Wal-Mart's German Flop

Public Eye's Brian Montopoli is writing weekly dispatches for CBSNews.com while living and working in Berlin as part of the Arthur F. Burns Fellowship Program. He will return to Public Eye in October.

Wal-Mart, the polarizing big-box retailer from Bentonville, Ark., has, after eight years, abandoned its efforts win over German consumers. On July 28, the company announced that it would sell its 85 stores in Germany to competitor Metro AG and pull out of the market — swallowing a loss of $1 billion in the process.

The development led to a fair amount of schadenfreude — that's the German word for pleasure taken from someone else's misfortune — on the part of the company's critics. "Wal-Mart, Hau Ab!," wrote blogger "Markus Arelius." (He helpfully explained that the phrase translates from German to "Get Lost!" "Scram!" or "Beat it!") Wrote another blogger: "I'm not usually one to gloat … But in this case, I'll make an exception. It couldn't have happened to a nicer evil empire."

Despite its appeal to millions of customers, Wal-Mart has attracted its fair share of detractors, many of whom rail against the company for making the American landscape increasingly homogenous. Particularly for those critics, it is tempting to cast the German rejection of the retailer as a culture-based rebuke of its distinctly American style of doing business.

There is something to that argument, at least on the surface. As The New York Times pointed out, Wal-Mart initially required that its sales associates smile at customers — "a practice that some male shoppers interpreted as flirting" — and also forced them to participate in the traditional morning Wal-Mart chant. The company at first seemed tone deaf to the German culture: It had employees bagging groceries for customers, for example, even though Germans traditionally do the bagging themselves.

But by the time it gave up on Germany, the company had worked out many of its culture-related problems. "Perhaps at first we had our stumbles in terms of find the right way of meshing the two cultures, but I think we have caught on in recent years," Amy Wyatt, a spokeswoman for Wal-Mart International, told CBSNews.com. Wyatt argues that the company learned from its early missteps, and, with the help of a strong German management team, "did understand [the German culture] in the end."

So what went wrong?

The company's problems in Germany, in the end, cannot be placed at the feet of a few unnecessary bagboys. The German economy, with its relatively high unemployment and low consumer spending, certainly didn't help. Neither did the way the company initially broke into the German market: It acquired a pair of very different, B-level German chains, Wertkauf and Interspar, a move that left it with stores far away from each other, many or which were in undesirable locations. Perhaps most important, however, was the fact that Wal-Mart was not competing when it came to its bread and butter: price.

Yes, you read that right. The German discount retail landscape is extremely competitive, with relatively small stories like Aldi and Lidl offering good-quality groceries at below-average prices. Metro AG, the German retail group that acquired the Wal-Mart stores, operates a number of successful chains that offer discount prices on everything from electronics to groceries to department store goods. German consumers, not unlike Americans, are extremely price-conscious. Wal-Mart was largely unable to undercut its competitors, particularly when it came to the grocery business. Potential customers may have been disenchanted with some of Wal-Mart's practices at the beginning, but one imagines they could have put up with having someone bag their groceries if those groceries had been cheaper than those they found at the competition.

It's important, then, not to look at Wal-Mart's unhappy ending in Germany as a direct result of culture clash. After all, while the company's flop in the third-largest retail market in the world (after the United States and Japan) is certainly a setback, the Wal-Mart model is far from untranslatable overseas. The company pulled out of South Korea in May, but it operates 2,700 stores in 14 foreign countries and is flying high in places like the U.K. (where it goes by the name Asda) and Mexico. Its international division is a fast-growing, $63 billion business, and it's now looking to expand into India and Australia.

Wal-Mart eventually may even look back on its German failure as a blessing in disguise. The company is now reassessing its practice of aggressively exporting its corporate culture to its stores abroad, and it no longer seems to think it can set up shop abroad without worrying about thinking hard about how it fits in in a particular country.

"It is a good, important lesson, a turning point," Beth Keck, an international spokeswoman for Wal-Mart, told the Times. "We literally bought the two chains and said, 'Hey, we are in Germany, isn't this great?'"