Walmart: why the world’s largest retailer left Germany after eight years

The situation

On 28 July 2006, Wal-Mart Stores announced from Bentonville, Arkansas, that it would sell its German retail business to Metro AG. The company said it had 85 supercentres and 11,000 associates in Germany, which it had entered eight years earlier by buying the Wertkauf and Interspar hypermarket chains. Terms were not disclosed, but Wal-Mart expected a pre-tax loss of about US$1 billion in the second quarter of its 2007 financial year.

The numbers show how small the German business was inside the group. Wal-Mart reported sales of US$312 billion in the previous year, from more than 6,600 outlets worldwide, 2,700 of them in 14 countries outside the United States. The German stores brought in about 2 billion euros (roughly US$2.55 billion) in 2005, according to a wire report. One trade report put Wal-Mart’s share of German food retail at about 0.9 per cent. A company that large was selling a business worth less than 1 per cent of its sales, and accepting a loss of roughly US$1 billion to get out.

It was the second withdrawal in about two months. Wal-Mart had also left South Korea in May 2006. Michael Duke, then vice-chairman, gave the reason in a short statement: given the business environment, it would be difficult to obtain the scale and results the company wanted in Germany. He said the sale would let Wal-Mart focus on markets where it could meet its objectives.

Background

How Wal-Mart came to Germany

Wal-Mart built much of its international presence by buying existing businesses, including Asda in Britain. In Germany it did the same. In December 1997 it bought the Wertkauf chain, which had 21 stores. In 1998 it added 74 stores from Interspar, giving it about 95 stores in total, according to a 2011 account in The American Prospect. The company later described its entry bluntly. Beth Keck, a Wal-Mart international spokeswoman, told CBS News in 2006 that the company had “literally bought the two chains” and then announced that it was in Germany.

Germany was an attractive target. CBS News called it the third-largest retail market in the world, after the United States and Japan. The prize was a large, rich consumer economy in the middle of Europe. Wal-Mart already owned Asda in Britain, which it bought in 1999 and which had about 320 stores and 140,000 employees by 2006.

What the two chains were

Several accounts agree that the acquired stores were a weak base. CBS News described Wertkauf and Interspar as “B-level” chains, with stores far apart and many in poor locations. Supermarket News said the acquisitions brought undesirable locations and poorly designed stores. This mattered because Wal-Mart’s usual model depends on volume, low prices and efficient logistics. A scattered network of mid-quality stores gave it little of the scale that its home-market model relies on.

The group around it

By 2006 Wal-Mart’s international division had sales of about US$62.7 billion in the year to January, about 20 per cent of group sales, according to a wire report. Over the previous year it had become majority owner of Seiyu in Japan, completed the Sonae acquisition in Brazil and entered six new markets. Germany was one bet among many, and the company was free to reallocate capital.

The industry

A market built around hard discount

Germany’s food market was worth about 130 billion euros and was dominated by Rewe, Aldi, Lidl and Metro, according to a 2006 wire report. Aldi and Lidl sold a narrow range, much of it under their own labels, at very low prices. Analysts quoted by Supermarket News said the two chains offered high-quality private-label goods cheaply. Sy Schlueter, chief executive of the Hamburg investment house Copernicus, told the Associated Press that German shoppers were highly price-focused and would drive to cheaper stores. Wal-Mart’s usual pitch, low prices, was not a distinctive offer in a market where the discounters already owned it.

The American Prospect reported one early comparison from the opening week of a Berlin superstore: Wal-Mart sold a loaf of bread for about US$1.13, while an Aldi across the street sold one for 34 cents. That is a single anecdote from a magazine with a stated political view, so it is better read as an illustration than as a measure of price levels across the range.

Rules on prices, hours and labour

The market was also tightly regulated. Shops could not open on Sundays, as The American Prospect noted. Germany’s competition law included a provision, strengthened in 1999 according to the Bundeskartellamt (the federal cartel office), that restricted dominant firms from selling certain basic goods below cost. Collective agreements were set at regional level. In July 2000 the service-sector union ver.di picketed 30 Wal-Mart stores, partly because the company would not follow the regional collective agreements, according to the same account.

The state of the economy

CBS News also cited weak economic conditions, including high unemployment and low consumer spending, as a drag on the whole sector in those years. In a market with soft demand and strong discounters, the growth that a newcomer needs was hard to find.

The decision

The 2006 decision had a simple shape. Wal-Mart had been in Germany for about eight years. The business was small and was not meeting the company’s targets. The alternatives were to keep investing, to hold the stores and wait, or to leave. The sources do not describe internal debate, so these options are framed here as the obvious ones rather than as a record of what was discussed.

