. Furthermore, these chains already exist in the market before Walmart entered it so they already have pre-established relationships with local suppliers. Moreover, German laws help local retailers with smaller scales can compete with big-box stores like Walmart with lower prices and along with the bad acquisition strategy, Walmart enters the market with a lower position than other retailers.
➢ Lack of understanding of local culture
Walmart did not have detailed research about the German culture before entering it as their formula in the U.S did not work with the German culture, they did not adapt their strategies to fit with the local culture. Walmart required its employees in Germany to greet customers with a smile at the door and the checkout counter which is a common thing in the U.S but it makes German people feel uncomfortable when being greeted with a smile by strangers and Walmart had to change this policy after they realized the issue about it. In addition, Walmart also required its employees to use English as the official language in the workplace as the manager of Walmart in Germany was from America and cannot speak German which is very inconvenient for employees in communication, it affects employees’ morale as they feel like foreigners in the company. The problem with language also causing the gap in communication within the hierarchy of the company.
➢ Consider different entry strategies
The entry strategy of Walmart through acquisitions of two pre-existing chains Wekauf and Interspar was not effective as those are two weak chains and they cannot compete with other powerful retailers. Walmart should consider other entry strategies such as greenfield or joint ventures. However, in this case, a joint venture with local firms seems to be the most appropriate since local firms would have better knowledge at the local people and culture and it can help Walmart to slowly accommodate the German market. A joint venture would reduce the risk significantly the risk of entering Germany and provide a better platform for Walmart to analyze the German market which can be different from the U.K despite the close proximity between the two countries.
➢ Doing extensive research before entering the market
Before entering the market, Walmart should do more research about the host country’s culture, people, laws, and regulations. Walmart should know that the German retail market in the 1990s is very difficult to enter and operate based on the 0.3% growth rates that the market can generate. If Walmart does some proper research, they would have known that the strategies that they use in the U.S did not fit with the German culture and they could have changed to adapt to the characteristics of the host country’s culture which can help Walmart to succeed in Germany. For example, Walmart should allow employees to use German in the workplace instead of making them use English to communicate since German is their official language or not forcing employees to smile with the customers which would not cause dissatisfaction within both employees and customers.
Complied by VietnamCredit