Question 2 Please apply the PEST analysis to the Wal-Marts case study.

"The secret of successful retailing is to give your customers what they want. And really, if you think about it from your point of view as a customer, you want everything: a wide assortment of good-quality merchandise; the lowest possible prices; guaranteed satisfaction with what y ou buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience." - Sam Walton (1918-1992) Wal-Mart is the third largest company in the world by revenue and the largest retailer in the world. Its sales for fiscal year 2011-2012 were USD446 Billion with profits of USD16.5Billi on. Of its revenue, 28.4% is generated outside of its country of origin of USA. This expansio n overseas started in 1991 when it opened its first store in Mexico City and moved into Germ any in 1997 with its acquisition of Wertkauf and subsequent purchase of Spar Handels AG+ i n 1998. Its failure can be largely attributed to its ignorance of the specific features of the extre mely competitive German retail market. (Deloitte, 2013) In Germany, retail is dominated by the top 5 players which account for 63% of the market sha re. In contrast, Wal-Mart was only the thirteenth player in the market. The retail scene was su ch that they were all hard discounters who offered a range of 600-700 products with a large p roportion of them being own-brands that were at rock bottom prices contributing to low marg ins. (DOI, n.d.) PEST Analysis is a framework of macro-environmental factors used in the environmental sca nning component markets. It is a part of the external analysis when conducting a strategic ana lysis or doing market research, and gives an overview of the different macroenvironmental fa ctors that the company has to take into consideration for the market they are operating in or w ish to operate in. It is a useful strategic tool for understanding market growth or decline, busin ess position, potential and direction for operations. Political factors are the degree that the government intervenes in the economy. This can affec t the tax policies, labour laws and whether certain goods can be provided within the country. Economic factors have major impacts on how businesses operate and make decisions. For exa mple, interest rates affect a firm's cost of capital and therefore to what extent a business grow s and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy. Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safe ty. Trends in social factors affect the demand for a company's products and how that compan y operates. Technological factors include technological aspects such as R&D activity, automa tion, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Applying PEST Analysis on the failure of Wal-Mart in Germany will allow us to see how Pol itical, Economic, Social and Technological factors played an -important role in the withdrawa l of Wal-Mart from Germany in 2006. Lessons can be learnt from the failure Wal-Mart experi ences and indeed they did take heed of these lessons to expand successfully into other countri es such as Korea and Brazil.

During Wal-Marts time in Germany, they had failed to recognise the inherent political polici es that were in place. Stringent planning regimes and zoning regulations were erected by the government hindered entry via greenfield investments. This resulted in the entry via acquisiti ons where they purchased two retail chains. There were restrictions in adding new stores or to remodel existing stores to reflect the consistent look and layout of all Wal-Mart stores. There were dictated shopping hours for large retailers and antitrust and (un)fair trading regulations restricted price competition and certain forms of advertising or promotions. For example, Germany had strict planning and zoning regulations designed to protect traditio nal retailers. Companies were restricted from constructing stores with more than 800m2 in are as not designated for retailing. (Howe, 2003)This meant that large stores were restricted to to wn centres but approvals required anywhere from 1-4 years. This meant that Wal-Mart could not enter via a greenfield strategy where they could build their stores from scratch and model them in the manner that was similar to in America. Therefore Wal-Mart chose to purchase exi sting chains and retrofit them into the Wal-Mart way. This was particularly detrimental to Wa l-Mart as they were unable to recreate the Supercentres that they were known for in America. (Arndt, 2003) The concept of Supercentres was such that shoppers could buy everything from one location and the more time they spent within the premises, the more they would spend. Wal-Marts first entered the German market via the acquisition of Wertkauf. However as they sought to increase market share, they made the purchase of Spar who was then the weakest p layer in the German market. This contributed significantly to its lack of success. Spar had run down stores and were heterogeneous in size and format. It also had the industries lowest tur nover per sq. meter of floor area resulting in higher logistics costs and lower returns. (Arndt, 2003) Geographically, they were mainly in less well-off areas and this meant that purchasing power of shoppers in the area was limited. The requirement to enter via acquisition of two separate companies meant that Wal-Mart had to synergise the operations via first providing a single look and feel to the stores and to bring the two entities under as single corporate structure. Being unable to remodel meant that stores within Germany provided disparate shopping experiences to the customers and brand value was diminished as a result. More time and effort was required to merge the entities in a comp etitive market. It was further exacerbated by the different operating models the two companie s had where Wertkauf was a professionally run company with competitive locations and good profits of 3% of sales. However the integration with Spar was difficult as it was run via a diff erent culture. Wal-Marts business strategy of providing everyday low prices meant that sales volumes w ere required to make up for the thin margins. However having limited opening hours meant th at sales volumes were lower as there were less hours where shoppers could visit the stores. St ores were only allowed to be legally open for a maximum of 80 hours/week making them the shortest within Europe. Sunday and holiday openings are not permitted at all. (KPMG/EHI, 2 001) As a result the labour costs in relation to revenue was higher as labour costs could not be reco vered sufficiently since staff were only required to work less hours. For example, in 2003, the Store Closing Law limits store hours to a 6:30 pm closing on weeknights and 8 pm on Saturd ays. Stores could not open at all on Sundays with exceptions granted by state government onl

