Case Study: Wal-Marts failure in Germany

Wal-Mart Stores, Inc. is the largest retailer in the world, the worlds second-largest company and the nations largest nongovernmental employer. Wal-Mart Stores, Inc. operates retail stores in various retailing formats in all 50 states in the United States. The Companys mass merchandising operations serve its customers primarily through the operation of three segments. The Wal-Mart Stores segment includes its discount stores, Supercenters, and Neighborhood Markets in the United States. The Sams club segment includes the warehouse membership clubs in the United States. The Companys subsidiary, McLane Company, Inc. provides products and distribution services to retail industry and institutional foodservice customers. Wal-Mart serves customers and members more than 200 million times per week at more than 8,416 retail units under 53 different banners in 15 countries. With fiscal year 2010 sales of $405 billion, Wal-Mart employs more than 2.1 million associates worldwide. Nearly 75% of its stores are in the United States (Wal-Mart International Operations, 2004), but Wal-Mart is expanding internationally. The Group is engaged in the operations of retail stores located in all 50 states of the United States, Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, Central America, Chile, Mexico,India and China Wal-Marts entry and operation in Germany Wal-Marts initial entry into German market was through the acquisitions of renowned 21 store Wertkauf chain for an estimated $1.04 billion in December 1997.It was followed one year later by the acquisition of In-terspars 74 hypermarkets from Spar Handels AG, the German unit of the French Intermarch Group , for 560 million. Thus Wal-Mart immediately became the countrys fourth biggest operator of hypermarkets. However, with a turnover of around 2.9 billion, and a stagnating market share of just 1.1 per cent, the US giant still was a negligible one in the German retail market. Even worse, with estimated accumulated losses of more than 1 billion, it is literally drowning in red ink although, according to WalMart Germanys CEO, Kay Hafner, its non food assortment, which accounts for around 50 per cent of its revenues, is profitable.. Instead of expanding its network of stores by 50 units by early 2001, as originally planned, the company has been forced to close two big outlets, while at the same time it was only able to fully remodel three locations into its flagship Super center format. Due to its problems the company also had to lay off around 1.000 staff. On July 2006,Wal-Mart announced its official defeat in Germany and would sell its 85 German stores to the rival supermarket chain Metro and would book a pre-tax loss of about $1 billion (536million) on the failed venture. A Critical Analysis of Reasons for Wal-Marts failure in Germany: There were several factors that contributed to Germanys unsuccessful business ride. Amazing management blunders have plagued Wal-Marts German operation from the very start. Wal-Marts major mistakes on the German market may be summarized as follows.

 Cultural Insensitivity was the major reason of failure Entry to German market by acquisition strategy, Failure to deliver on its legendary every-day low prices and excellent service value proposition. Bad Publicity about the company due to breaking of some prevailing German law and regulations. In January 1997, Wal-Mart had first entry in Europe market with the acquisition of Wertkauf hypermarkets in Germany. Later in that year, Wal-Mart also acquired Interspar, another German hypermarket chain.. While its first move the 1997 takeover of the 21 Wertkaufstores was indeed a shrewd one, given that companys excellent earnings, its competitive locations, and its very capable management. Wal-Marts 1998 follow-updeal with Spar for 74 hypermarkets was widely judged an ill-informed, ill-advised act, for several reasons: Spar is considered to be the weakest player on the German market due to its mostly run-down stores, very heterogeneous in size and format, with the majority of them located in less well-off inner-city residential areas. Wal-Marts cultural insensitivity led to its failure in Germany. This Study focuses only on the flaws made by the Wal-Mart in its International operations in Germany from a Cross-Cultural Managements perspective. Wal-Marts failure in Germany- A Case of cultural insensitivity: Most of the Global mergers and acquisitions failed to produce any benefit for the shareholders or reduced value, which was mainly due to the lack of intercultural competence. Lack of sensitivity and understanding of language barriers, local traditions, consumer behavior, merchandising, and employment practices irreversibly damaged Wal-Marts image in Germany. One of the main reasons that failed Wal-Mart in Germany is when it attempted to transport the companys unique culture and retailing concept to the new country. The top management refused to even acknowledge the differences in customer behavior and culture in Germany when compared to its US customers, and the top management failed to listen to the feedback from its employees. Not every new cross- border retailer can be a retail giant outer its home. The mistake of exporting its culture wholesale, rather than adapting to local market, leads Wal-Mart failed in Germany market. Wal-Marts ambitions to position itself profitably in European markets through Germany have been hit badly by their inability to fully understand and to adapt to the specific conditions of doing business in other countries. This exposed their obvious lack of intercultural competence and management skills. The main challenge of post-merger integration is further complicated significantly if it is in a Cross-border Merger or acquisition, with all issues frequently being compounded by a lack of language and culture bridging skills.

