Wal-Mart in Germany: Critical Analysis

Introduction

For decades, the researchers agree the entering of foreign markets must be studied because it needs more understand (Hennart and Slangen, 2014; Arslan et al., 2015). Multinational companies (MNCs) leave the research of the entry mode that more than underexplored to the Small and medium-sized enterprise’s SMEs (Brouthers and Hennart, 2007). Choose a suitable model for entry the markets are therefore crucial, and unsuitable decision-making through SMEs could have grave financial and survival implying (Gatington and Anderson, 1988; Root, 1994). SMEs are heading to exporting, which identified the most important among the entry modes (Lu and Beamish, 2001). Whether the company set direct Exporting or indirect Exporting are the most predominant, and marketable due to the low risk and low cost (Leonidou et al., 2010).

Based on the hole which exists in the present researches, this paper plans to search the barriers to Wal-Mart to internationalization in Germany. Institutional factors influence export tendency and rendering, and therefore skipping firm drive in exploring operators and performance could seriously border our comprehension, (GAO Et Al. 2010). SMEs have to consider the institutional constraints which prevent the growth process Hessels and Parker (2013), point out to potential barriers, so they have to make research institutional factors in the home country.

As mentioned by (Morgan et al., 2004) many of demerits were previously examined in marketing literature, but most of those were focused on SMEs in the USA and European (Bruton et al., 2008). The factories are different between those counties and the developing country (GAO Et Al., 2010), so they make some misleading (Milanzi, 2012).

Literature Review and Hypothesis Development

In response with criticism which presents from Shaver (2013) related to current research on market entry mode, summarized that researches are indecisive, and a need more examine Hennart and Slangen (2014), many market entry are available among those export, an acquisitions, licensing, joint ventures, and franchising Pan and Tse (2000). Choosing the entry strategic is an important process before the foreign market entry to analysis the resources and possible risk (Hill et al., 1990) and control rate (Anderson and Gatington, 1986), because any change this strategic after the entry may harm performance Lu and Beamish (2001)

Economic Barriers

Are the humanly designed which bond between political, social and economic interactions. Politics and lawful proceedings constraints are a portion of formal firms, it also considers as economic barriers for internationalization the SME, its combination between future trends for the country and its stability (Daunton, 2011). Generally, the governments have to develop their political and legal for the business by considering their lifestyle because the business is a portion of lifestyle (Sethi et al., 2012). The business environments influence many factors, firstly the political and legal system, secondly, the government sets monetary and pecuniary policy that affects the way of business work. Finally, they have to look the political stability in the target country (Bhatti and Awais, 2012).

Social Barriers

The social and cultural environment dimensions part of institutional, position, behaviors, beliefs, tastes, lifestyle and its relationship with the population. Business performance objectively meets the needs of the people, whereas, the needs of the commune are based on, functional requirements, social need and cultural parts. Social and cultural factors are the most important part of the internationalization process (Ellis, 2011); they pass the barriers through involving themselves with society and culture (Gomes et al., 2011, p.238). Uppsala model which mention by Johanson and Vahlne (1977) focuses on ‘psychic distance’, which defined as a sum between the flow information to and from the markets. , Furthermore. It gives an example such as education, language, culture, industrial development, and business practices. Finally, according to Rothaermel et al. (2006), there is strong bonding between cultural distance and internationalization.

Wal-Mart background

Wal-Mart in Germany

In 2001, Germany was formed about 15% of the European retail market which considered as the biggest economy in Europe (Phoebe Jui, 2011). In 1997, Wal-Mart entered into Germany through the acquisition of the Wertkauf chain which was had 24 stores and Interspar chain which was had 74 stores across Germany for €560 million O’Brian (2002); Brück (2002). But Wal-Mart achieved less than 3% in retail markets in 2002 Lebensmittelzeitung (Internet edition) (2003). That led to Intersper store located in a poor place with bad repair Ronke de Paoli (2003) . In the 1990s, Retail market development had averaged 0.3% yearly European Economy, 2002. This led to decreasing the margin profit which faced many companies to go bankrupt in 2002 Phoebe Jui,( 2011). .

These points towards Wal-Mart tried to prove the challenge of success, so its many strategies were improving appearance by renewing the stores and preserve their price strategy as its strategy in the US through cost leadership. Wal-Mart had formed a violent price war in Germany because of had modification the feeding chain systems and mix fresh scanning systems, localize distribution, and high-quality client service.

According to Lee Scott (2001) to German business weekly Wirtschaftswoche, that Wal-Mart had corrupted things up more than the things they managed it. Indeed, an endless chain of blunders that done from Wal-Mart from the very start has prevented it to operate in Germany. Walmart’s main mistakes in their entry to the German market may be abbreviated

The market entry strategy by acquisition is flawed, management by collision and arrogance of cultures oncoming to labour relations, a sharp failure to achieve on its uniqueness by the offer at a low price and high quality of customer service and bad reputation due to its repeated transgressions to the laws and regulations in Germany.

