Spoil the Ship for a Hap’orth of Tar
What Wal-Mart has taught us about expansion into Europe
The U.S. is the world’s largest overseas investor. A recent study by the United Nations indicates that U.S. firms are the largest foreign direct investors in the world and own as much abroad as the British and Germans combined, the next largest foreign direct investors. Europe accounts for over half of all direct investment from the U.S. valued in 2010 at the $2 trillion mark. With such staggering sums in mind, it is vital that American companies get it right time after time. I have worked in corporate relocation for over 20 years and have seen first hand, how specialist professional assistance greatly increases the success of overseas expansion. Relocation companies are at the forefront of this specialist knowledge and are one major ingredient in the recipe for success. In this article I will look at how direct investment in terms of corporate expansion in the retail sector has been handled by U.S. firms coming into Europe, and what factors limit and promote success for companies opening up in Europe.
Corporations, no matter how large, are run by people. It is not the corporation per se that will expand overseas, it the people who work for it who will form the vanguard of the new enterprise. The process of being relocated to a new country ranks right up there with divorce and redundancy as a life stress. The Holmes and Rahe social readjustment scale maps out those issues that can have a serious impact on normal emotional functioning and the components of an international relocation rank among the highest on the scale when combined. It’s easy to forget that in any business expansion into a new territory, the people who will carry out the work are the absolute key to the success or failure of the project. Corporate expansions into new markets rely on happy and settled managers and families for their success and this is where outsourcing to the professionals is key.
The biggest failure rate for international assignments is from which country to which other? I have asked this question all over the world as part of an intercultural training session my organization runs and mostly people figure that the more extreme the move, the less likely it is to succeed. Examples such as U.S. to China, or Sweden to Qatar are given, with the intelligent assumption that the more extreme the cultures are, the more challenges the expat will face. But in fact the highest rate for assignment failures is for moves between the U.S.A and the U.K., and the reason for 60% of assignment failures is attributable to an inability for the individual or family to assimilate into the host culture. So, the culture shock of coming to Europe and transferring from a U.S. lifestyle to a European one, involves not just a dramatic change in comfort and status, but also in cultural reference. There is an expectation for American citizens of familiarity with Europe, as we have a long shared history and many common societal references such as similar political systems. But scratch just a little deeper and the commonality ends. European social democracies work with an entirely different mindset to the American self-determinist model. On a recent visit to New England I had a very interesting discussion about access to healthcare, which in Europe is seen as almost an inalienable human right, but which in the U.S. is perceived as the result of hard work and taking a stake within society as a functioning economic citizen. These differences in attitude are not necessarily expected prior to a move to Europe and only increase a sense of difference that had not been perceived in advance. If we are talking about a move from Europe or the U.S. to the middle-east, we are already aware of the vast difference between the cultural norms and therefore don’t face such a unexpected reality check. So the more prepared the expat and family are, the higher the rate of success for their assignment and therefore for the whole project itself.
One of the most striking examples of corporate expansion failure in the retail sector in recent years was Wal-Mart’s move into Germany. Even by American standards, Wal-Mart must be considered as a success story without precedent. Forty years after its start in 1962, when Sam Walton and his brother Bud set up their first convenience store in tiny Rogers, Arkansas, continuous double-digit growth rates have transformed it into the world’s largest retailer. Wal-Mart recently overtook General Motors and Exxon to become the world’s largest corporation in terms of revenue. After establishing itself as the dominant player in its home market, Wal-Mart decided, in the late 1980s, to embark upon an ambitious overseas expansion plan to sustain its brisk corporate growth. The goal was to have its overseas operations contribute a third of its total profits by 2005. In 1991, the first store outside the U.S.A, a SAM’s Club membership warehouse, was opened in Polenco, a suburb of Mexico City. Continuing this aggressive expansion model, Wal-Mart set its sights on Europe and a strategy was drawn up to enter the highly competitive German retail market. In the U.K. Wal-Mart has succeeded in becoming the second largest supermarket chain with its takeover of ASDA, a far less risky investment strategy than the doomed project drawn up for Germany.
