Sunday, February 24, 2013

How to Fail as a Company in Germany

In 1997, Wal-Mart made the move into Germany.  To be honest, they brought their US business model with them.  They figured....it worked in the US and various other nations....so it'd work in Germany.

By 2006, Wal-Mart admitted defeat, put up a plan to leave, and in roughly nine months....were gone from Germany.

The Wal-Mart experience into Germany was deemed a failure by the company.....but the explanation has a curious twist to it.  Some journalists will point to using the purchase of InterSpar as a jumping board in the beginning, and that InterSpar was never much of a success....so that failure just blended into future problems of Wal-Mart and brought them down.

Here's the big picture.....Wal-Mart has a general plan as they move into each town. They put up a major building and they want cut their prices to the bare minimum, gut the competition just in that town, and within three years....start seeing the competition in that town shut down. At that point, the prices at that one single Wal-Mart will rise by two-to-four percent overnight. Then they can relax because they've got customers glued into shopping at the store, and occasionally offer up some great deals, but not like the original first three years.

The German stumbling block is that German stores really don't like new competition appearing in their town. So they go to the local city council and make life miserable for Wal-Mart as they apply and try to get property/building space. In a number of cases....like Kaiserslautern....the city council just wouldn't allow them to go forward.

Then the competition business came around to pricing. Wal-Mart has a secondary trick of going to Pepsi and Coke.....buying massive truckloads of soft-drinks, and then selling each drink for five percent less than they paid for the 'unit'. For each drink, there's zero profit, and even a loss which would normally appear on the books.

Strangely enough, there is a German law forbidding this type of aggressive pricing (you can't sell less than what you bought the item for). So week after week.....they were taken into court. Court costs, lawyer fees, and fines were deemed fairly excessive after a couple years of this practice.

Wal-Mart just simply kept looking at this practice as one of their major ways to get ahead and get addicted shoppers. At some point, between the hostile competition situation, and the fines....the leadership of Wal-Mart deemed Germany as a place where you can't launch and make a profit with the business model that the company uses.

Rather than change a business model proven successful, Wal-Mart packed up in less than nine months and left. They will never come back....as long as the current business model stays the same way.

Yes, Wal-Mart has used this business model in roughly fifteen countries.  Currently their China operation is surging ahead, and there's an awful lot of optimistic views in India over what Wal-Mart may accomplish in the next decade.

Most people who study business and how failures occur, will readily that Germany has a unique atmosphere.  There are rules to protect business operations, jobs, and to ensure a stable business environment.  To the public, it all makes perfect sense.  To a guy wanting to establish a new business or bring an international business into Germany....it's a pain.

In plain terms....business in Germany isn't a simple task.  Even Germans, with German business models, end up every year with failed businesses.

2 comments:

Anonymous said...

If I recall correctly, another reason Wal-Mart failed in Germany was its failure to adhere to cultural norms; for instance, employees were required to flash fake smiles, much to the annoyance of many a German customer.

P.S. How do you find out about new comments on old posts? This one, for instance, is five years old now.

R Hammond said...

Blogger collects and stores all comments...in the order of newer ones. Other platforms, perform this in a marginal way. On the list of ten benefits with using Blogger, I'd put this as one of the better reasons to use it.

Wal-Mart, as I remember a great deal of the hype....really ran into a brick wall. Everytime that they put a product up where it was priced at less than what they bought it for (an example: a can of Pepsi being 22-Euro cents when they bought it, and it ought be sold in a regular shop for a minimum of 40-Euro cents....well, Wal-Mart would throw pallets out in the entry for 18-Euro cents per can). That got a lot of attention because NO ONE else in Germany sells in that fashion, at a loss. That gimmick was to entice you to return often to find other such deals.

Well....it's absolutely illegal. They actually have a law that says you can't sell an item for less than what you bought it. Price-checkers roamed around...found the instances, and they went into court almost weekly to pay fines (it's not cheap). Their managers were ordered by judges to comply and not repeat the practice.

In the US, you'd get hyping sales and taking in more customers until you wiped out real competition in towns. That's the Wal-Mart model. Then you'd bring the prices back up to a norm, and the customer would have no competitor existing that might offer similar deals.

There were a couple of articles like you mention...the fake friendliness noted, and Germans felt uncomfortable with this. Journalists did write to talk about it. But I think if you asked a hundred Germans around that time about this fake friendliness thing...the bulk of people would say it really didn't register as a big negative to them. My take was that the journalists were looking for criticism items, and simply dug into this. If anything, the articles simply portrayed the view of Germans (or journalists) not wanting a smile, unless it could be absolutely genuine. Meanwhile, at the bulk of German shops...no one 'smiled'.

Looking back over that era...this whole Wal-Mart era in Germany started a trend on competition. Look around today....probably half of the big-name shops that existed in the mid-90s...don't exist today. Look at the effect of Amazon on the 'mom-and-pop' shops. There's a bold new world existing for competition in German sales today. The Wal-Mart wave came and went...but it's effects still linger.