The barriers faced Wal-Mart in Germany

Zoning

In 1977, Germany had elicited regulations for planning and designing the zone for the retail markets to save traditional retailers in their country (Trumbull, 2012). So, they prevented build the stores whose area exceeds 800 m2 in the location which didn’t designate for retail. This event resulted in hypermarket’s expansion in the center of town/city. However, even in cities; the barriers were less fatigued for retail. But the approval operation for a fresh store could need from 1 to 4 years. Opening a mega-market outside civilian area was likely, however, requested many steps. Requested from a retailers to put their using plan that would be coating a comprehensive development connotation consider for private legal conservation, environmental. An example, any new market hasn’t to sell any product available in nearby towns’ stores. In the spite of getting approved for opening new market needs first from the town council, after which approval from the regional planning boards at national and state levels. That resulted to reduce the success rate. Principally, since the German government wanted retailers to stay in the city center and not to move outside the city this event resulted in a big problem for Wal-Mart.

Labor Union Relations

The soon entered the German market, they were sued by sector union Ver.di which consider the largest union it the world because they didn’t provide their final figures in 1999 and 2000. The negotiation took place between two parties, which led to an increased salary of about 0.5% by Wal-Mart (Ver.di 2008). Also, media coverage to this lawsuit led to appearance negative image for Wal-Mart to German people.

Store Hours law

In 2001, the germen government allowed the retailer stores to work for 80 hours/week; exceptions granted the one that sells essential items such as the pharmaceutical drugs and tobacco or the stores which approve from the Government. So all market was closed daily at 6:30 pm and at 8:00 pm on Saturday and prevents opening the stores on Sunday. KPMG/EHI (2001, p.10). It was established to protect native retailers from considerable competitors, who would afford lower price comparison with small market.

Supplier

Wal-Mart had trouble dealing with suppliers, to buy the items in low price that back the weakness of bargaining power in Germany. Also, they didn’t have reputability of low prices in Germany. Wal-Mart has increased the distribution system to 20% comparison to 7% averaged to the same industry. Thus they succeeded to manage inventory by using the scanning system (Phoebe Jui, 2011).

Competitors

Wal- Mart’s prices were higher than other competitors by 11-25% in 2001. The competitors were using many ways to reduce the cost such as using lower labour number and lower consumer service. Because those markets can’t control the labour cost so they weren’t turned to invest in the store’s style, IT system or commercialize. However, after using the scanner system by Wal-Mart the pressure was increased to the German retailers that led to increasing the pressure to the suppliers of the goods.

Culture and communication

Another mistake was done from Wal-Mart when it makes the operation centre from the United Kingdom. So the language cooperate was played in this part because the centre uses English while the manger in Wal-Mart speak German. That led many employees’ to left their position and lost major soppier such as Adidas, Samsonite, and Nike, and most important part of goods

Product/ service failure

As consideration, the mega-market in Germany which provides the low cost always has low customer service. So Wal-Mart from its beginning tried to change this idea by using the “ten-foot rule “which defined to the customer find a person who can help him every ten-foot. (Knorr and Arndt 2003). This service reflected badly to Wal-Mart in Germany because the people who go to low-cost grocery shopping are used self-service

Conclusion and Analysis of Wal-Mart Entering Germany

After entry the new market most of the company give up some advantage which available in existing markets. According to the strategy was used to enter the German market by acquisition which considers as flawed. They might use another way such as licensing and franchising, Greenfields investing or joint venture with German partners.

So the Greenfields direct investment can have the same effect or riskier than acquisition so this strategy ignored. Licensing and franchising don’t give much value to the retailer market in Germany, That back when Wal-Mart Failed to achieve the low price strategy in Germany. In the same time, the best strategy to enter the German market was the joint venture with local investor. Wal-Mart could get its experience in improving the capacity of retailers market while its partner mission to attract the suppliers and improve the relationship with labor union and have the knowledge of legal regulations in Germany. Although Germany location beside UK, the German market has many differ than UK market. A German partner could have the core competencies of Wal-Mart and achievement them to the movement forward of the German market.

However, the case study shows us how the competitors adapted to the Wal-Mart advantage from scanning systems to control inventory. Furthermore, they don’t need to provide the German partner in this technology by giving it the use right only and control all process done from the IT department in the US. Unfortunately, after the successful recording for Wal-Mart in many countries would contribute to its success in Germany through acquisition and their thought of knowledge of consumer market and supplier relationships harmed Wal-Mart that resulting to decrease the margin and profitability. So Wal-Mart had many choosing in this way firstly, gaining economies of scale by continued expansion through acquisitions, stop expansion and modify its current stores to fit with the industry landscape in Germany or divest from the German market

Wal-Mart might continue in the expansion strategy to gain economies of scale that led to bleed in both of time and cost. Also, Wal-Mart proving they destroy the shareholder value through using the acquiring way to achieve the expansion in Germany markets. The organic scale-up plan wouldn’t work in Germany that back to the stringent regulatory environment. So if Wal-Mart pursues to achieve the organic growth it would take much time and high cost to take the approval from the German government which appears unlikely to give Wal-Mart to establish more supercenter market.

Another negative tactic could be to hold the remaining property and amend it to fit with the dynamics of the industry. However, Wal-Mart delayed in this step, even reducing the quality helping service, shrinking the stores that help to reduce the cost, it wouldn’t help because the competitor has already adopted Wal-Mart technology to improve efficiency to reduce the cost such as new logistics, Radio-frequency identification and scanning systems also they have developed relationships with Ver.di union and the supplier.

Finally, Wal-Mart adopted divest from the German market to cut their losses. That considers the most appropriate approach because of limited gainfulness with the highly competitive landscape. This step was finally taken from Wal-Mart in 2006 by selling their all retail stores to Metro with $1 billion loss.