LONDON (Dow Jones)--German retailers' ability to resist Wal-Mart's efforts to squeeze them out explains the U.S. giant's costly pullout, but only in part. The simple truth is that Wal-Mart's strategy in Germany was flawed from the start.
The post-mortem of Wal-Mart's German strategy will show a variety of reasons for its failure. Top of the list are: poor acquisition strategy, scant respect for local regulations, and the erroneous belief that U.S. marketing style will work with German consumers.
First, acquisitions. Wal-Mart started well in 1997 by buying 21 Wertkauf stores that collectively generated profits of 3% of sales. But its 1998 deal to buy 75 hypermarkets from Spar was a wrong move.
Those stores were considered run-down and several were located in poor neighborhoods. Hence the revenues per square meter floor area were weak for Wal-Mart, right from the start. One Wall Street analyst commenting on the deal had described the stores as "shabby" when they were bought.
A University of Bremen study says Wal-Mart paid EUR560 million for those stores - but only two years before, Spar had bought 36 of them for EUR85 million. Even worse, Wal-Mart didn't buy the real estate but had only subtenant status at most of these locations.
The costly acquisition, which brought little hard asset value, is primarily responsible for Wal-Mart's $1 billion charge, which translates into around $12 million per store.
One reason for Wal-Mart's success in the U.S. is its ability to extract concessions from suppliers on the strength of its expanding hypermarket chain. But in Germany strict zoning and planning regulations don't easily allow organic growth.
Indeed, Wal-Mart admitted Friday that its inability to achieve economies of scale quickly enough was the primary reason it couldn't succeed in Germany.
Experts peg the optimum "economies of scale" sales number for Germany at roughly EUR8 billion. Wal-Mart seldom came close to even the halfway mark.
Another mistake was the failure to take on an experienced German to head its business. In an industry where knowledge of local sentiments matters most, the company started off with Rob Tiarks, a U.S. citizen who had supervised 200 U.S. super-centers from Wal-Mart's headquarters in Bentonville, Arkansas.
Tiarks was replaced by Allan Leighton, the British head of the U.K.'s Asda, which Wal-Mart bought in 1998. But within a year he was gone, to be replaced by Volker Barth, the first German and also one of the few remaining managers from Wertkauf, Wal-Mart's first acquisition.
But by then Wal-Mart was being criticized as an employer. It was starting to clash with unions. Another mismatch with Wal-Mart's strategy: Germany's strictly regulated retail opening hours.
In Germany, the legal maximum is just over 80 hours a week, half of what it is in the U.K. and less than Spain and France at 144 hours.
Another factor that played against Wal-Mart was Germany's fair trading and antitrust laws that, barring a few exceptions, don't allow retailers to sell goods below cost price for a long time. This prevented Wal-Mart from attracting traffic away from rivals, a ploy that has worked well in the U.K.
All said, Wal-Mart alone is to blame for its failure in Germany. It clearly should have done more risk analysis and thought twice before making its investments.
Wal-Mart's lesson is a costly one, but one that will make a good case study for future managers.