How does Walmart make the maximum profit

Globalization and Adaptation: Walmart's inability to adapt to the German market. Patrick Burke

Transcript

1 Globalization and Adaptation: Walmart's Inability to Adjust to the German Market Patrick Burke Since Walmart is a stable, global company, it is difficult to understand that this company could fail in Germany. With global net income of $ 14.15 billion in 2016 and branches in 28 countries, Walmart had enough resources to build a strong business plan that it could use in other countries. In this sense, it was unbelievable that in 2006 the company had to leave its division in Germany after only 9 years. Understanding this unique incident is not only useful for companies looking to expand into other countries, but also for the general public as it draws the general public's attention to norms and ideas that are taken for granted, such as consumer behavior and service quality. Walmart's mistakes draw attention to cultural differences and shed light on economic behaviors that are normal in a given society. The company failed for several reasons. The main reasons are problems with brand identity and image, strong competition and the German supplier system. You can better explain these problems by applying institutional theory to Walmart. And to understand the many problems there are, one must first have some background information about Walmart. The company's main strategy is Lean Retailing according to Barriers To 'US Style' Lean Retailing: The Case of Wal-Mart's Failure in Germany. This means that a company should reduce its costs as much as possible so that it can make big profits and its customers can buy cheaper products. This strategy is still very successful in the US. Walmart has strong control over its prices. With the Lean Retailing strategy

2 Walmart sell good goods at low prices. You can see this idea in Walmart Cheer 1, which workers say almost every day. A saying says Who is number one? The customers. Always! It is said that phrases like Every Dollar We Waste Comes from our customers' pockets are hanging in many store manager offices (Brück). Although prices are lower for customers, Walmart's profit remains high. The company had been able to be financially successful because Walmart dumped its costs on suppliers. Because of this, the company has a complex relationship with its suppliers. In the US, Walmart has a huge economic influence. With around 3,290 branches, the group has a lot of power over its suppliers because, as a company, it determines the prices (Our Locations). The various suppliers depend on the company because the company has many branches and they are in every state and almost every city in the United States. Almost every American knows Walmart and therefore the company is a gateway to a large market for suppliers. Because of this, it has enormous economic power in the US and can set prices; but the supplier has fewer options. If the supplier does not agree to the low prices, then his product will not be sold in the stores. Since many small towns have only one Walmart and no other retail stores, the vendors cannot sell anything in those cities or to customers of other Walmart stores who live in larger cities. (Kotkin) The company has about a hundred million customers a week and the suppliers would have no other means of contacting them. Walmart Can So Pressure 1 Almost every morning, workers and managers sing the Walmart Cheer. The reason for the Walmart Cheer is because the managers want it to improve work ethic. In the song they spell Walmart e.g. Give me a W! Give me to A! Give me to L! etc.

3 exercise on suppliers so that they turn off everything that is unnecessary. (Christopherson) With this apparent economic superiority in the USA, the question arises why Walmart wanted to set up branches in Germany. Here's the main reason: In the US, retail sales growth slowed in 1996. The market had been saturated for a long time. Walmart could no longer grow in the US, sales had flattened in recent years and the company was looking for new growth (Christopherson). It was known that after the USA and Japan, Germany was the largest retail market (Seith). Not only is Germany the third largest retail market in the world, but the German retail market also provides access to the Eastern European market. Walmart believed it could use the same strategy as in the US. This misjudgment is explained by Handelsblatt as follows: (Walmart) believed that it would be able to open up the highly competitive German market within a very short time - without even knowing and understanding it (Brück). In order to conquer the German market, Walmart used its plan as a market spoiler, which had already been very successful in the USA. But the company had to quickly realize that it wasn't that easy. Market spoiler means that a new company changes customer needs in a new market in their favor. Walmart was a market spoiler in the US because it changed the way customers wanted it in the US. They now expected cheaper prices and that everything could be bought in one store. For example, before Walmart, customers had to shop in different stores to get different goods such as To be able to buy milk, toys, clothes and auto parts. But with Walmart, customers are now expecting a wider range of goods in a store. Also with the relationship between Walmart and the suppliers

