Wal-Mart's Germany Exit Reflects on Its Market Entry Strategy


Archived Published: 02 August 2006 ID: G00142370

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Summary

Wal-Mart, the world's largest retailer, announced it will exit the German market after eight years of failing to become a viable force in one of Europe's toughest retail markets.

News Analysis

Event

On 28 July 2006, Wal-Mart announced it will exit the German retail market by selling its 85 "Supercenters" to retailer Metro AG on the back of pre-tax losses of approximately U.S. $1 billion on its German operations.

Analysis

Since entering the German market in 1998 with the acquisition of Wertkauf and the buyout of Interspar in 1999, Wal-Mart has failed to live up to its reputation as the world’s most feared retailer.

At the outset, the Bentonville-based retailer incurred heavy initial losses, and has been plagued by problems that include:

  • Difficult economic and market trading conditions

  • Aggressive competition from no-frills "hard” discounters, such as Aldi and Lidl

  • Protracted store planning approval processes

  • Lack of understanding of local consumers' tastes

  • Imposition of an American management culture

  • Falling afoul of the regulatory authorities for having too-low prices

  • Losing battles with Germany’s largest workers union

  • An abortive bid to buy out the Real stores of German retail giant Metro

Wal-Mart’s most fundamental mistake, however, was its initial strategy of entering a highly mature retail market by acquiring small companies with a relatively low combined market share of about three percent. Even with its current 85 stores, Wal-Mart was less than one-fifth the size of its main rival Kaufland.

The shortcoming of Wal-Mart's entry strategy into Germany is underlined by contrasting it with the success of the company's ASDA acquisition in the U.K. in 1999. Here, Wal-Mart immediately gained a large market share to become a key player in the U.K market. While it has found Tesco an immovable foe, with 30 percent market share, ASDA Wal-Mart is a significant force in the U.K., with market share approaching 17 percent. After its exit from Germany, Wal-Mart is likely to redouble its efforts to increase its U.K. market share.

Recommendations

  • All retailers: When considering entering very mature and competitive foreign markets by acquisition, establish an immediate market share that is large enough to gain acceptance in the consumer's mind and to benefit from economies of scale. Before entering any foreign market, be sure you fully understand the culture, expectations of shoppers, competition, regulatory bodies and, where appropriate, the strength of unions — given that a retailer as renowned as Wal-Mart apparently failed to do so.

  • U.K.-based retailers: Expect greater focus and investment by Wal-Mart in ASDA Wal-Mart in the U.K. Look for pressure to be applied directly through cost competition and indirectly through challenging the U.K. regulatory authorities on Tesco’s dominance of the U.K. market.

Analytical Sources: John Davison and Mim Burt, Gartner

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