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Global Market Expansion: Why Walmart succeeded in the America's and failed in Germany

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A vision of global expansion has been sought out by businesses for decades. Upon entering any new market, a company must factor in many considerations such as their business strategy, entry mode and market challenges. These elements are important as they lower the business’risk of failure. Therefore, it is crucial to implement the most suitable strategy and entry mode as this is likely to increases the business’ opportunity of success in international markets. Thispaper uses Walmart’s expansion into Mexico, Canada and Germany to address the proposed question. The essay will analyse why Walmart’s entry into Mexico and Canada was largely successful and why, despite their global expansion experience, Germany was a failure. Theframework used to examine Walmart’s growth varies depending on the country. The analysis of Mexico will examine how Walmart was successful in a joint venture despite the cultural and administrative challenges encountered. Secondly, exploring Canada will illustrate how Walmart was successful through a large acquisition and the associated challenges. Finally, this article will identify the primary reasons why the combination of cultural, administrative and economic challenges, and a global standardised strategy and acquisition entry, caused Walmart to fail in Germany.

Walmart is a multinational retail corporation managing a large chain of supercentre markets, discount stores and neighbourhood markets (Walmart, 2017). The philosophy of Walmart is to offer consumers household items at a highly competitive rate. It does so through highly efficient distribution strategies that enables it to keep the costs low. Presently, Walmart has successfully assimilated into 27 countries outside the United States (Walmart, 2017).

During the mid 1980’s, Mexico directed their economy towards international business. The country encouraged foreign direct investment (FDI) and dismantled the extensive system of trade barriers (Keller & Tybout, 2009). In addition to these changes, Mexico’s populationincreased from 69 million to 85 million (World Bank, 2017). Mexico became Walmart’s firstinternational market, which it entered in 1991 mainly through a multi-format strategy (Walmart, 2017). The entry mode used by Walmart was a joint venture with CIFRA, Mexico’slargest retailer (Mun & Yazdanifard, 2014). Walmart faced numerous challenges while trying to break into the market, which involved administrative, cultural, geographical and economic drawbacks. The main concerns were the risks involved with the managing of the operations in a developing country and the uncertainties of a newly opened market (Hecht & Morici, 1993). To overcome these issues, Walmart exchanged their managerial know-how for CIFRA’slocal knowledge. This is the primary reason that led Walmart to gain a better understanding of the market (Mun & Yazdanifard, 2014). The seemingly invaluable transfer of knowledge from CIFRA to Walmart ensured their future success in the Mexican market. Through the information Walmart acquired from CIFRA, they were able to combat the challenges of entering Mexico and become profitable in a very short time frame. Walmart was successful in Mexico as they entered through a multi-format entry strategy and joint venture entry mode. Walmart had so much success that in 1991, the same year they penetrated the market, they also opened a chain retailer Club Aurrera. Following this, CIFRA and Walmart announced two additional joint ventures; the discount Aurrera stores and an import/export company that connected CIFRA’s suppliers with Walmart outlets in the US (Millman, 1991 cited in Mun & Yazdanifard, 2014). After six years of business, Walmart acquired majority control of CIFRA’sinvestment in 1997, becoming Walmart de México (WALMEX).

Shortly after entering Mexico, Walmart entered Canada in 1994 (Walmart, 2017). They entered the market through the acquisition of 122 Woolco stores. Similarly to Mexico, Walmart also entered the Canadian market through a multi-format strategy; more specifically, a globalised standardisation strategy and localisation strategy. Walmart kept globalised standardisation through the introduction of hypermarkets, discount stores and neighbourhood markets. However, they localised their strategy by including a licensed Canadian brand Better Homes &Gardens and ‘Grocery Shelf’, a subsidiary of Walmart and a uniquely Canadian discount store. This not only catered to the Canadian demand of hard and soft home categories but it also gave Walmart an original brand that differentiated the company from its competitors (Mun & Yazdanifard, 2014).

The greatest challenge Walmart faced entering Canada was acquisition opportunity and the implementation of a new work culture. The Canadian market is quite competitive and mature (Govindarajan & Gupta, 2002). Thus, entering as a greenfield operation was quite risky, as it would give competitors the opportunity to compete, disallowing Walmart to establish their position or loyal customers. Moreover, a study conducted by Mercer Management Consulting from 1990-1995 found that 83% of businesses who acquire firms were judged to be unsuccessful in the takeover due to the hubris hypothesis (Hill, Cronk & Wickramasekera, 2014). Due to Woolco’s high costs and low productivity the business was forced to exit as they were operating below the operational cost margin (Gupta, Govindarajan & Wang, 2008). This allowed Walmart to acquire retail stores at a reasonable price. Moreover, to mitigate workplace issues found within changes of ownership, Walmart sent a transition team to Canada to seamlessly integrate Woolco’s 15,000 employees into Walmart’s work culture (Gupta, Govindarajan & Wang, 2008).