The corporate culture of Wal-Mart is interesting. The U.S. success formula was based on low prices due to extensive use of advanced IT in logistics and inventory management coupled with a highly motivated workforce, influenced to some degree by a quasi-religious attitude common in many U.S. companies. Some of the statistics surrounding the company are quite astonishing. Wal-Mart is the world’s largest private sector employer with 1.4 million staff. The Retail Link system, controlling inventory is the biggest civilian database in the world. The company operate the world’s largest private satellite communication system, and their turnover is three times higher than the world’s second largest retailer, Carrefour. So how could they get expansion into one European market so wrong?
Firstly the entry-by-acquisition strategy they adopted was fundamentally flawed. Of the two existing retailers they bought, Spar and Wertkauf, Spar was considered a very weak player in Germany and perceived as very low quality. Its stores were small and in less well off inner city areas. The corporate cultures and marketing strategies just were not compatible. Coupled with this, Wal-Mart paid far too much for the ailing Spar group and could not recoup the loss.
Secondly and most crucially from a relocation perspective, the U.S. management clashed cultures with the existing German teams. Post merger integration is tricky at the best of times, but when this is taking place across two very different cultures, the importance of intercultural competence in the management team is key to success. Wal-Mart appointed four different CEO’s during the first four years of German operations. The first, Rob Tiarks, had supervised 200 U.S. mega stores from the Arkansas HQ. He had never been expatriated before, spoke no German and therefore decreed that the official language of Wal-Mart Germany would be English. His team ignored legal frameworks that governed retail operations and as a result the top three senior executives from Wertkauf resigned. After Wal-Mart bought ASDA in the U.K. in 1998, Tiarks was replaced by British Allan Leighton, who ran the German group from the HQ of ASDA in Leeds. Six months later he was replaced by Volker Barth, the first German to be in the CEO role and one of the remaining top executives at Wertkauf. By this time, faith in the top management team had evaporated and Volker failed to integrate Spar into the operation.
The third reason why Wal-Mart failed was a lack of cultural sensitivity to the retail operations as a whole. U.S. and German consumers are very different and even the most basic of intercultural training programmes could at least have highlighted this fact prior to the expensive takeovers. U.S. consumers are used to a very high level of interactivity with staff in a retail environment. High and low context cultures, were first identified by Geert Hofstede in the 1970’s. Consumers in a high context culture do not need the same levels of assistance and information given to them as consumers in a low context culture. The U.S. is a low context culture and Germany, a high context one. The result was that the meet-and-greet philosophy so popular in Wal-Mart U.S.A, was seen as intrusive and rude to the German customers, who did not want or like Wal-Mart greeters welcoming them to the store. They perceived it as patronizing. One retail success in Germany is the U.S. chain Eddie Bauer, specialists in outdoor clothing. Walk into Eddie Bauer in the U.S. and a staff member will immediately ask if you need help. Walk into Eddie Bauer in Berlin and the staff remain at arms length until you ask for help. This is the German way and the management team at Eddie Bauer recognized this and incorporated it into their expansion planning.
It may seem counter-intuitive to look at failure as a way to promote success, but the lessons learned from the Wal-Mart expansion give very clear indicators. The retail sector in Europe is dominated by home-grown brands, but there are marked U.S. success stories. Gap has been a huge player in the retail market since the 1980’s, but interestingly the group has not chosen to replicate this success with it’s two other key brands, Old Navy and Banana Republic. However this is about to change as the first Banana Republic is about to open in France. The first branch in the U.K. opened with great success in 2008. The high end clothing retailer Abercrombie and Fitch opened in London in 2010 to queues around the block. The U.K. is very often the first destination for U.S. brands as we share a cultural similarity for how we like to shop. The same meet and greet attitude of stores such as Abercombie and Fitch and it’s sister brand, Hollister may not translate to Germany or Scandinavia but hopefully the lessons learned by Wal-Mart will form part of the expansion feasibility studies for other major brands. Abercrombie are about to launch in Madrid, Dusseldorf and Brussels and as long as the brand manages to keep the exclusivity that makes teens willing to pay €100 for a sweatshirt, the importance of cultural integration may be small in comparison to Wal-Mart.
