The Failure A Report On Walmart

Abstract: Wal-mart entered in Europe via Germany in 1997 through acquisition of Spar Handel and Wertkauf stores. Wal-mart changed all the stores of these companies into Wal-mart stores. Wal-mart hoped to replicate its US success in Europe using the same strengths of Everyday low prices(EDLP), efficient operations, strong organizational culture and good customer service. Lot of analysts believed that the domestic retail players would not be able to compete with the North American giant and that the domestic retail industry would suffer (Bergmann, 2000). However, this was not to happen. The company was not able to replicate its success in Europe. In fact, they had to exit Germany in 2006 and have not achieved leadership position in England.

This report studies the performance of Wal-mart in Germany. The reasons for bad performance are studied and the lessons learned are discussed.

Introduction – Walmart: Wal-Mart Stores, Inc., branded as Walmart, is an American multinational retail corporation that runs chains of large discount department stores and warehouse stores. The company is the world's third largest public corporation, according to the Fortune Global 500 list in 2012, the biggest private employer in the world with over two million employees, and is the largest retailer in the world. Walmart remains a family-owned business, as the company is controlled by the Walton family, who own a 48 percent stake in Walmart. It is also one of the world's most valuable companies. The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. It is headquartered in Bentonville, Arkansas. Walmart is also the largest grocery retailer in the United States. In 2009, it generated 51 percent of its US$258 billion sales in the U.S. from grocery business. It also owns and operates the Sam's Club retail warehouses in North America. By 1988, Wal-Mart was the most profitable retailer in the US, and by November 1990, it outsold K-mart. By 1991 it outsold Sears in retail, making it America's largest retailer, a distinction it still holds. Page | 1

Walmart has 8,500 stores in 15 countries, under 55 different names. The company operates under the Walmart name in the United States, including the 50 states and Puerto Rico. It operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price. It has wholly owned operations in Argentina, Brazil, and Canada. Walmart's investments outside North America have had mixed results: its operations in the United Kingdom, South America, and China are highly successful, whereas ventures in Germany and South Korea were unsuccessful.

Research Background In recent times, the multinationals have been on the offensive as the retail industry of the emerging markets has been growing in geometric progression. A couple of decades ago, the international sales of the world's top five retail chains accounted for less than 5% of their total turnover (Akehurst and Alexander, 1996). However, this trend is undergoing a dramatic change, as the multinationals are beginning to recognise the global appeal of their brand image, their vast and ever increasing product range, as well as their cuttingedge merchandising techniques. So here they are, beginning to exploit these advantages through international expansion. If the study of Anderson (2002) is anything to go by, the world’s stop ten retail chains have been observed to be growing faster internationally vis-a-vis their performance in their respective domestic markets, and most of them have been operating in no less than ten emerging overseas markets.

Wal-Mart is one of the multinational retail chains that have shown a significant growth in their overseas operations over the years. At a time when businesses the world over have been reeling under global economic meltdown, the Wal-Mart’s international sales was registering significant growth (Wal-Mart Annual Report, 2005; 2010). As a case in point, we single out their operations in Germany, Korea, and India to investigate and illustrate their penetration methods.

The concept and evolution of Global Retail Industry The concept of Global Retail Industry was born when retail giants of the developed nations decided to expand their operations into the markets of the developing countries (Burt 1993). The

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concept was first introduced by Hollander (1970) who defined it as 'initiative taken by companies to venture into international markets'. Globalisation of the retail industry is a recent development as compared to other industries (Da Rocha and Dib, 2002). According to Akehurst and Alexander (1996), only a few retail businesses managed to go international before 1970s, while most retailers by that time concentrated on expanding their market share in the local markets. It was only a decade later (1980s) that some European retailers like Auchan, Carrefour and Promodes (French hypermarkets) and Aldi, Lidl and Swartz (German food retailers) expanded their operations in other European countries. US retailer Wal-Mart and Staples, Home Depot were the pioneers who decided to going global by venture into the markets of the developing nations (Doole and Lowe, 2001). Over the years this trend has gained momentum and European retailers like Tengelmann (Germany), Ahold (Netherlands), and Delhaizae Le Lion (Belgium) have been generating more sales and profits from their foreign markets spanning US, Central Europe and Asia (Doole and Lowe, 2001). Metro, the German retail chain, is one such success story, having expanded their business into developing countries like India and Korea (BBC, 2007).