4 the company was able to change customer requirements in the USA. If it has lower prices, then customers expect these prices from other stores as well. According to the law of supply and demand, if the stores cannot offer the lowest prices, customers will stop buying and the stores will be forced out of the market. Walmart wanted to set up its branches in Germany and, through its strategy, force the German retail stores to close so that it could build up a strong control like in the USA in Germany. Despite having a plan and lots of resources, Walmart struggled with its brand identity and image. When the company came to Germany, Walmart immediately took over two companies: Wertkauf and Interspar. Both companies have opposing images. Wertkauf stores were more attractive and appealing than Interspar and had a larger range of goods, but there were only 21 stores in Germany. Interspar owned 74 stores, but they were of poor quality and small compared to Wertkauf (Gerhard 19). The Germans saw the two companies as very different. One shop was a big shop with lots of goods, but not cheap, and the other shop was small, cheap, and of poor quality. So Walmart had to delete both brand identities and merge both chains with a new brand identity of good quality and low prices. But Walmart couldn't do it. So says Ulrich Eggert, trend and trade researcher at the management consultancy BBE 2: 2 The Federal Network for Citizenship Engagement (BBE) is an association of actors from civil society, the state and the economy. [The] aim is to sustainably promote civil society and civic engagement in all areas of society and politics. ("Who we are.")

5 Wal-Mart bought the stores that could be bought and wrote his own name on the door. There was still more Wertkauf and Interspar waiting for customers behind the new company sign than Wal-Mart - and thus two very different store concepts Wertkauf , it was almost like the elite of the self-service markets in Germany - beautifully made, big, with pretty good service. Interspar, they were small, a bit dingy Kruschtläden. (Seith) The Germans saw no difference between the old Interspar and Wertkauf stores and the new Walmart. When they bought from Walmart, they thought it was just like the former stores. It was bad for the company because it needed its own identity, but it hadn't changed the way of doing business. Because of this, the stores had conflicting identities that were detrimental to the company. The Walmart stores that were in old Interspar supermarkets were seen as dingy crap stores and the Walmart stores that were in old value stores were seen as expensive, elite stores. But the company not only had problems with its brand identity, but also with its Every Day Low Price motto. It is very important for Walmart that it has the lowest prices. His mottos in Germany were low prices every day and prices stay down. Always! Every tagline promises the company has the lowest prices, but it wasn't true. The article Barriers To 'US Style' Lean Retailing: The Case of Wal-Mart's Failure in Germany gives a few examples where Walmart offered higher prices than the competition. Here's one of them: The week that Walmart opened in Berlin, the Aldi across the street from the new super store was offering the same loaf of bread that Walmart was selling for $ 1.33 US at $ .34 US (Christopherson 460). That's why the Germans didn't associate anything with the motto every day

6 Low prices because other stores actually had lower prices. The article Consumer Acceptance and Market Success: Wal-Mart in the UK and Germany shows a survey that was carried out in Würzburg, Germany and Manchester, England. In Würzburg, 400 people answered questions about their two main reasons for shopping at a particular store. The first table shows these standards. For Germans, convenience and value are most important. Table 1 In the same article, in the second table, all stores were compared with a different standard. A score of one means the business is working as expected. A higher score means the business exceeded expectation and a score below one indicates inferior performance. By comparing the first table and second table, one can understand why Walmart was unsuccessful.

7 Table 2 Because for Germans in Würzburg, consumer-friendliness is most important, but the second table shows that Walmart got a score of only 0.49 for consumer-friendliness. That was a big problem because it couldn't meet the main standard. The value is also important for the Würzburg, but Walmart got a score of only 0.97 for it. Usually a score of one is good, but it should be higher for this company whose strategy is lean retailing. Aldi, a competitor, got a score of 2.52. That was problematic, of course, because the competitors had better prices than Walmart. Walmart had high scores for range and advertising, but advertising was the least important to customers, and while the range was important, it wasn't the most important. This survey shows that Walmart's competitors led in many categories. The American company was not successful with the standards that were important and also had problems with the German retail market because the market is highly concentrated and the suppliers in Germany have a stronger position than in the USA. In 2006 there were 3,289 Walmart stores in the US, but only 85 Walmart stores in Germany (Landler). That was a big problem for the company because of the