Option one: keep building

Wal-Mart had once intended to grow. The Progressive Grocer reported that the company had dropped a plan to open 50 new superstores in Germany by 2003. Building more stores would have meant a bet that the German format could be fixed with more scale. The evidence against that bet was the lack of progress in the previous years, and the fact that rivals could match Wal-Mart on price.

Option two: hold and adjust

The company had already tried adjusting. Spokeswoman Amy Wyatt said in 2006 that Wal-Mart had “stumbles” at first in meshing the two cultures, and credited a stronger German management team later. Holding on meant paying for a business that was not becoming one of the group’s strong units.

Option three: sell or close

Metro, a large German retailer, was a willing buyer. Its chief executive, Hans-Joachim Koerber, said Wal-Mart was keen to sell and sold below asset value, according to the wire report. For Metro the deal added more than 670 food stores and hypermarkets in Germany and raised its share of German grocery to nearly 10 per cent. Metro already ran the Real hypermarket chain, a format similar to Wal-Mart’s. For Wal-Mart a sale limited the damage and freed money for other markets. Patricia Edwards, a portfolio manager at Wentworth, Hauser and Violich, told the Associated Press: “At some point it feels really good to stop beating your head against the concrete.”

What they did

Entry, 1997 and 1998

Wal-Mart bought Wertkauf in December 1997 and the Interspar stores in 1998. By 2006 the stores traded as Wal-Mart supercentres. The company tried to bring its US store habits with it. CBS News listed several: employees were asked to smile at customers, which some male shoppers read as flirting, staff took part in a morning chant, and baggers packed groceries for customers, though Germans usually bag their own. Associated Press reporting added that analysts said shoppers also disliked the out-of-town locations.

The price dispute, 2000 to 2002

On 1 September 2000 the Bundeskartellamt prohibited Wal-Mart, Aldi-Nord and Lidl from selling certain basic foods below their cost prices. The foods named were milk, sugar and vegetable fat. Wal-Mart was the only one of the three to appeal. The Higher Regional Court in Dusseldorf upheld the appeal. It found that Wal-Mart’s dairy prices matched those of Aldi-Nord and Lidl, which justified them, and that the vegetable fat costs had been inflated by third parties. On sugar it found an unjustified below-cost sale but held that it had no appreciable effect on competition.

The cartel office then went to the Federal Supreme Court. It filed its appeal on points of law on 17 January 2002. A later report in Progressive Grocer said the supreme court found that below-wholesale pricing harmed competition among smaller and mid-sized stores, and quoted Wyatt: “We respect the decision taken by the federal court today.” She said Wal-Mart would adjust its pricing and stay committed to low prices. That report gave no date, and The American Prospect placed the ruling in 2003, so the exact date is not settled here.

Slowing down, 2001 to 2005

By then Wal-Mart had abandoned its plan to open 50 new superstores by 2003. It kept running its existing stores. Sources do not record a major new investment programme in these years, and the group put its growth effort into other regions, including the Sonae purchase in Brazil and a majority stake in Seiyu.

The sale, July 2006

The sale to Metro was announced on 28 July 2006, subject to antitrust approval. Metro was to take over 19 Wal-Mart assets, and the remaining stores were to be leased, according to a report on the deal. The stores were folded into Metro’s Real hypermarket brand. Duke said Wal-Mart would work with Metro on a smooth transition and thanked the German associates for their contribution.

What happened

The cost

Wal-Mart booked a pre-tax loss of about US$1 billion on the exit, in its second quarter. Its shares rose 0.8 per cent to US$43.91 on the day of the announcement, according to a wire report, while Metro’s rose 2.5 per cent to 44.91 euros. Markets read the deal as good news for both: Wal-Mart was shedding a weak unit, and Metro was gaining scale.

How the exit was read

Analysts welcomed the move. The Associated Press quoted commentators saying the capital could be used in more profitable markets, with China and Latin America named. Supermarket News said the exit might blunt Wal-Mart’s European growth, and Bryan Roberts of Planet Retail said a German base would have been a useful bridge to Eastern Europe. David Rogers of DSR Marketing Systems pointed to “a fundamental misunderstanding of the market”.

The wire report said Wal-Mart acknowledged it had misjudged German regulations, shopping habits and tastes. Wal-Mart did not deny the mistake in its public statements. Keck called the experience “a good, important lesson, a turning point”.

What Metro did with the stores

For Metro the stores were the base of its Real chain, which it later struggled with. In February 2020 Metro agreed to sell Real, with 276 stores and 34,000 employees, to the investment group SCP for about 300 million euros, 200 million below its own target, according to RetailDetail. Metro’s chief executive said Real had lost more than 250 million euros the previous year. The sale suggests that German hypermarkets were a hard business for Wal-Mart’s successor too, though the Real chain had many stores that were not part of the Wal-Mart purchase.

