In July 2006, retail giant Wal-Mart announced that it was pulling out of Germany, where it had lost millions of dollars since entering that market in the late 1990s. What happened? This topic was the subject of a New York Times article headlined “Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture” [Mark Landler and Michael Barbaro, 31 July 2006] According to the article:
The retail giant has struggled in countries like South Korea and Japan as it discovered that its formula for success — low prices, zealous inventory control and a large array of merchandise — did not translate to markets with their own discount chains and shoppers with different habits.
It is ironic that the retailer that most changed the American business landscape (showing other large retailers they weren’t as resilient as they thought they were) learned that its own business resiliency needed some work. The article notes that hubris paid a part. To be fair, unparalleled success like that enjoyed by Wal-Mart in the United States makes it difficult to see how the same formula won’t work elsewhere. As I have discussed previously, however, every organization needs someone or some group whose job it is to question assumptions — like the viability of Wal-Mart’s business model in all markets. One hard lesson that Wal-Mart has learned is the importance of building on local branding.
Wal-Mart now cares less whether its foreign stores carry the name derived from its founder, Sam Walton, as the German Wal-Marts do. Seventy percent of Wal-Mart’s international sales come from outlets with names like Asda in Britain, Seiyu in Japan or Bompreço in Brazil.
It apparently came as a surprise to Wal-Mart decision makers in Arkansas that the local culture wouldn’t be embraced in other areas around the world. For example:
In Germany, Wal-Mart stopped requiring sales clerks to smile at customers — a practice that some male shoppers interpreted as flirting — and scrapped the morning Wal-Mart chant by staff members. “People found these things strange; Germans just don’t behave that way,” said Hans-Martin Poschmann, the secretary of the Verdi union, which represents 5,000 Wal-Mart employees here.
As I recall, the Japanese found similar cultural obstacles when they started building automobile plants in the United States. Recently, I have traveled extensively in China and I can assure you that anyone who wants to do business there must understand the Chinese culture. Resilience means adapting to culture when necessary — not trying to change the culture to adapt to you. The first course of action is under your control, the latter is not.
Some of Wal-Mart’s missteps — selling golf clubs in Brazil, where the game is unfamiliar, or ice skates in Mexico — are so frequently mentioned, they have become the stuff of urban legend. But even more subtle differences in shopping habits have tripped up the company. In Korea, Wal-Mart’s stores originally had taller racks than those of local rivals, forcing shoppers to use ladders or stretch for items on high shelves. Wal-Mart’s utilitarian design — ceilings with exposed pipes — put off shoppers used to the decorated ceilings in E-Mart stores. Beyond the ambience, Wal-Mart’s shoes-to-sausage product line does not suit the shopping habits of many non-American shoppers. They prefer daily outings to a variety of local stores that specialize in groceries, drugs or household goods, rather than shopping once a week at Wal-Mart. “They have stacks of goods in boxes,” said Lee Jin Sook, 46, a housewife sitting on a subway in Seoul. “That may be good for some American housewives who drive out in their own cars.” But Koreans, she said, prefer smaller packages: “Why would you buy a box of shampoo bottles?”
“I heard Wal-Mart later tried to change their style,” Ms. Lee added, “but I guess it was too late.”
To its credit, Wal-Mart has apparently learned to adapt and continues to grow.
Wal-Mart’s changes came too late for Germany, but they could help it crack other markets, like China, where it already has 60 stores and 30,000 employees. Far from being chastened by its setbacks, Wal-Mart is forging ahead with an aggressive program of foreign acquisitions. In a single week last fall, Wal-Mart completed the purchase of the Sonae chain in Brazil, bought a controlling stake in Seiyu of Japan, and became a partner in the Carcho chain in Central America. The deals added 545 stores and 50,000 employees to Wal-Mart’s overseas empire.
The article reports that Wal-Mart International is the fasting growing part of the company. It also notes how rising gas prices has affected sales in the United States. Wal-Mart’s mega-stores operate on the assumption that shoppers prefer to make a single stop for all their needs. Hence, one would think that rising gas prices would validate its business model. Intriguingly, sales have not risen as quickly as expected. This more likely reflects the fact that gas prices have decreased the amount of spending money shoppers have available than the fact that the business model’s assumption is wrong. The article concludes by noting that Wal-Mart has encountered its greatest success when it has “gone big,” meaning it buys enough inventory that it can demand steeper discounts from suppliers than its competitors. China, among others, is worried about big stores and, as I recall reading, is considering legislation to regulate store size. Wal-Mart, however, can generate large inventories by selling from many, smaller stores as they can selling from fewer large ones.
Finally, the article talks about how Wal-Mart has learned the importance of maintaining local management. This starts to sound a lot more like Sam Palmisano’s globally integrated enterprise than it does a centrally-controlled Wal-Mart multinational corporation. If Wal-Mart carefully studies what Palmisano and I have been saying about Resilient Enterprises, they will continue to promote locally-excellent retail chains as opposed to a network of mini-me Wal-Mart chains managed out of Bentonville, Arkansas. The commercial world still has a lot to learn from Wal-Mart, but Wal-Mart now understands there are things it still has to learn as well.