8 Reason for the economic success in the USA are the many branches and thus Walmart can reach many customers. Because of this, there is a great demand in the US for suppliers who sell their products to Walmart. In Germany the situation was quite the opposite. Because of the few branches in Germany, it had little power. In 2006 the population in the US was 298.38 million and Germany was 82.32 million. That is why there is one Walmart for every 90.7 inhabitants in the USA and one shop per inhabitant in Germany. In contrast to the difficulties in Germany, Walmart is actually very successful in countries like Great Britain, Mexico and Brazil. The reason for its success in these countries is that the company bought numerous stores in these countries while buying under a hundred stores in Germany. Because of this, its stores in these other countries are more accessible and have a larger market share compared to stores in Germany. Another reason is that Walmart didn't change the names of old stores. In the UK the name remains ASDA and in Brazil there are names like Bompreço, TodoDia, Maxxi Atacado etc (Landler). That was important for its success in these countries because it didn't have to erase the old brand identity or create a new one. In Brazil there is no confusion between the different stores and their brand identity. However, the name change in Germany made customers confused about the new name (Walmart). Since Walmart couldn't reach many customers, German suppliers saw it as an unimportant company. On the one hand, the German suppliers didn't need Walmart for their products because other retail stores could reach multiple customers. On the other hand, Walmart needed the products so that it had enough supplies. Because of this, the company lost its negotiating advantage and had to sell the products at higher prices

Buy 9 German suppliers. Then Walmart had to resell its products, which it bought from the German suppliers, for higher prices so that it could make a profit. However, the high prices impaired the brand image of low prices. The many difficulties with brand identity and suppliers can be explained well by institutional theory. Institutional theory is a theoretical framework for analyzing social (particularly organizational) phenomena, which views the social world as significantly comprised of institutions enduring rules, practices, and structures that set conditions on action (Lawrence 2288). Institutional theory can be applied to any organization that interacts with a society. The following three areas show how an organization is integrated into a society. Table 3 The three areas are the regulatory, the normative and the cognitive and an organization must correspond to all three areas or it does not fit into society. The regulatory area is the legal system. An example of the regulatory area is that a company is being audited. For example, it is normal in the regulatory field that if a company fails the review then it has to close. The normative domain is the moral and ethical system of a society. An example is that a university doesn't have any

10 must get accreditation, but the accreditation legitimizes the university. It is believed that the university is empowered now, even though the university was empowered before. Because without accreditation, an employer thinks that the university is not qualified and the job applicant is not qualified. (The Importance of Accreditation) The third, the cognitive area, is the cultural system or what we as a society take for granted. An example of the cognitive realm is that customers expect there to be a cashier in a department store, but the department store could do without a cashier. (Metz) It could only get by with a self-checkout system, but customers would think that something doesn't work. These three areas have to be in balance, otherwise the company will not fit into society. In this work the organization is Walmart and the company is Germany. Institutional theory can now be applied to this company. Walmart had problems with the regulatory area because its strategy was not in accordance with the zoning ordinance. The main problem is presented by Michael Wortmann as follows: In most urban areas (outside of core and special areas) only shops with a maximum floor area of ​​1,200m² are allowed, which corresponds to a sales area of ​​700m². In addition, the ranges that can be sold in large-scale operations on the greenfield and outside of shopping centers are limited. This politically desired protection of the small areas has not only had a positive effect on medium-sized grocery stores, but also on the relatively small-scale discounters. (Wortmann 8)

11 The Building Use Ordinance (BauNVO) was an obstacle for Walmart. Its smallest store was around m 2 and therefore it could not build its stores in a city but a few kilometers outside where there are expensive retail stores. Because of this, it has been compared to other expensive retail stores and because of this, its brand identity has been damaged. Walmart was also not suitable and for the Germans (see Table 1) this is most important. Although Walmart technically complied with this area, its strategy and store plan did not work with the regulatory area. It could also not correspond to the normative area.In Germany it is very important that a company negotiates with its stakeholders when the company makes a big decision, but Walmart sees itself as a separate company. It has a complex and opaque logistics system. That's why Walmart doesn't want to invite its stakeholders when faced with a big decision. When the company was in Germany, it worked behind closed doors (Christopherson). This is why the German suppliers and stakeholders did not trust Walmart. Since the company did not work with the German suppliers and stakeholders, it was very difficult to reach an agreement with the suppliers. Because of this, it couldn't buy its products from suppliers for lower prices. Since Walmart could not work with other German suppliers, it does not correspond to the normative area. The last area, the cognitive, contains social aspects that a society takes for granted. Walmart takes it for granted that discounters in the USA can be very large, but in Germany discounters are almost always very small stores, for example Netto and Aldi (Elke). In Germany, these stores only have two or three aisles with limited products, but Walmart looks very different. It