Failure to accomplish this task satisfactorily, results in mutual distrust, de-motivation and negatively impacts the merged companies competitiveness, profits and shareholder value. This is exactly what happened to Wal-Mart Germany. Following are the main two factors that Contributed to the Wal-Marts unsuccessful efforts in Germany: 1) Specific Difference in German Consumer behavior and Culture in comparison with US consumers: The biggest mistake of Wal-Mart was to ignore the local culture, local buying habits and impose an American boss on its German operations. Wal-Mart stores are designed for customers who are willing to spend lot of time shopping. But in Germany, the shopping hours are shorter: Shops close by 5 PM on weekdays, and no shopping on Sundays. This meant that customers dont have the habit of spending lots of time in a store wandering around for the things they need. Coupled with this problem, German customers do not like to be assisted by Wal-Marts friendly store assistants. Germans prefer to do their own search for bargains. Instead of understanding and adjusting to the culture of its clients, Wal-Mart tried to impose their Culture on to the Customers, which never worked out. Germans like to see the advertised discount products upfront without having to ask the store assistant. This implies that the discount products must be placed at the eye level. Instead Wal-Mart chose to use its US style merchandise display strategy where premium priced products are kept at eye level and discount products are kept at higher shelf or in the bottom racks. This irritated the German shoppers. WalMart also got its store inventory wrong, Wal-Mart stocked its store with clothes, hardware, electronics and other non-food products were given much bigger floor space than food products, as a result more than 50% of the revenue was from non-food products. But other German retailers stock more of food products. For example for Metro, food products constitute more than 75% of the revenue. Germans prefer to bag groceries themselves into reusable carriers, or at least to pay a small fee for the avoidable sin of needing a plastic bag. Germans are introvert in nature and doesnt like display of emotion in public, as they always care for their private personal space. Employees, like the reserved customers, didnt care for Wal-Marts public displays of corporate moral such as the morning cheer. The German Customers even didnt liked to be accompanied by the Cheerful employees either, as they would like to make choices by themselves. These are cultural misunderstandings as well, but one could say the cultural philosophy of Wal-Mart could not survive in the context of a German culture with a Happy Planet Index significantly higher than Americas 2) Inefficient Top Management which ignored the relevance of local Culture: It was clear that the cultural insensitivity of Wal-Mart started right at the top management. To begin with, it appointed four CEOs during its first four years of operation. The first head of German operations was Rob Tiarks ,an expat from the USA who did not understand Germany or its culture. He had previously supervised around 200 Supercenters in America. Not only did he not speak any German. Due to his

unwillingness to learn the language ,English was soon decreed as the official company language at the management level. He also ignores the complexities and the legal framework of the German retail market, ignoring any strategic advice presented to him by former Wertkauf executives . This has resulted in the resignation of top three management executives from Wertkauf. His successors were also unsuccessful in integrating German Outlets with the Wal-Marts Business model and culture. Suggestions and Recommendations Cross-border, Cross-cultural business is a challenge even for the biggest companies. Companies have to be sensitive to the local cultures and tailor their offerings to local market. To localize their offerings, WalMart and other Companies that are going global companies must carry out cultural assessment of the Citizens of the Country before acquisitions. All their Corporate Business and Communication strategies should be based on this cultural assessment. This will help companies measure the effectiveness of its localization efforts and make adequate changes in local strategy & tactics as and when required. Considering the following steps would help Wal-Mart or any other Company while they are on lookout of Global alliance or business. 1) Political, Social, Economic and Cultural Analysis of the Country Before expanding its business operations to a new country, the Company should understand the Political, Social, Economic and cultural aspects of the Country in depth. Wal-Marts case, Germany was selected primarily because of a central European location and economic attractiveness of the Wertkauf acquisition. But a serious research would have shown that Germany had strong national values resistant to change; possibly the most deeply rooted retail traditions in Western Europe. This could have avoided either WalMarts selection of the Country or the strategies it has adopted in Germany. 2) Go global and think they are local After conducting an in depth research about the prevailing trends in the customers Country, the Company should be ready to modify its own identity to suit itself to the cultural differences without compromising much on its Corporate Mission. This step will also force organizations to clearly define globalization goals. Wal-Mart put the company name on many German stores before being fully established. Immediately, the run down stores left an impression on consumers who formed a negative image of the Wal-Mart name. 3) Employment of Cross-Cultural Management approaches like Hampden-Turner and

Trompanaars Analysis: Employement of Hofsteds Culture Dimensions or HT&T Analysis will help Companies in understanding the minute cultural differences between the countries. For example,Communitarianism over Individualism Germans degree of communitarianism is on the higher side mainly because Germans prefer participating on a team. Most Germans see business as a group of related persons working together. But, most of Americans see their company as a set of functions, tasks, people, machines and payments in which individuals compete.

