To American eyes, the new ethics manual is standard stuff. But when Wal-Mart Stores Inc. (WMT) distributed the newly translated code to German employees a few weeks ago, it caused a furor. They read a caution against supervisor-employee relationships as a puritanical ban on interoffice romance, while a call to report improper behavior was taken as an invitation to rat on co-workers. "They have to communicate better," says Ulrich Dalibor, an official at the ver.di service-workers union, which represents German employees of the Bentonville (Arkansas)-based retailer.
No kidding. Seemingly surprised Wal-Mart officials said they have nothing against romance -- plenty of Wal-Mart co-workers have married, the company notes. And reporting lawbreaking is just good citizenship, it said. But to no avail.
The ethics-code flap, which has prompted a flurry of negative headlines in the local press, is another sign that Wal-Mart doesn't quite get the $370 billion German retail market. Since entering the country in late 1997, Wal-Mart has captured just 2% of German food sales, or $3.2 billion annually, estimates Columbus (Ohio)-based market watcher Retail Forward Inc. "They are really just a secondary player here," says Sirko Siemssen, a retail specialist at Mercer Management Consulting (MMC) in Munich.
Wal-Mart a secondary player? To Americans accustomed to the chain's relentlessly successful expansion, that's hard to believe. But in Germany the store count has slipped from 95 Supercenters in 2002 to 91, a fifth the number of rival Kaufland. Wal-Mart has recently made headway in upgrading store interiors and paring losses once estimated in the hundreds of millions of dollars. The German operations are closer to being profitable after achieving positive cash flow in 2004, according to Wal-Mart. "We are pushing ahead in a turmoil-shaken market where overall consumer spending is on the decline," Kay Hafner, president and managing director of Wal-Mart Germany, says in an e-mail. But the company is still a long way from reaching the critical mass it needs to be significantly profitable in Germany, analysts say. (Wal-Mart does not break out financial performance by country).
The chain to beat is Aldi, which features a limited selection of high-quality but very inexpensive products. It boasts a 19% share of the market through its network of some 4,000 stores, which are much smaller than Wal-Mart's. Even when Wal-Mart can undercut Aldi on price, the differences are often too slight to motivate consumers to travel the extra distance to a Supercenter, analysts say. Both Wal-Mart and Aldi recently ran specials on kids' inline skates, for example, but Aldi's were more than $6 cheaper. "In the U.S., Wal-Mart has the image of being the price leader, but Aldi owns that territory in Germany," says Wolfgang Twardawa, director of consumer research at Nuremberg-based market researcher GfK.
No doubt, Wal-Mart's mind-boggling annual turnover of $285 billion gives it a scale advantage on globally sourced products such as Chinese-made toys and clothing. But that purchasing clout does not extend to regional brands of bratwurst and beer. "Food is primarily local, and even in nonfood the assortment is different," says Andreas W. Bauer, a partner at Roland Berger Strategy Consultants in Munich. Wal-Mart's German selection is dominated by European brands, from Fischer bicycles to Vernel fabric softener.
The American company has been showing more savvy about the local market since installing a German chief. Under Hafner, it caters to local tastes better -- for example, recently offering a special on fresh carp, an Easter specialty, for $7.54 per kilo. It's also introducing private labels such as Cosies baby products and Equate cosmetics. Company officials say the plan is to concentrate on improving distribution efficiency and building relationships with local suppliers, then to consider expanding.
But the ethics-code fiasco shows that Wal-Mart is still prone to do things the Wal-Mart way without enough consideration to local customs. Rivals continue to chuckle about the customer reaction when, initially, Wal-Mart offered services such as grocery bagging. It turned out that Germans didn't want strangers handling their groceries. And when clerks followed orders to smile at shoppers, male customers took it as a come-on. Also, German companies are used to dealing with workers' councils, which are easy to organize under German law. Some even say the co-determination system improves communication with employees. That's likely to be a tough sell in Bentonville, though. Indeed, Wal-Mart clashes regularly with the ver.di union, which says it has organized every Supercenter in Germany. According to the union, Wal-Mart repeatedly ignores German co-determination rules, which give employees a say in corporate decisions that affect working conditions. The union also complains that Wal-Mart has not kept it adequately informed about store closings. Company officials say they comply with labor laws.
What Wal-Mart really needs is more stores so that it can advertise more efficiently and exert more purchasing power. Yet building new Supercenters, which in Germany average 12,960 square meters, is a laborious process because of restrictive building codes and a dearth of locations. Buying a competitor would build critical mass fast, but there's no sign of that yet. Wal-Mart watchers don't expect the company to leave the country, but unless it can figure out the Germans, it won't be a local success story, either.
By Jack Ewing in Frankfurt