The auto-industry in the U.S. has suffered terrible losses since 2008 and overseas expansion is vital to the success of manufacturers such as GM, who are investing €9 billion in updating plants producing the Opel and Vauxhall brands to strengthen European sales. GM is a good example of a company who fully understand the repercussions of relocating operations overseas and developed a huge company in its own right, delivering relocation services initially to GM employees being expatriated and then to the wider corporate world. GMAC became one of the largest relocation management companies in the world and now operates independently as Brookfield Mobility. This strategy has enabled GM to move seamlessly into Europe with newer brands such as Dodge and Chevrolet now taking a sizeable chunk of the market.
If things do start to fail on a management level as they did with Wal-Marts disasterous CEO appointments, there is help available from the experts. Many relocation providers also offer intercultural coaching programmes for senior executives joining an overseas team. ICUnetAG based in Berlin but operating all over Germany have a specialist team of intercultural leadership coaches who could potentially have identified issues and assisted the three companies to integrate. Kerstin Groenlund, a relocation professional with 20 years experience of assisting companies moving into Germany, knows how far coaching can go at improving success;
“Coaches with experience of working across borders in specific cultures can really help to assimilate teams. By addressing central questions with the individual manager such as, how they can find a leadership style that will be effective in gaining the trust of the team, what they need to know about the corporate and the wider culture in which they are working and the self examination of their own cultural background and how this is perceived by the team. Using this level of understanding it is then possible to pinpoint which behaviour needs to be adapted and how best the manager can change his management style.”
Mike Amos is the CEO of Empathica who provide customer feedback research to retailers and who recently drew up a 10 point formula for success in international expansion.
1. Do some research first
Money can be wasted if you plunge into a new market without researching its potential first. Identify whether there’s a local appetite for your products or services by attending trade shows, researching local competitors and identifying any local trade associations that can assist you.
2. Consider cultural differences
When expanding into Europe, many U.S. companies choose the U.K. as their starting point. But while we share a common language, both cultures tend to have different business styles. In the U.S., management tend to be open to ideas being pitched by vendors, whereas in the U.K., access to decision makers is more restricted, making the sales cycle considerably longer. However, once contact has been migrated up to senior levels, U.K. businesses tend to stay loyal to suppliers.
3. Take advantage of government support and resources
Government assistance to business expansion comes in many shapes and sizes and it’s important to check out what’s available, whether it be at a regional level, or sector-related.
4. Keep one eye on the money
Make sure you raise the necessary capital to support your growth. As bank loans become more difficult to secure, businesses need to investigate a variety of funding options. Also, be aware of how currency fluctuations can affect your business costs.
5. Build a relationship
Going it alone can be a lonely journey, so consider partnering with an established local business to help gain a foothold in the market. This will cut the costs of reaching the market and save a lot of time in getting started.
6. Understand the legal system
Whether it’s employment law, contract law or commercial law, it is necessary to make sure you are appropriately knowledgeable to deliver on the business you are contracting in the country.
7. Get to grips with employment practices
Standard employment practice varies widely from country to country and it’s important employers understand local requirements, from holiday allocation through to maternity and now paternity provision.
8. Consider office location
You need to be in the right place to access the right resources for your business to flourish. Being in the middle of a country does not necessarily mean you’re at the centre of the action. Take advice, even if this comes at a premium.
9. Be an innovator
While planning and strategy are critical, it’s a fast-changing world and businesses need to stay ahead of the curve. The dynamics that can make your business irrelevant come around more quickly than ever.
10. Don’t underestimate the cost
All of the above factors and associated costs must be carefully considered before a final decision to expand is made. Entrepreneurs are known for taking risks, but they like to be better prepared than their less successful, cautious counterparts.
U.S. companies coming into Europe face challenges that they may not be aware of. Working with specialists who provide advice, management consultancy and individual support for the family and manager in transition is vital to success – look at Wal-Mart, and then look at GM and decide which approach you would take. There are multiple factors in the success of U.S. companies moving into Europe and before Wal-Mart many believed that product strength was enough. However, the challenges thrown up by cultural assimilation for both the individual and the corporate body cannot be underestimated anymore.
This article first appeared in British American Trade and Investment Magazine
Dominic Tidey is the C.O.O.for EuRA, the European Relocation Association, who have 520 member companies in 95 countries offering professional relocation support to corporate clients.