3 household names…3 US companies who failed in an overseas market for reasons that mostly could have been avoided with some research. So what are the mistakes that Walmart made in Germany, Starbucks in Israel and AirBnB in China? What can we learn from them?
Let’s take these international business failures chronologically and look at what happened as well as why things went wrong for the companies concerned. Realistically speaking all of these cases could have been successful with a little more preparation and less arrogance. Of course, there are no guarantees in life, but in these cases at least some of the mistakes could have been easily avoided, saving all of the companies a lot of money, time, energy and reputation. After all, they have all succeeded in other overseas markets and none of them are newbies in the world of expanding to new markets.
International Business Failures: Walmart in Germany
Back in 1988, Walmart became the largest retailer in the US and started thinking about expansion abroad. Over the years they can claim to have been successful in some markets, such as Mexico, Canada, China and the UK but Germany was the opposite story and has become the stuff of business school international case studies.
In the US, Walmart’s success formula based on
- a low price guarantee
- tight stock management
- effective logistics and distribution
Would this translate to Germany?
In 1997 Walmart bought the Wertkauf and Interspar stores in Germany, with a plan to gain traction in Europe’s largest retail market. However whilst the market might have been large, it was also saturated with strong local players and an annual growth rate of just 0.3%. Compared to other markets, Germany is highly regulated with opening hours being restricted and the total cost of employees higher than in other countries (+19% at that time vs the UK).
Walmart immediately introduced a number of aspects from their US operations:
- group stretching in a morning
- Walmart chants in the morning
- requirement for cashiers to smile all the time
- greeters (smiling!) at the entrance to stores
- an “ethics code” that obliged employees to report on other staff members if they didn’t comply with the rules, as well as forbidding relationships with other staff members
Although the idea was to increase motivation and loyalty to the company, group stretching and chanting seemed cult-like to many Germans. You really wouldn’t want to be next to me first thing if someone tried to make me do anything like that!
Many also felt that it was too strong a reminder of a period in history where many Germans went along with such activities, and felt reminded of the Nuremberg rallies.
As for smiling all the time, that just came across as weird and insincere. It’s not like Germans don’t smile, but when someone smiles at you ALL.THE.TIME it just feels fake.
Placing greeters at the entrances to stores felt creepy to many people as well as being a complete waste of time and money. Why do you need someone with a plastic smile to greet you cheerily when you go to do the “necessary evil” of your weekly shop?
Ethics code? Until now, I’ve not been able to find anyone who could tell me what was so ethical about it BUT it employed both communist methods (informing on colleagues to avoid punishment yourself) and was against German law (as a company you can’t regulate people’s private lives unless it is having a deliberate effect on the company’s reputation. So you can stop people running hate campaigns about the company on Facebook, but you can’t prevent Jane from accounts having an affair with the Head of Fresh Veg). In 2005 the court overturned this ethics code, but by then Walmart was far along the road of companies that failed internationally due to cultural differences.
It wasn’t just the ethics code that got Walmart into hot water though – there were a whole list of other legal issues as well. This in my book is completely unacceptable – I can fathom how a company can fail due to being new in a saturated market but becoming one of the most notorious international business failures due to not checking with local law??? And this for a US company who normally would be more concerned about getting sued for things!
Walmart apparently discussed at the US HQ that the German employees were all communists, however this truly says more about US labour laws than Germany. Most of the laws which Walmart fell foul of were either European laws, or ones which have at least a similar equivalent across many parts of the world. (And as an interesting aside, China – regarded as one of the few “communist” countries worldwide – is a major market for Walmart where the brand is well accepted. What does that say? 🤔).
So what were these “communist” ideas? Well…
- Walmart in many cases failed to pay the minimum wage
- Employees were forced to work too many hours (this is an EU regulation that limits worker exploitation)
- German requirements for paid holiday time are completely different to the US (5 weeks is very usual in Europe with many German companies offering 6)
- Walmart didn’t want to pay sick leave (legal requirement)
As you can imagine, the relationship between the labour unions and Walmart were pretty terrible, rather than the usual generally amicable cooperation that exists in Germany.
As if the above problems were not enough, the strong local competitors Aldi and Lidl were making life hard. The discount sector had around 40% market share at that time in Germany and prices were generally around 15% lower than the European average. (Food prices in retail are still relatively low in Germany due to intense competition and customer expectations).
Walmart’s answer was to sell at lower prices than the discounters to try and push them out and then to raise prices later. This however, fell foul of anti-dumping laws that forbid selling products below the purchasing price and the company was accused of predatory pricing.
Consumers also had higher expectations about quality than Walmart expected. In Germany it’s not simply enough to sell at the lowest price – the quality has to be at least reasonable too (this is something that Aldi & Lidl are famed for managing well)
On top of all that, German customers didn’t like the “pack everything in plastic bags” attitude or amount of non food items made of cheap Chinese plastic as it conflicted with their environmental principles.
All of the factors mentioned above combined to result in falling sales. Profit margins were just 1% (compared to 6-8% with Asda’s in the UK) and Walmart were unable to rise above the 3% market share mark. That in itself isn’t such a bad situation in Germany BUT the company’s expectations had been completely different.