In 1997, Walmart entered the German market through the acquisition of 21 Wertkauf hypermarkets and an additional 74 Interspar chains a year later (Govindarajan & Gupta, 2002). However, in 2006, after 9 years and a loss of USD$1 billion, Walmart was forced to exit the German market. There are numerous reasons why the company failed in the German economy. In essence, acquiring wholly owned subsidiaries through a globalised standardisation strategy was an unsuitable choice as it was evident, Walmart did not understand or cater the business to German culture. This resulted in frequent and unanticipated challenges of cultural, administrative and economic distances.

One of the biggest challenges entering Germany is the German culture. For Walmart, it is arguably the main reason why they were unable to succeed. Not only was Walmart’sunderstanding of the market very limited, but also, they did not understand that Walmart’svalues had no value for Germans. This is best shown with Walmart’s core philosophy, ‘EveryDay Low Price’ (Walmart, 2017). Germans believe that the value of a product increases with itsprice (Landler, 2006). Therefore, the single and most powerful factor in differentiating Walmart from its competitors, did not affect the Germans. Once Walmart was open for business, Walmart brought American management and retail culture to Germany. This affectedWalmart’s image, as it was clear that the business did not invest enough time to understand the social norms. Such is the case with Walmart’s credit card payment offerings. Roughly 80% of transactions in Germany are paid in cash (Phillips, 2014). Walmart also introduced friendly customer service and free bags upon purchases. Typically, German’s like to bag their own groceries and are accustomed to brusque service (Landler, 2006). Moreover, Walmart did not attempt to establish a good business and customer relationship. A German Union Ver.di filed a lawsuit against Walmart for not releasing year-end figures, that would enable the union to negotiate Walmart wages (Jui, 2011). The wages were increased by 0.5%, but the company did not offer benefits most German employers did.

In an administrative sense, Germany is a highly bureaucratic country, which was a challenge Walmart was aware of, but only to an extent. Germany’s socialist views meant that the government intervened in the market to protect local businesses. Not only did Walmart’s low- price philosophy did not appeal to German customers, but it was also undermined as the prices could be matched and in some cases beaten (Meyerson, 2011). Germany has price flooring regulations to ensure large corporations such as Walmart were not able push local competition out of the market. Furthermore, Germany has very strict opening hour laws. On weekdays, stores could be open until 6:30pm at the latest; on Saturdays it is until 8pm, and on Sundays no stores could open unless they provided necessities such as pharmaceuticals or tobacco (Jui, 2011).

The last, and equally as an important challenge Walmart faced entering Germany was an extensively matured food and retail market. In 2001, the top ten leading food retailers in Germany controlled 30% of the market, the two most successful being the Metro Group, followed by the Rewe Group, making this a highly saturated and very competitive environment (Jui, 2011). Additionally, gaining consumers was also a highly competitive exercise, ascustomers are very loyal to their brands, particularly the German ones. The people preferred gourmet grocers to hypermarkets. Moreover, the acquired Wertkauf and Interspar stores weregeographically dispersed and situated in poor locations (Meyerson, 2011). While operational,the Wertkauf and Interspar stores had a combined market share of 3% (Jui, 2011).

It is evident due to the challenges aforementioned that the chosen entry strategy and mode were not suitable choices for entering into this particular market. Perhaps the best strategy was a localised strategy, whereby Walmart would sell more German-tailored goods such as high-quality merchandise and fresh produce. The most effective mode of entry would have been a joint venture. This way, Walmart would be able to understand the dynamics of the country and its people on a far more intimate level, through local partnerships.

In summation, this essay has shown how Walmart expanded into the foreign markets of Mexico, Canada and Germany and the challenges they incurred while entering. Walmart penetrated Mexico as a joint venture and focussed more on a localised strategy. This proved to be greatly successful as they were able to fully understand this market. Whereas in Canada and Germany the company entered through acquisitions with a shift towards a global standardisation strategy. For Canada, this was very successful as the market was quite similar to the US. The challenge however was finding the most economical acquisition. Whereas in Germany, this strategy was highly incompatible. Walmart’s business model is incompatible for the German market. To become successful, they needed a much greater understanding of the country and a business more tailored the German consumer.

 

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