12 sells a variety of products. That's why Walmart doesn't look like a discount store. When Germans thought of Walmart, they saw the company as a business that sells expensive products. These stores are usually big and sell a lot of products like Walmart. It took this social aspect for granted. It assumed that Germans, like Americans, think that there are large and small discounters and not the cultural expectation that a discount store should be small. Since Walmart did not meet the German expectations of a small discounter, it was also unsuccessful in this area. Since the organization (Walmart) did not correspond to the three areas and Walmart made the decision that it has to be left to society (Germany). Although Walmart was unable to gain a foothold in continental Europe, many other American companies are thriving in continental Europe. For example, McDonalds is very successful in almost all of Europe, but the difference between McDonalds and Walmart is that McDonalds incorporate the culture of each country into its business. In France e.g. McDonalds has redesigned its stores to maintain the daily eating rhythm of the French. Walmart did not adapt to German culture like McDonalds did to French. Because of this, McDonalds was accepted in France and other countries, but Walmart was not. You can also see it in Germany, where McDonalds has big McCafes compared to the McDonalds in the US. The company learned from this mistake and later later changed its strategies in other countries to adapt to the culture of the respective country (Landler). Overall, Walmart is a powerful company that is known worldwide. It's been very successful in the Americas, China, Japan, the United Kingdom, and South Africa, but Walmart has failed to invade continental Europe (Landler). It had

13 Problems with the brand identity and its image, the delivery company and social expectations. Walmart will remain a strong company, but its first unsuccessful attempt will make it nearly impossible for the company to regain a foothold in continental Europe.

14 Bibliography Brücks, Mario. "Wal-Mart: Mission Impossible." Handelsblatt, Aug. 15, 2006, pp Christopherson, Susan. "Barriers To 'US Style' Lean Retailing: The Case of Wal-Mart's Failure in Germany." Journal of Economic Geography, 16 Feb. 2017, pp Fancourt, Lucy, Bredesen Lewis, and Nicholas Majka. "Born in the USA, Made in France: How McDonald's Succeeds in the Land of Michelin Stars." 03 Jan. 2012, knowledge.wharton.upenn.edu/article/born-in-the-usa-made-in-france-howmcdonalds-succeeds-in-the-land-of-michelin-stars/. Accessed 07 June Gerhard, Ulrike, and Barbara Hahn. "Wal-Mart and Aldi: Two Retail Giants in Germany." GeoJournal, 2005, pp Kotkin, Joel. What Happens When Walmart Dumps You. The Daily Beast, The Daily Beast Company, 13 Mar 2016, Accessed 07 May Landler, Mark, and Michael Barbaro. "Wal-Mart Finds That Its Formula Doesn t Fit Every Culture." The New York Times, Aug. 2, 2006, nytimes.com/2006/08/02/business/worldbusiness/02walmart.html. Accessed June 07 Lawrence, Thomas B., and Masoud Shadnam. "Institutional Theory." The International Encyclopedia of Communication. Ed. Wolfgang Donsbach. Vol. V. Malden: Blackwell, UK, pp Metz, Rachel. Amazon's Cashier-Less Seattle Grocery Store Is Opening to the Public. MIT Technology Review, Jan 22, 2018, Accessed March 07, 2018, "Our Locations." Walmart, 2017, corporate.walmart.com/our-story/our-locations. Accessed Feb 15 Palthe, Jennifer. "Regulative, Normative, and Cognitive Elements of Organizations: Implications for Managing Change." Management and Organizational Studies, 27 May 2014, pp Elke Pioch Ulrike Gerhard John Fernie Stephen J. Arnold, "Consumer acceptance and market success: Wal-Mart in the UK and Germany", International Journal of Retail & Distribution Management, vol. 37, Iss 3, 2009 pp

15 Seith, Anne. "Wal-Mart's Withdrawal: Why the US Titan Failed." Spiegel Online, July 28, 2006, html. Accessed Feb 16, "The Importance of Accreditation." ACICS Accrediting Council for Independent Colleges and Schools. N.p., n.d. Accessed March 16, Wal-Mart Stores, Inc Annual Report. Wal-Mart Stores, Inc., Jan 31 Wal-Mart Stores, Inc Annual Report. Wal-Mart Stores, Inc., Jan 31, "Walmart Income Statement 2016." Walmart Income Statement for 2016, Amigobulls. amigobulls.com/stocks/wmt/income-statement/annual. Accessed 15 Feb "Who We Are." BBE. Accessed June 25 Wortmann, Michael. "Structural change and globalization of the German retail trade." WZBdiscussion paper, 2003, pp. 1-37