This difference in Cultural dimensions between the 2 countries has resulted in inside management conflict among the employees, which also resulted in resignation of efficient German executives from Wal-Mart post integration. Understanding the cultural dimensions of a Country through proven Cross-Culture models will always help a company to formulate a specific approach that will encourage team spirit and joy among the Global Team. 4) Continuous Updation of Strategies to successfully withstand the local competition It is very important for a Global firm to continuously analyse the impact of their various strategies on the local market. Understand the shortfalls, and modify it in such a way as to cater the local market in a much better way than the competitors. It is always better to scrutinize the strategies adopted by them with a panel of Local experts, as they will be having a better picture about the local consuming behavior and culture. Perceptions do matter a lot, So a surveys to find the customers perception about the company will also help them to change their strategies accordingly.

Case study of KFC in India

Case Details:
Case Code Case Length Period Pub. Date Teaching Note Organization Industry Countries : : : : : : : : BECG044 17 Pages 1995-2004 2004 Available KFC Fast Foods India

Price:
For delivery in electronic format: Rs. 500 ; For delivery through courier (within India): Rs. 500 + Rs. 25 for Shipping & Handling Charges

Themes
Business Ethics

Abstract:

The case highlights the ethical issues involved in Kentucky Fried Chicken's (KFC) business operations in India. KFC entered India in 1995 and has been in midst of controversies since then. The regulatory authorities found that KFC's chickens did not adhere to the Prevention of Food Adulteration Act, 1954. Chickens contained nearly three times more monosodium glutamate (popularly known as MSG, a flavor enhancing ingredient) as allowed by the Act. Since the late 1990s, KFC faced severe protests by People for Ethical Treatment of Animals (PETA), an animal rights protection organization. PETA accused KFC of cruelty towards chickens and released a video tape showing the ill-treatment of birds in KFC's poultry farms. However, undeterred by the protests by PETA and other animal rights organizations, KFC planned a massive expansion program in India.

Issues: Understand the significance of cultural, economic, regulatory and ecological issues while establishing business in a foreign country

Appreciate the need for protecting animal rights in developed and developing countries like India

Understand

the

importance

of

ethics

in

doing

business

Examine

the

reasons

for

protests

of

PETA

Identify solutions for KFC's problems in India

Each bird whom KFC puts into a box or a bucket had a miserable life and a frightening death. People would be shocked to see our footage of a KFC supplier's employee who walks through a barn, carelessly lighting lamps and letting flames fall on the terrified birds. The air inside these filthy barns reeks of ammonia fumes, making it difficult for the birds to breathe. No one with a grain of compassion should set foot in KFC." 1 - Ingrid Newkirk, Director, PETA.2 "The chicken they serve is full of chemicals, and the birds are given hormones, antibiotics and arsenic chemicals to fatten them quickly." 3 - Nanjundaswamy.4 Protest Against KFC On August 20, 2003, a five-foot tall chicken complete with an ensemble of feathers and beak hobbled on a pair of crutches outside Kentucky Fried Chicken's (KFC) Indian outlet in Bangalore.

The chicken was brought by PETA (People for Ethical Treatment of Animals) activists, who carried placards reading, "Quit India" and "Stop Playing Fowl" (a pun on "Foul"). The chicken was placed at the centre and a peaceful protest was held against the alleged ill treatment of birds in KFC's poultry farms. Media persons were called to give the demonstration a wide coverage (Refer Exhibit I for a visual on the protest by PETA activists).

Explaining the rationale behind the protest, Bijal Vachcharajani, special projects coordinator of PETA, said, "Ours is the land of Gandhi. Just as 61 years back our leaders gave a call for colonizers to quit India, we too are saying we will not tolerate cruel multinationals."5 On the 61st anniversary of the 'Quit India' movement,6 PETA India wrote a letter to the Managing Director of Tricon Restaurant International, the parent company of KFC, asking them to close their sole KFC outlet in India. They got no reply. PETA activists decided to protest against KFC by carrying crippled chicken, which represented the birds suffering in the KFC's farms. PETA claimed that after two years of intensive campaigning to increase animal welfare standards in poultry farms, other foreign fast food restaurants operating in India like McDonald's7 and Burger King8 had improved the treatment of animals specially raised and slaughtered for food.

Only KFC had not acted. Though PETA had organized other protests earlier, the crippled chicken campaign became the precursor for more intensive protests. PETA's was one of the many shows of protest against KFC's Indian outlet.

Background Note KFC was founded by Harland Sanders (Sanders) in the early 1930s, when he started cooking and serving food for hungry travellers who stopped by his service station in Corbin, Kentucky, US. He did not own a restaurant then, but served people on his own dining table in the living quarters of his service station. His chicken delicacies became popular and people started coming just for food.

