Walmart in Germany: bought fast, gone after eight and a half years

A giant American retailer entered what the New York Times calls the world's third-largest retail market (The New York Times, 2006), stayed eight and a half years, then sold 85 stores and wrote off about USD 1bn. If you are thinking of buying a few existing sites abroad to get in quickly, this case deserves a close look. The post sets it beside the entry modes and the triple liability of young international firms, to see what they explain and what they do not.

What happened on 28 July 2006?

Walmart announced the sale of all 85 of its German stores to Metro Group. The New York Times opened its report with Walmart admitting defeat in Germany's huge but cutthroat retail market, and called the move a marked retreat from its breakneck global expansion, coming two months after Walmart sold its South Korean stores (The New York Times, 2006). The two sides did not disclose financial terms. Walmart said it would take a pretax charge of about USD 1bn to write off its German investment (The New York Times, 2006).

Metro said it would fold the 85 stores into its Real chain, which the report puts at 550 supermarkets and hypermarkets and describes as bigger than Walmart's chain but also ailing. According to Metro, Walmart's German stores employed 11,000 people and generated €2bn a year in sales (The New York Times, 2006). Walmart does not break out results by country. Analysts estimated that it lost money for most of its eight and a half years in Germany, sometimes hundreds of millions of dollars a year (The New York Times, 2006). That is an outside estimate, not a published figure.

How did Walmart enter, and what did that mode leave it with?

Walmart entered in 1998 by buying the outlets of two second-tier chains, Wertkauf and Interspar. Analysts told the New York Times that this left Walmart with a hodgepodge of stores, geographically scattered and often badly sited (The New York Times, 2006). In the site's framework summary, the closest match, by my classification, is a wholly owned subsidiary entered by acquisition: high control, high resource commitment, high capital risk, fast speed Foreign market entry modes.

Speed is what Walmart bought. What came with it was the seller's sites. The table says a wholly owned subsidiary is slow if you build and fast if you buy; it does not say that buying lets you choose the locations. As I read it, that is the weak point of the choice in the Walmart case.

Johanson and Vahlne (1977) note that the quickest way to gain market experience is to hire a representative's staff or buy all or part of that firm, but that this experience is often not for sale (Johanson and Vahlne, 1977, p. 29). Whether Wertkauf and Interspar passed their experience on to Walmart, the sources I read do not say. Nor do they say whether building from scratch or a joint venture would have done better.

Which outsider liabilities apply to Walmart?

Only the liability of foreignness, as I read it. The triple-liability framework has three parts, newness, smallness and foreignness, and was built for young firms with thin resources. According to the article, Walmart was the world's largest retailer, neither new nor small. Foreignness is the outsider's disadvantage against local firms, such as trade barriers and an incomplete grasp of laws, language and business practices (Oviatt and McDougall, 1994, p. 55).

Dunning (1988), restating the eclectic paradigm, says a firm's ownership advantage must be enough to cover the cost of setting up and running a foreign operation, on top of the costs that local producers face (Dunning, 1988, p. 2). The Walmart case suggests that an advantage at home does not automatically become one abroad. According to the New York Times, size gave Walmart great buying power in clothing and other goods, but it had to buy much of its food locally, where Aldi, with 4,100 shops, was far stronger (The New York Times, 2006). One analyst said Germany is the home of the discounter and that Walmart was not competing on price, one of its main attributes at home (The New York Times, 2006).

The table below sets the four common causes in the abstract of Yoder and colleagues beside details from the article. The pairing is mine, and the judgements come from the reporter and the analysts the paper quotes, not from measurements.

Did Walmart adapt, and was it too late?

Yes, though one analyst thought it came too late. According to the New York Times, Walmart first installed American managers, who made the well-intentioned cultural gaffes above. It then used German managers, and later appointed David Wild, a former Tesco executive, who tried to win customers with organic meat and produce (The New York Times, 2006). The analyst James Bacos said Walmart found it had things to learn about the German market and did change, but maybe too late. He also said it had walked into a "triple-witching hour" in Germany, just as the whole market was moving away from its model (The New York Times, 2006).

That is one analyst's judgement after the event. The article has no data showing how much any of the three management steps affected sales per store.

What should you check before buying a chain abroad?

Ask five questions before you sign, each drawn from a signal in the Walmart case, and write down in advance how much loss you will accept. The example below is invented: "Ngõ Nhỏ Bakery" and the chain it would buy in Phnom Penh are my own creation.

Suppose Ngõ Nhỏ Bakery has 12 shops in Ho Chi Minh City and plans to buy an 8-shop chain in Phnom Penh to get in quickly.

This suits you if you can buy shops with sales figures for each site and local people willing to stay. It does not suit you if the target chain is little more than cheap leases and murky numbers: then buying for speed means buying the seller's problems. The five questions are my own inference from the Walmart case, not checked against data on Vietnamese firms.

Going deeper: what does each source tell us, and what could I not check?

Every detail about Walmart in this post comes from a single article, so it carries the viewpoint of the American press in 2006 and of the analysts it quotes. I read the New York Times piece through an archived copy of the 29 July 2006 print version, headlined "Wal-Mart to Abandon Germany" and written by Mark Landler, because the 28 July page cited in the library blocks automated access. I could not open the 28 July page, so every Walmart detail here rests on the print version.

For Yoder, Visich and Rustambekov (2016) I have only the abstract, so I do not know how they analyse Walmart in detail. I have not checked Walmart's or Metro's own reports and have read no other academic study of the case. The triple-liability framework and the entry-mode table come from the library's framework summaries, not from the underlying textbooks.

This post does not prove that acquisition caused the failure. It shows one documented case in which the speed bought came with a network of sites that analysts judged poor.