Problem U.S. retail giant Wal-Mart failed to get a foothold on the German market – Reasons : 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 Page | 3

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 Page | 4

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 Page | 5

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."

PEST Analysis This analysis would give a good overview of the external environment prevalent in Germany at the time when Wal-mart made an entry into the country: Political: The policies in Germany were not conducive to the entrance of big retailers in the country. The number of maximum hours allowed per week was amongst the lowest in the world. Also, there was a very stringent policy against price cut. Retailers were not allowed to sell goods Page | 6

below the cost price. It was also difficult to get a license to enter in the retail industry of the country. There were various regulations that rendered Wal-Mart’s resources of economies of scale and network control useless in Germany(Christopherson, 2007)

Economic: Germany is the biggest retail market in Europe and the GNP of the country in 2000 was 2 trillion Euros with the total population of 80 million people. Retail industry in Germany is very competitive and low margin industry. Wal-mart entered the country because of the big market, but during that time the industry in the country was saturated(Senge, 2004).

Social: People in Germany were very price conscious when it came to the retailing industry. Many more people considered themselves as price conscious rather than quality and service conscious. As a result, the retail industry in Germany was least profitable as compared to other industries in Germany as well as retail industry of other countries. Overall, the culture in Germany was very different than that in US.

Technological: The technology used by German retailers was among the best in the world. They used the available technology such as IT systems and RFID to improve the efficiency of their businesses. German firms had resources of highly skilled labor, technological logistics application and complex network coordination (Christopherson, 2007)

Retail industry: Porter’s Analysis Porter’s Analysis (Porter, 1985) will give us a good idea of the various factors at play in the retail industry in Germany.

Competitors: The retail industry in Germany was least profitable as compared to other industries in Germany as well as retail industry of other countries. The profits were less than one percent of sales for most of the retailers and very few were able to generate healthy returns on capital. Most of the retail operations were run by family owned businesses and the focus was not on shareholder returns. The market during early 2000 was consolidating at that point with Page | 7

percentage of revenues by top players in the industry increasing. The top 5 companies accounted for the market share of 63%.

Customer power: Customers were very price conscious and held high buying power over retailers since there was no cost of switch over and the product available was same at all the retail locations. Most of the customers were influenced by prices rather than quality and service.

Supplier power: Lot of suppliers worked due to relationship building with the relationship between suppliers and existing big players being very strong. Also, suppliers preferred retailers who would give them high volumes. Manufacturers enjoyed much higher power in Germany, as opposed to the US market where the power lie in the hands of the retailers (Christopherson, 2007)

Threat of substitutes: There was little threat of substitute for retailers. Though online retailing was increasing, it was very small in comparison to the physical retail shops.

Barriers to entry: It was difficult for a new entrant to enter in the German retail industry since the political climate and the policies were not encouraging in this regard. Also, supplier relationship and cultural integration proved to be big barriers in the industry.

Why Wal-mart entered Germany It is useful to understand the reasons behind Wal-mart’s decision to enter Germany. This would give us the parameters to judge how successful the company was based on these reasons:

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The retail market in United States was getting saturated without much growth. The industry has reached the mature cycle and Wal-mart had undertaken all the initiatives it could to increase its top line and bottom line. Having expanded in all the parts of US, the company had to look towards international expansion in order to maintain growth. Page | 8

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The population of US was not increasing much and hence there was no growth opportunity from that front as well.

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Entry barriers were not high in the retailing industry due to increasing globalization and some small players were trying to make an entry.