Other views

The culture explanation

The most repeated story is cultural. The smiling, the chant, the bagging and the cheerful greeting all became shorthand for an American company that did not understand a German one. The story is vivid and partly documented, since it appears in several 2006 reports. A Wal-Mart spokeswoman accepted a version of it.

The price and entry explanation

CBS News argued that culture alone does not explain the failure. It said price competitiveness and the entry strategy were bigger problems. Wal-Mart bought two mediocre chains whose stores were poorly placed, and it could not beat Aldi, Lidl and Metro on price, especially in groceries. On that reading the cultural stumbles were visible symptoms, and the structural position was the cause. This reading fits the sales figures: a business that sells under 1 per cent of the food market cannot match the buying power of the leaders.

The regulatory view

Ulf Boege, then president of the Bundeskartellamt, argued in his 2002 statement that the competition law largely worked as intended. His office took the view that Wal-Mart’s market power over small and mid-sized competitors was greater than theirs, a position the Dusseldorf court generally confirmed. Wal-Mart’s own position was that it had matched rivals’ prices. The dispute shows that Wal-Mart’s low-price playbook was legally contested in Germany, even though the company won the first round in the court.

Limits of the evidence

Wal-Mart never published a detailed German profit and loss. Neither company disclosed the price. The sources are mostly press reports from 2006 and company statements, plus a few later retrospectives. Claims about what drove the loss are interpretations. The roughly US$1 billion figure is the company’s own estimate of the pre-tax loss in the quarter, not an audited measure of everything spent in Germany since 1997.

Reading it through a framework

Porter’s five forces

Rivalry among existing firms was fierce: Aldi, Lidl, Rewe and Metro already held the market, and the discounters competed on price and private labels. Buyer power was high because shoppers were willing to travel to the cheapest store and had little loyalty to a foreign newcomer. The threat of new entrants was real for the incumbents, and Wal-Mart was one such entrant, but it faced an obstacle that its entry did not remove: German discounters had scale and a cost base built for low prices. Regulation added a further layer, because the below-cost rule limited the tool Wal-Mart used elsewhere. In a market with these forces, a newcomer with 0.9 per cent share had little room to earn a margin.

Positioning

Positioning asks what a company offers that rivals do not. In the United States Wal-Mart’s position is the lowest price with a wide range under one roof. In Germany a part of that promise was already taken by Aldi and Lidl, which were cheaper on the basics, and by rivals whose locations shoppers preferred, according to analysts. Wal-Mart’s service touches, such as greeting and baggers, did not add anything shoppers said they wanted. The result was a store that was neither the cheapest nor the most convenient. The positioning problem was visible in the Berlin bread comparison, whatever its limits as evidence.

Since then

Metro integrated the former Wal-Mart stores into Real, and Real itself was sold in 2020 to SCP, with about 50 core stores to keep trading for two years and most of the others expected to go to rivals or be closed, according to RetailDetail. The report said around a third of Real’s jobs, roughly 10,000, were at risk, a figure that one buyer called exaggerated.

Wal-Mart kept growing abroad through different routes. In August 2018 it completed the purchase of a 77 per cent stake in Flipkart, India’s leading e-commerce marketplace, for US$16 billion, according to Business Standard. That was a large minority-to-majority investment in a local company, rather than a purchase of stores to be rebranded. Walmart executive Judith McKenna said the two companies would “achieve more together than each of us could accomplish separately”. The sources opened for this case do not cover the company’s other overseas moves after 2018, so this section stops there.

What to take from it

• Buying a chain is not the same as buying a position. Wal-Mart acquired 95 stores in two chains that were poorly placed and poorly designed, and the scale it needed never arrived.
• A cost advantage at home does not travel automatically. In a market where Aldi and Lidl already owned the low-price position, the same promise made Wal-Mart one more discounter rather than a different one.
• Local rules shape the business model. Sunday closing, sector labour agreements and the below-cost pricing rule each limited what the American model could do.
• Cultural missteps are costly mainly when they signal that the company has not listened. The smiling and the chant were small, but they were reported as evidence of a larger lack of fit.
• Leaving can be the right decision. Wal-Mart took a loss of about US$1 billion, and analysts treated the exit as a way to stop spending in a market that was not meeting targets and to redirect the money.

Questions to think about

1. If Wal-Mart had opened new stores from scratch instead of buying two chains, what would it have needed to learn about German sites, suppliers and shopping habits before starting?
2. Where is the line between adapting a business to a country and giving up the features that made it successful at home?
3. How should a company judge when a small foreign unit that is missing its targets is worth a further investment, and what evidence would persuade it to leave?
4. Does a competition rule against below-cost pricing protect shoppers or small shops, and how should a new entrant plan around it?

Concepts at work

This case shows market entry mode (acquisition against building from scratch), competitive positioning in a discount market, and the cost of cultural distance in retail. Explore them in Insights.

Written from the public sources listed below. Figures are as those sources report them.