Why Wal-Mart packed its bags in Germany

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When Wal-Mart arrived in Germany eight years ago, it tried to introduce its new customers to an American custom – assigning staff to pack shoppers’ bags at the checkouts.

But rather than hailing this US import, Germans balked at the idea. “The German consumer does not like extra service. He’s worried he’ll have to pay for it,” said Thorsten de Boer, a retail specialist at Roland Berger, a Munich-based consulting company. “People in this country only ever look out for one thing – price.”

That trait should have been a boon for Wal-Mart’s “Every day, low prices” philosophy, after it acquired 95 German hypermarkets in 1998 and 1999 from the Wertkauf and Interspar food chains.

Frugal Germans already had a number of well-established alternatives, including Aldi and Lidl, the privately-owned discounters, and Metro, the country’s largest listed retailer, which had efficient if drab out-of-town sites and economies of scale.

In the ensuing battle over prices, all the retailers suffered. According to GfK, the German consumer research firm, packaged groceries cost 2.5 per cent less last month than in 2001. The average shopping cart load did cost 0.5 per cent more than five years ago – but that was because of a recent spike in fresh produce prices.

“At the end of the day, price pressure was so intense that Wal-Mart’s formula of clear price leadership didn’t work,” said Mr de Boer.

Wal-Mart also encountered other cultural problems, clashing with Verdi, Germany’s service workers’ union, and refusing to participate in national wage negotiations.

The retailer tried to adapt to local tastes, adding fresh carp at Easter, for instance.

But last year, there was a dispute over the company’s global ethics policy, after Germans took offence to suggestions that an anonymous call line could be used to inform on co-workers breaching the retailer’s ban on romantic relationships.

Last year, Wal-Mart’s 85 remaining German outlets and 11,000 employees sold about €2bn ($2.5bn) of merchandise. Industry observers said the company was probably still writing a loss in the hundred of millions. It had tried German managers, US managers and a combination of the two. Upheaval at the top was matched by problems on the front line.

“We knew Wal-Mart were losing money, but it’s still a surprise they’re pulling out,” said Mr de Boer.

The feeling among rivals was that the US group would tough it out, too afraid to tarnish its image by pulling out of the world’s third-largest economy.

In May, however, Wal-Mart closed down its much smaller operation in South Korea, suggesting that a continuing focus on return on investment was causing it to take a harsher view of underperforming international units, in a move welcomed by Wall Street analysts.

“Wal-Mart’s detachment from the German market and focus on more opportunistic markets should drive profitability, return, and ultimately the [earnings] multiple, in our view,” wrote Adrianne Shapira, retail analyst at Goldman Sachs.

Ray Bracy, vice-president of corporate affairs at Wal-Mart, argued that the disposals did not represent a shift in international strategy, and that the timing of the Germany sale was “opportunistic”, reflecting Metro’s interest in the deal.

“You can’t really connect them in any way as the result of a new international strategy,” he said, of the German and South Korean moves.

He also said Wal-Mart remained committed to its other, much larger, loss-making unit, its roughly 400 Seiyu stores in Japan, which account for 12 per cent of its international sales.

“Japan is a very different animal . . . we do see a lot of upside, in terms of making over the stores and their merchandise, and with the transition to every day low prices, it offers a lot of potential,” he said.

Fred Crawford, retail specialist at AlixPartners, pointed out that Wal-Mart had struggled in the past to adapt its business model to the complexities of foreign markets. Wal-Mart de Mexico, for instance, is now one of its most successful international units, but only after the retailer realised that Mexican consumers wanted Mexican, not American, products.

“They have a very well-oiled, well-honed, almost militaristic machine that can be difficult to export to other cultures,” he says of Wal-Mart’s record abroad.

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