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The competition amongst retailers was intense in US. Competitors like K-mart were giving stiff competition to Wal-mart and market share was under pressure.

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Wal-mart wanted to leverage its successful strategy of everyday low pricing in other countries as well. The belief was that this strategy could be successfully replicated to foreign countries.

Entry Strategy of Wal-mart and Reasons for failure Wal-mart made an entry in Germany through two acquisitions. One of the acquisitions has been described as flawed and resulting in huge failures. Also, Wal-mart was unable to culturally integrate its US management team with German team on ground and this lead to huge friction. The company also did not always follow the law and received bad publicity due to this. Following section discusses these reasons in detail

Bad Acquisitions Strategy The second acquisition of Spar by Wal-mart was highly flawed and proper study and analysis was not done by Wal-mart before making the acquisition. The stores were located in poor locations and there was no uniformity in the operations. In a rush to expand, Wal-mart ended up paying much more than what Spar was worth for. The company wasn’t able to achieve the minimum sales in order to generate sustainable profits.

Failure with Cultural Integration Lack of cultural integration is one of the biggest reasons of failure of mergers and acquisitions and the same happened with Wal-mart in Germany. Many employees left Wal-mart after acquisition and there was mistrust between the new management and existing employees. Wal- mart forced the usage of English as the official language in the company and the new Page | 9

management made no efforts to connect with existing employees. Wal-Mart’s employees are unhappy about the low pay in the company and are not happy with the quality of products that they sell. Wal-mart was not able to lay down employees in Germany as easily as it did in US. There were stringent laws in this regard and the labor unions were very strong.

Failure of Everyday Low Prices Strategy The basis of Wal-mart’s success in most of the markets has been its strategy of everyday low prices where they undercut the competitors and gain market share. However, in Germany the price cut was matched by competitors and Wal-mart was unable to provide goods at cheaper price. Also, the goods made available were not at high discount and some newspapers and magazines exposed the low price promise as an empty one. Wal-Mart was unable to achieve cost leadership since it was unable to attain economies of scale and control over retail network (Christopherson, 2007)

Lack of Customer Satisfaction Wal-mart has enjoyed high customer satisfaction in US market, but was unable to replicate this in Germany. Wal-mart was unable to tweak its services according to the German preferences and ended up paying the price in form of dropping customer satisfaction.

Conclusion As a result of all the failures discussed in the report, Wal-mart exited from the German market in 2006. The retail industry in Germany was not attractive enough to enter and the acquisition made by Wal-mart was not based on good judgment. The macro environment as well as industry was not attractive. Also, Wal-mart was unable to come up with a proper positioning in Germany and the company was not able to culturally integrate the US management with German workers.

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The failure of Walmart in Germany and its future in India

Abstract : The report analyses the reasons of failure of Walmart in Germany and how will it cope up in India so that it won’t face such situation here. The report also presents us with an overview of the various strategies that it should adopt in India that would help it in its survival here . A questionnaire was prepared and people from different background were interviewed to put forward their views about Walmart and its fate in India. We predicted that Wal-Mart is more successful in India as compared to Germany and Korea, inflation period in India is boon for establishing its brand by proving goods at cheap price, joint-Venture is the best mode of entry into international economies.

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Introduction:

Social relations play a vital role in economic transactions. Acknowledging social interactions has become even more critical with current trends of globalization. Diverse groups are interacting more today than ever before, highlighting differences in social behaviors. It is no longer enough for corporate retailers to work solely on garnering customers within their own country. Rather, the world’s biggest firms have turned their focus to capturing international markets. The clash of cultures, languages, and habits that has now become the norm is also illustrative of potential problems when differences in background and contexts are not properly acknowledged by firms. International retail chains like Walmart hope to expand into emerging markets in developing countries like India, especially as the country’s middle class – and their levels of disposable income – continues to grow. As flows of information and people become increasingly networked, India is becoming increasingly westernized. Furthermore, despite high sunk costs involved in setting up foreign branches, the Walmarts of the world have never been more financially powerful. But here a contradiction arises. As of 2006, sales from Western retail corporations like Walmart made up only 4% of India’s total domestic market of $322 billion.

