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No-frills Germans repel Wal-Mart

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Thursday, Aug 3, 2006

Recently Wal-Mart announced it was retreating from the German market and would sell all its stores there to a German competitor, the Metro Group (proprietors of European hypermarkets Real and Extra). This could be celebrated as a proof of the resilience of global diversity, as Reason editor Kerry Howley suggests. And for those in America who would like to see Wal-Mart’s influence recede in their own country, perhaps there are lessons to be drawn from this, though Wal-Mart’s scale and its already established discount-dictating power over producers for the American market make American defeat unlikely—in fact WSJ online’s “MarketBeat” cites financial analysts who think Wal-Mart didn’t aim high enough: “However, its ventures in China and Japan haven’t been as successful. Fast-growing India is another option, if restrictions on foreign investment there are eased. A.G. Edwards analyst Robert Buchanan said Wal-Mart will fare best if it focuses on markets where it has the potential to open at least 100 stores. “Just as the legendary Moby Dick had no business swallowing minnows, we believe Wal-Mart has no business operating 16 stores in South Korea and 85 money-losing stores in Germany,’’ he wrote in a note, adding that Wal-Mart should also get rid of its 11 stores in Argentina.”


Defenders of Wal-Mart like to point out that its succesful not because of some nefarious conspiracy but because Americans like to shop there, and the company’s experience in Germany may lend some credence to this idea. The story usually told about Wal-Mart is that it succeeded in America by appealing to lower-class customers’ wallets, offering deep discounts on virtually everything. If this were so, you might expect the company to succeed in Germany, which, as this NY Times piece mentions, is home to consumers who are “one of the most parsimonious and price-conscious in Europe.” But Wal-Mart failed in Germany in part because they could not discount enough to compete with the so-called hard discounters, epitomized by Aldi, which has recently begun to appear in America. For Americans, Aldi can be extremely disconcerting for three reasons—its stock is restricted to far fewer items than you’d expect in such a store, customer service is virtually non-existent, and virtually all of its products are unbranded. Germans were thrown by the inverse of these qualities at Wal-Mart: According to the NY Times article, “The company initially installed American managers, who made some well-intentioned cultural gaffes, like offering to bag groceries for customers (Germans prefer to bag their own groceries) or instructing clerks to smile at customers (Germans, used to brusque service, were put off).” But how “well-intentioned” are these gaffes? Even if you put aside the cultural insensitivity, you still have to wonder. The intention is to make money, a neutral intention at best. (If you see profit seeking as the baseline definition of rationality, than it is simply beyond evaluation.) German customers likely see these service wrinkles for what they are, extra expenses eventually passed through to them that also connote a fundamental distrust of the consumer, a belief that the conusmer won’t know what he wants without salesperson intrusion. As I’ve argued before customer service demeans both clerk and customer, it’s a disguised form of petty surveillence.

Germans also reject the convenience of one-stop shopping, thereby nullifying the loss-leader strategy typical of American grocery retailers. The Wall Street Journal reports that Germans “are willing to buy laundry detergent at one store and then go to another to get a better price on paper towels. That behavior is called basket splitting.” You can quibble over whether this is an efficient use of time, going from store to store to round up necessaries, but one thing such a default shopping mentality may ensure is that you don’t waste time buying things that aren’t necessary. Deliberately hewing to an approach that makes bargain hunting to be so ruthless as to be inconvenient is that it keeps you from buying on impulse—the whimsical purchase being one of the most illusory pleasures promoted in America (an escapist thrill with no lasting satisfaction supplied and lasting consequences potentially for one’s credit).


But what I found most interesting is Germans’ relative lack of interest in branded goods: The Wall Street Journal notes that “Metro’s acquisition of Wal-Mart’s German stores has some retail analysts questioning Mr. Körber’s logic. “It is in no way guaranteed that this will result in a vibrant hypermarket chain,” says James Bacos, director of the retail and consumer-goods practice at Mercer Management Consulting in Munich, Germany. Mr. Bacos and others say Real must define a pricing strategy against Germany’s so-called hard discount chains, stores that sell mostly private-label goods that cost less than brands and account for roughly 40% of the country’s food sales. Like other hypermarkets, Real has had to lower prices of many basic goods to match those of hard discounters like Aldi Einkaufs GmbH or Lidl GmbH. But Real, like Wal-Mart, had higher operating costs than those no-frills chains. So Real partly offset its lost margins with higher prices on branded products, a strategy that backfired because it led many shoppers to think of Real as expensive. Real also cut prices more aggressively at some times than at other times, which further blurred its image in the minds of its shoppers.” So in other words, retailers that rely on the mark-ups on branded goods struggle in Germany, where the consumers care more about price and trust their own judgment as to a product’s quality.


All of these things probably boil down to convenience—branded goods, one-stop shopping and customer service all involve a trade-off where the customer trusts in the retailer in exchange for the ability to be more lazy. Wal-Mart has managed to capitalize on these trends toward convenience the most, accelerating them with the momentum of its own success and increasing monopsonistic reach. American consumers would need to suddenly turn away from brands and convenience if they wanted to stop the big-boxification of society, a prospect which, with youth allegedly embracing branding as synonymous with personal style, seems increasingly unlikely. I’ll venture a gross overgeneralization in hopes that it might make a point with a kernal of truth in it: German consumer behavior manifests one ideology of dignity, rooted in self-reliance; American consumer behavior exemplifies another, rooted in belonging to logo-laden cliques. Which side are you on?


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