The following article is from our September 2006 issue.

This Is Not America. Why Wal-Mart left Germany. By Harald Schultz

U.S. retail giant Wal-Mart failed to get a foothold on the German market - first and foremost because management didn't take into account German consumer habits.

German retailers could have been forgiven for panicking when Wal-Mart first arrived in Germany. They probably felt like ants about to be trodden on by an angry giant. But nine years on, the giant turned on its heel and disappeared. "TextilWirtschaft," Europe's leading trade publications for textiles and clothing, described the fiasco as "Wal-Mart's Waterloo" in a reference to Napoleon's bitter defeat against Prussia and Britain in 1815.

But what on earth made the giant capitulate? When Wal-Mart decided to expand in 1996, its managers saw Germany as a promising market. Europe's largest market is home to 82 million - far more than in England, France and Italy which each have a population of 60 million. Germany enjoys a healthy pro capita income, so consumer spending is robust. The country has good transport infrastructure, which is good when stocks need to be replenished. Given these excellent conditions, Wal-Mart must have thought success was guaranteed.

It wasn't to be. Its German venture ended disastrously, with the retreat costing the company $1 billion.

Just why did Wal-Mart Germany end so badly in Germany, just like before in South Korea? The answer is simple but banal, and can be encapsulated by a line once sung by David Bowie: "This is not America."

Management's mistake was to implement a successful U.S. business formula in Germany without paying any attention to local idiosyncrasies.

"The problem was the company's business philosophy, which had always worked so well," wrote Frankfurt's Börsenzeitung in what pretty much amounted to an obituary. "It's people-centered - but that doesn't actually work when the people aren't American."

The problems added up. The company gave the job of masterminding Wal-Mart Germany to an American who didn't speak a word of German. This should surely have been indispensable to finding out what the German salespersons would need to know about local shopping habits.

The second problem was that Wal-Mart initially bought up a chain of 21 stores, then another 74, which included sites previous owners had failed to make profitable.

The third problem was bad press. The media reported that shoppers were turned off by Wal-Mart staff hired to greet them at the door and bag their groceries. This sort of thing was and still is unusual practice in Germany, so it was done away with. The company also scrapped the staff warm-up sessions scheduled at the start of every day, on the grounds that German employees found them ridiculous.

The authorities also kept a close eye on Wal-Mart. Anti-trust lawyers banned its practice of luring consumers with price-dumping, while Germany's stringent laws governing opening hours meant stores couldn't stay open too long. German labor law prevented the easy-come, easy-go hiring and firing common in the U.S., and the unions and the public alike were outraged by what Germans saw as an absurd ban on flirting in the workplace. All in all, Wal-Mart operated what the newspaper Handelsblatt described as a "bizarre company culture."

Another fatal flaw was that Germany's retail market is already saturated with discounters such as Aldi and Lidl, meaning that any new arrival inevitably finds itself in the midst of a cutthroat price war. Germany has the cheapest groceries in Europe. Moreover, real incomes have barely grown in recent years, which has dampened consumer spending. Retailers are vying for customers by cutting back profit margins. In the foods sector, the yield returns in Germany are less than 2 percent, often even only at 1.5 percent. Against this backdrop, presenting German consumers with unfamiliar U.S. brands was doomed to failure.

With just 95 outlets, Wal-Mart also remained too small. Originally, it had wanted to build 50 superstores as quickly as possible, but while Germany has one-third of the population of the U.S., it doesn't have one-third of its surface area. It is only about as big as Oregon - and consequently, every square foot is either developed, or about to be. German planning law therefore has a lot of obstacles when someone wants to construct stores on the Wal-Mart scale. So instead of increasing its number of stores, Wal-Mart actually had to close a few down - some of which were taken over by Wal-Mart's rivals once its leases ran out.

But the full extent of Germany's strategic retaliation against Wal-Mart only became clear when the local competition - primarily the Metro Group - snatched a number of chains up for sale from under Wal-Mart's nose. The bottom line: the American company had to abandon its expansion plans.

Paradoxically, the U.S. giant ended up terminally dwarfed in Germany. Experts estimated that a turnover of ?8 billion ($10 billion) would have been needed to reduce each store's logistics costs to a sensible size, but Wal-Mart barely managed to scrape together a turnover of ?2 billion ($2.5 billion), a result expected to get even worse. One consequence was less competitive prices than those of their rivals.

These weren't management's only mistakes. Germany is a country that loves stability, even on the executive floor. Chaotic leadership and frequent personnel changes make a frivolous impression and suggest company problems. "American management methods are often primitive," said Aldi's former CEO Dieter Brandes in the weekly magazine Stern. "It's all about budgets, not customers. When the figures look bad, no one looks for the roots of the problem; they just replace the CEO."

And soon enough, Wal-Mart did indeed replace its CEO in Germany - with a Brit. Unfortunately, cultural differences between Britain and Germany are even greater than those between the U.S. and Germany. Based as he was in England, he too failed to grasp what makes German consumers tick, and after a few months at the helm, he too had to go. The German who took over had plenty of experience with kiosks and gas stations, but not with superstores.

It may be some comfort to Wal-Mart to know it's not the only foreign retail chain that has failed in Germany. A similar fate befell Intermarché, Castorama and Prénatal from France, Marks & Spencer from England, and Oviesse from Italy. Even the Metro Group, which bought all of Germany's 85 Wal-Marts, is unhappy with the Real chain which the stores will be merged with. Real also chalked up losses in 2005.

Wal-Mart's German failure could be summed up by a German proverb - translated, it means: "A nightmarish end is better than a nightmare that doesn't end."

- Harald Schultz is a senior editor at the Handelsblatt.