Scope and coverage of study : This paper is to explore the challenges that Wal-Mart may face as it expands into the Indian retail market. Wal-Mart's failures in Germany are analyzed to identify learnings that could be utilized in the Indian expansion.

Research methodology : This study has been done in two parts. In first part secondary data has been used from different studies, research papers, journals and websites and the second part consists of the experience survey of 50 consumers from organised and unorganized sector in the National Capital Region of Delhi as per details mentioned below:(i) Sampling Unit : Consumers from different age groups, gender, locations, income levels and educational backgrounds. Page | 12

(ii) Sampling Method : Convenience Sampling. (iii) Method of data collection : Personal interview with respondents. (iv) Type of Questionnaire : Structured questionnaire (vi) Type of questions: Open ended, close ended and multiple choice questions.

Questionnaire:

Q1. Why do you think Wal-Mart wants to enter into India ? a) Due to large customer base. b) India is in fast growing economy phase in the world. c) Opening of FDI in Multi Brand Retail sector. d) To expand their presence outside USA and Europe. A) a-15% , b-40% , b-40% , d-5% Q2.What are the challenges faced by Wal-Mart while entering in India ? a) Poor Infrastructure b) Unstable Political Environment c) Unfriendly Regulatory Framework and Policies d) Excessive Bureaucracy e) Lack of support from Government f) Supply Chain Bottleneck g) Hostile Response by many traders and similar organization A) b-20% , c- 30% , f-50% Q3. Since most of the cities have Sky Rocket Real Estate prices which place Wal-Mart can set up its large scale format. A)

Well considering that, in India, most of cities have sky rocket real estate prices, the only place where Wal-mart can set up such large scale formats is out of city center.

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Q4. What is your opinion about Wal-Mart Success/Failure in India? A)

Indian consumers mindset has taken a great shift. In present scenario, it is difficult to say

that WALMART will fail as WALMART is a huge brand and has great marketing strategy and we all know that everything depends on marketing and branding. Q5.What are the possibilities for Wal-Mart sales if open in outskirts of cities? A)

Nowadays people are travelling outside city to Dhabas for evening out. The same people

will venture into Wal-mart. By the way Wal-mart will not only have provisions. They will have restaurants coming nearby, may be theaters coming nearby. Those who do not own a car will have so many taxiwallas and who knows even city busses will ply there soon.Also 1.5 lakh sqft in total land is not so huge that it is unimaginable. It is just more than 3 acres. Q6. What will be its impact on the Kiranawalas? A)

I think it is a wishful thinking. Even now if you observe out of the retail sector of 400+

billion market, organized retail garners only 6%. It means 94% market is with Kirana. With multimational retail, the percentage will go a little lower from 94 to lets say 85%. This is becasue Kirana is spread in every nook and corner of India while organised retail is only in cities and towns. But people still shop at both kirana and branded retail. Same will happen with Walmart. No big difference. Q7.Will the consumers be benefitted ? A) People will see economics and decide. If you shop at kirana for 1000 bucks and he delivers the stuff home free and if you shop at Wal-mart the same stuff at 900 bucks and spend 100 for transport, people will go for Wal-mart because of the whole experience of travelling, window shopping, wide spaced goods, nicely dressed sales girls, use of credit cards will make the Walmart overshadow kirana. Q8. What are the reasons you feel for its success in India ? A) I feel it might succeed. The reasons are: Page | 14

1. Indians always look 4 lower prices. no one can provide better than them 2. they can squeeze suppliers better than anyone else 3. They can outsell most in market by selling at a loss 4. They will have covert and overt support of high n mighty in india. Q9. What barriers to entry did Wal-mart encounters in India ? The dormancy of the government to change regulations on the foreign direct investment (FDI) for retail companies has created a large barrier to entry for companies that want to involve themselves in this industry (. While the government has been relatively progressive in reducing regulations for single-brand retailers, this is not the case for multi-brand retailers who are not permitted to partake in FDI in India. The government is fearful that multi-brand retailers will take away business from the traditional unorganized form of retailing in India that employs approximately 33 million people .