y if they provided essential functions: pharmaceutical drugs and tobacco. This was to protec t domestic retailers from larger competitors who could afford to keep their stores open longer with lower expenses. This was also reinforced by religious factions who supported the import ance of family time while the left side of the political spectrum believed that retailers workin g longer than other workers was inherently unfair. (Jui, 2011)This meant that employees in G ermany were paid on average 19% higher than similar employees in UK. Policies that limited the establishment of new hypermarts meant that Wal-Mart was unable to attain economies of scale to pass on the savings to customers and provide low prices. Competitors in Germany had a lower price to shoppers as they simplified their business mode l by minimizing cost at the expense of customer service. This was a typical trade off that shop pers were willing to accept. The act of minimizing customer service meant that less labour wa s required. This was something that Wal-Mart did not employ as a strategy as shown by their preference to hire greeters. This meant that Wal-Mart only had a margin of less than 1% com pared to their other stores such as those in UK which had 6-8% margins during a similar peri od. (Jui, 2011) The specific policy Section 20(4) of the Act Against Restraints of Competition (Gesetz geg en Wettbewerbsbeschrnkungen or GWB). This centrepiece of German antitrust legislation b ans all undertakings with superior market power from selling a range of goods not merely occasionally below its cost price, unless there is an objective justification for this, (Arndt, 20 03)meant that Wal-Mart was not able to use Loss Leaders as a retail strategy. Having Loss Le aders typically allowed retailers to attract new customers to their stores. Wal-Mart being the l atest player in the retail market would have greatly benefited from being able to attract new c ustomers to attain economies of scale as well as improve their branding of providing everyd ay low prices. Germany practises a unionised labour force. This meant that the unions and workers wielded great influence in terms of policies and the workplace. Wages were decided centrally by the u nion via a sector specific wage bargaining process. Wal-Mart failed to recognise this and resu lted in walk-outs by staff at 30 of their stores. This was both lost sales and extremely bad pub licity for a new entrant to the retail scene. When Wal-Marts sales performance was not ideal, they looked to shed their staff as well as c lose off unprofitable stores. However worker protection regulations meant that to lay off wor kers, there were procedures to follow as well as lay off fees that they had to pay to satisfy the regulations. This cut into their bottomline when they were already facing a unprofitable busin ess. They had also failed to provide their financial statements to the unions as unions used thi s as a key metric to determine any salary increases the workers were entitled to. Shoppers in Germany were typically not well informed of the offerings by retailers in their ar ea. Therefore they were not sensitive to the availability, price or quality of the products offere d. This meant that the location of Wal-Mart stores put them at a disadvantaged. From a economic standpoint, Wal- Mart never had the economies of scale to compete with th e incumbents. It required to scale up to 2.5 times of its revenue in Germany to exploit econo mies of scale in food retailing according to German retail experts. (Arndt, 2003)This also mea nt that it could never compete effectively with the other retailers to offer everyday low price s to consumers which was largely trumpeted as a key differentiator between Wal -Mart and it s competitors. This was further hampered by an economy that was largely stagnant. The avera