Kentucky Fried Chicken was born. Soon, Sanders moved across the street to a motel-cumrestaurant, later named 'Sanders Court & Cafe,' that seated around 142 people.

Over the next nine years, he perfected his secret blend of 11 herbs and spices and the basic cooking technique of chicken. Sanders' fame grew and he was given the title Kentucky Colonel by the state Governor in 1935 for his contribution to the state's cuisine. Sanders' restaurant business witnessed an unexpected halt in the early 1950s, when a new interstate highway was planned bypassing the town of Corbin. His restaurant flourished mainly due to the patronage of highway travellers. The new development meant the end of this. Sanders sold his restaurant operations. After settling all his bills, he was reduced to living on a meagre $105 social security cheque. But Sanders did not lose hope. Banking on the popularity of his product and confident of his unique recipe for fried chicken, Sanders started franchising his chicken business in 1952. He called it Kentucky Fried Chicken. He travelled the length and breadth of the country by car, visiting as many restaurants as possible and cooking batches of chicken. If the restaurant owners liked his chicken, he entered into a handshake agreement that stipulated payment of a nickel9 for each plate of chicken sold by the restaurant. By 1964, Sanders franchised more than 600 chicken outlets in the US and Canada...

KFC's Entry in India Foreign fast food companies were allowed to enter India during the early 1990s due to the economic liberalization policy of the Indian Government. KFC was among the first fast food multinationals to enter India. On receiving permission to open 30 new outlets across the country, KFC opened its first fastfood outlet in Bangalore in June 1995. Bangalore was chosen as the launch pad because it had a substantial upper middle class population, with a trend of families eating out. It was considered India's fastest growing metropolis in the 1990s. Apart from Bangalore, PepsiCo planned to open

60 KFC and Pizza Hut outlets in the country in the next seven years. However, KFC got embroiled in various controversies even before it started full- fledged business in India. When the issue of granting permission to multinational food giants to set up business in the country came up for discussion in the Indian parliament, some members from the opposition parties were vocal in their displeasure... Problems for KFC From the very first day of opening its restaurant, KFC faced problems in the form of protests by angry farmers led by the Karnataka Rajya Ryota Sangha (KRRS). The farmers leader, Nanjundaswamy, who led these protests, vehemently condemned KFC's entry into India, saying that it was unethical to promote highly processed 'junk food' in a poor country like India with severe malnutrition problems. Nanjundaswamy expressed concern that the growing number of foreign fast food chains would deplete India's livestock, which would adversely affect its agriculture and the environment. He argued that non-vegetarian fast-food restaurants like KFC would encourage Indian farmers to shift from production of basic crops to more lucrative varieties like animal feed and meat, leaving poorer sections of society with no affordable food. KRRS held a convention on November 01, 1995 to protest the entry of fast food multinationals and the Westernization of local agriculture...

The Aftermath By late 2003, PETA further intensified its campaign against the cruel treatment meted out to chickens by KFC through protests at regular intervals. Celebrities like Anoushka Shankar, daughter of the legendary sitar maestro Ravi Shankar, directly supported the cause of PETA. Anoushka, a sitarist herself, wrote a letter to the top management of PepsiCo condemning the continued cruelty of KFC in spite of repeated requests of PETA. The organization also had the support of other celebrities like the famous cricket player Anil Kumble (based in Bangalore), popular Indian models like Aditi Govitrikar, the late Nafisa Joseph and John Abraham, who promoted vegetarianism. Film actresses like Raveena Tandon and Ameesha Patel also took up

the cause of animal abuse. Undeterred by the continued protests, KFC added three more outlets to its existing one at Bangalore. KFC also announced a major expansion programme for 2005. Sharanita Keswani (Keswani), KFC's Marketing Director, said that as the retail business was poised for a boom in India, they considered it the right time for expansion... Feeling positive about the flourishing malls in all big cities, Keswani revealed that this time KFC planned to have a presence in prime locations or in a mall where turnout would be assured.

The company aimed at targeting cosmopolitan cities like Chandigarh, Pune, Kolkata, Chennai and Hyderabad, where mall culture was fast developing.

PepsiCo also decided to concentrate on the expansion of KFC since its other brand, "Pizza Hut", had successfully established a strong foothold in India.

Vegetarianism was predominant and was a way of life in India. Many people ate non-vegetarian food only occasionally and avoided it during festivals or religious occasions... Exhibits Exhibit Exhibit Exhibit Exhibit Exhibit V: IV: I: II: III: PETA'S Relevant Protests Definition KFC's Fact of by of Cruelity, Sheet the of Animal PETA Adulterated Camera KFC's Welfare Activists Food Shots Cruelty Legislation

Provision

Exhibit VI: KFC's Poultry Welfare Guidelines