The other choice for foreign retailers that want to move into India is to set up a cash and carry wholesale distribution system, which is permitted to have 100% foreign ownership. A wholesale distribution system is only regulated to sell to other retailers and not to any final customers. In addition to the regulatory provisions on FDI, India’s rate for import tariffs is set quite high at 36.8% for several retail products . This makes exporting an unattractive option for entry into the Indian retail sector. Q10. How is Wal-Mart in India different from Wal-Mart in other countries in case of its logistics? 

A critical lack of proper storage facilities, refrigerated trucks and adequate highways.

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Middlemen, tiny farming plots, and bad road conditions aren’t unique to India.

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State laws (there are 28 states) that are different, and which mandate that farmers must take their harvest to government-run wholesale markets and generally can’t sell directly to retailers. Food goes on circuitous journeys through multiple government markets and middlemen before reaching consumers.

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This level of bureaucracy alone represents a substantial burden for Walmart or any other big retailer. Logistics infrastructure is one of the most challenging issues, particularly for retailers who are expanding into BRIC countries such as India. This is certainly the case illustrated by Walmart’s exploits in India, as a world-class supply chain confronts the realities of roads and transport conditions in India.

Discussion and Analysis: Walmart’s presence in India today cannot be assessed only by contemporary or economic factors. When using the narrow lens of economic performance via the enforcement of formal rules, it appears as if the U.S. retail giant has run into and will continue to run into very few obstacles on its way to setting up shop in the South Asian country – which is why the contradiction behind the retail giant’s struggles in India continues to be a puzzle. India is an example of a setting where informal constraints are not merely extensions of formal rules. In fact, they have indirectly shaped legislation. It is critical to understand how tacit norms have achieved this – not by brute force but rather through an organic emergence of traditions that have affixed to the very structure of markets and policy-making. But perhaps the winning strategy for Walmart and other foreign retail chains already exists, and has been implemented. Consider, Big Bazaar, a domestic hypermarket retail chain founded in Mumbai in 2001. Big Bazaar has 214 stores scattered across 50 different Indian cities, and in 2011 its revenues were more than 6000 crores – approximately US$1.1 billion. Sometimes it is easy to brush aside contextual differences and rely on the idea of “the global.” After all, technological and political infrastructures have made it so easy for global flows of goods, people, and ideas; surely economies must be able to function adeptly in the same transnational way. Perhaps surprisingly, however, the advent of globalization has also made cultural differences that much more glaring in matters of trade. The obstinacy of social traditions, embedded into institutional frameworks and networks of individuals, continues to play a central role in shaping the way that exchange occurs. Despite their vast resources and systems of coordination, foreign corporations will not be able to simply steamroll over embedded constraints when entering new marketplaces.

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Research Limitations and scope of research : One of the major limitations of this research is that the scope of this research is limited up to India only as the situation of conducting research varies with respect to country. Again one of the limitations of this research is that it uses only the secondary data for analyzing the failure of Walmart in Germany. Further scope of this research may include interviews with Wal-Mart’s senior management to gain insight about

the company’s move into retail

internationalization. Obviously, the opportunities were limited and difficult to come by. Another limitation of this research was that an extensive survey with more retail firms including Wal-Mart, for more accurate and conclusive results, called for more time and money, and was abandoned for obvious reasons.

Conclusion: The key findings of the study are that Wal-Mart faces many ownership as well as locational disadvantages while expanding in India. These significant challenges need to be well-understood and suitably addressed for success in the Indian market.

Reference:

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