ge retail growth in the 1990s was 0.3%, which also reduced Wal-Marts ability to grow organ ically. German citizens, were distinctively in terms of their social habits compared to the American citizens that Wal-Mart executives were used to dealing with. They were especially price sensi tive, preferred to purchase their food in certain manners and viewed actions differently. For instance, Germans were willing to take extra effort to ensure that every item they bought were of the lowest price possible. This meant that Loss Leaders were not a effective strategy i n getting customers into the door as customers would only purchase the loss leaders from Wa l-Mart and no further items whilst going to competitors like Aldi and Metro to purchase furth er item that were cheaper. This actually meant that Wal-Mart was making losses on the items without gaining additional profits back through selling other items. Wal-Mart traditionally employed greeters at their stores to welcome customers, however this served to deter customers from shopping at their stores for two reasons. Traditionally German s were used to shopping in a self-service manner without any assistance therefore the greeters were actually viewed as people who were harassing them. When they realised that the greete rs were hired to assist them, this created the perception that excessive cost was added to their purchases as Wal-Mart were hiring people that the shoppers felt were unnecessary. Therefore trying to impose their culture on the German shoppers Germans like to see the advertised discount products upfront without having to ask the store a ssistant. This implies that the discount products must be placed at the eye level. Instead WalMart chose to use its US style merchandise display strategy where premium priced products a re kept at eye level and discount products are kept at higher shelf or in the bottom racks. This irritated the German shoppers. Wal-Mart also got its store inventory wrong, Wal-Mart stocke d its store with clothes, hardware, electronics and other non-food products were given much b igger floor space than food products, as a result more than 50% of the revenue was from nonfood products. But other German retailers stock more of food products. For example for Metr o, food products constitute more than 75% of the revenue. Germans prefer to bag groceries th emselves into reusable carriers, or at least to pay a small fee for the avoidable sin of needing a plastic bag. (scribed.com, n.d.) Part of the social shopping habits that Wal-Mart did not figure out was the way shoppers like d to purchase their groceries. For instance, Germans had been used to buying their meats fro m butchers instead of packaged meats. This would mean that as important staple for all shopp ers would not be purchased from Wal-Mart. Excess inventory would also be likely in this sce nario. Cashiers at Wal-Mart were required to smile at all shoppers. However, this did not fit into the social norms of German society as this was viewed as flirting by male shoppers. From the e mployees perspective, they were asked to do morning cheers which is not a culture that Ger man employees were used to. This would deter shoppers from returning and exacerbate shopp er volumes and economies of scale to provide everyday low prices. Germans did not like strangers to handle the food. However Wal-Marts insistence to adhere t o their American methods meant that cashiers were trained to assist shoppers to bag their gro ceries. This likely deterred shoppers from returning to make further purchases at their stores.

All the social factors that contributed to the failure of Wal-Mart in Germany can be attributed to the hiring of American management to oversee the operations in Germany. Integration of management and staff resulting from mergers are traditionally difficult due to the inherent dis trust between two formerly separate entities further compounded by differences in culture and language.The cultural differences between America and Germany were significant in this sit uation and failure to recognise the need to assimilate to the culture presented a huge obstacle t o Wal-Marts success. Change of management was regular during the initial years. Four CEOs were appointed durin g the first four years. The first CEO, Rob Tiarks was a US citizen and did not speak any Ger man. He also chose not to learn the language and as a result made English the company langu age for the management level. He also chose to ignore advices given by former Wertkauf exe cutives who were familiar with the market conditions. This resulted in three of them to quit w ithin six months of his appointment. The second CEO, Allan Leighton was an Englishman wh o also chose not to learn German and worked from his office in UK. (Arndt, 2003) In terms of technology, Wal-Mart did bring with it a sophisticated logistics system that requi red heavy information technology investments. (scribed.com, n.d.)This heavy investment incr eased costs to shoppers who were very price sensitive and probably deterred shoppers from re turning. On its own, this would have given it a leg up against its competitors. However this te chnology was also readily available to its competitors and one they replicated. This removed t he advantage that Wal-Mart had and probably strengthened the retail market technology with out benefiting Wal-Mart. In conclusion, using PEST analysis, it can be seen that the Political, Economic and Social fact ors were significant in Wal-Marts failure in Germany. They had failed to do sufficient resear ch before entering Germany which resulted in them entering via acquisitions and subsequentl y not gaining sufficient scale. Without a good understanding of the social environment in Ger many, they did not manage to win over both their employees whom interact directly with the customers as well as the customers who had a less than ideal perception of Wal-Mart as a reta il store of choice. Wal-Marts strategy to bring everyday low price to Germany was a sound one which given the shopping habits of Germans would have taken off. However each of the factors within PEST sought to go against them. Had Wal-Mart taken into consideration each of the factors and tailored their entry into the German market better, they would have achieve d greater success.

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