Brands that Failed Internationally: Starbucks in Israel
In 2001 Starbucks entered the Israeli market, opening 6 stores in prime locations. Israel is a market that has close relationships with the US and many US brands are successful there. If you walk into a supermarket or around a shopping mall you will see one American brand after another. So how did Starbucks become one of my international business failures examples?
Coffee to go?
In the early 2000’s Israel already had a strong coffee culture of their own. However coffee to go wasn’t a part of that. Independent coffee shops were on every corner, especially in vibrant Tel Aviv, however they were a place for relaxing, for hanging out with friends and drinking a leisurely coffee.
What the American consumer saw as convenience wasn’t part of the Israeli culture with their more laid back eastern Mediterranean approach.
Anyone who has done business with Israelis will know that they are sensitive to prices – check out my review of Osnan Lautman’s book on Israeli Business Culture. Starbucks coffees were priced at 3-4 times a local brew though, which if you’ll pardon the pun, was a recipe for disaster. They were simply too expensive.
Taste and Quality
After convenience, the 2nd attribute that Starbucks strives for is quality. This can obviously be defined in different ways but for food and beverages one of the attributes of quality is certainly taste, which is a subjective factor. If we’re talking about the quality of the coffee beans (do they have pests inside, are they class A) then I’m sure that Starbucks reaches those standards.
One of the next parts of quality in coffee is the roasting as this is a major contributor to the taste, and as a US coffee grower I once met in Costa Rica said “it’s great that Americans drink Starbucks coffee as we can sell them what the rest of the world won’t drink”.
In order to keep things as polite as possible, let’s just say that Starbucks is closer to dishwater than a caffeine hit in the eyes of most Israelis, who prefer something darker and stronger. (The whole Eastern Mediterranean has centuries of tradition of drinking strong coffee).
Failed to Research the Market and Customer Preferences
This is one of the main points for companies that failed internationally due to cultural differences. I know that compared to many others around the world, Israel is a small market, however how can you think to enter a new country without researching how, why, when, where, what and with whom people consume your product? This is really the ABC of internationalisation.
For example, if you go to an independent coffee store in Israel, it’s usual that you can buy simple food there. So you can enjoy a full meal for a reasonable price and consume your coffee in a leisurely way with friends over say lunch or a breakfast.
The Starbucks’ culture of exotic drinks and seasonal promotions didn’t really catch on either. I mean it has to be hard to sell a pumpkin spice latte in a country without a noticeable autumn season.
Local Partnership didn’t work
To enter the Israeli market, Starbucks partnered with the Delek Group to found the “Shalom Coffee Company”. Things didn’t work out though and the relationship broke down, also in part because the Delek Group were unable to make money on the deal (- see my post about what distributors want from a supplier)
The two companies were unable to agree on how to develop the market.
Even though it was pointed out that Israeli taste in coffee is different, Starbucks were unwilling to adapt and within 2 years they left the market again and haven’t returned since.
At the time there were also rumours about pressure on the company from the Arab countries to not work in Israel, but this seems unrealistic when I look at how many US companies are working in both Israel and the Arab world.
Companies that failed internationally: AirBnB in China
This is the most recent of my international case studies, as the company will leave China at the end of July 2022 after 7 years on the market. The company will turn off its nearly 150,000 listings in the country on July 30th, but will still be accessible for Chinese travelling overseas, when they finally start travelling again. (If you compare that to the largest rival Tujia, they have 1.2 million listings). At least up until now they are the largest of the known international expansion failures examples 2022.
As with the other two cases, the reasons are multiple – it’s not down to a single factor. The official reason for leaving China is the fact that as the borders are still closed the pandemic is having a negative effect, however the domestic travel market in China is more than large enough to support a local operation so let’s look at the localisation issues behind the move. If the brand had succeeded with their localisation, surely they wouldn’t be dependent on outside tourists coming in?
Whilst if you look at AirBnB’s presence now on the market, they’ve done a pretty good job of localising for China it wasn’t like that right from the start. Over time, the user interface and search function was adapted to be more Chinese as well as linking to a local map solution rather than Google which doesn’t work in China.
In 2019 the name was changed to Aibiying – not sure why they didn’t have a Chinese name right from the start 🤷🏻♀️ but this never really resonated with consumers, as it didn’t have a deeper meaning & also wasn’t a “snappy title” so seemed like a name change just for the sake of ticking the box.
Whilst the appearance of the platform seemed quite localised, AirBnB fundamentally struggled with adapting to the needs and desires of Chinese consumers.
Many Chinese were initially wary of the idea of homestays. Most were not comfortable with the idea of “sharing their home with a stranger”. So, Airbnb had to first overcome this barrier and build trust with the consumers. A lot of people felt that hosting strangers was too risky, and to be honest most Chinese travelled on package trips in the past – the majority were not used to the DIY style of travel.
This cultural question of trust is also impacted by the fact that many of the properties used in China for homestays are investment properties, which are otherwise standing empty (see my point about sharing the home being uncomfortable).
That trust question has implications in many other details too. For instance if you stay in an AirBnB in Europe you probably take the rubbish out if necessary and clean up a bit in the kitchen. Chinese guests are not used to being expected to take care of themselves in that way.
Competitor Tujia got around this by firstly managing all of their properties themselves, and secondly by offering cleaning services as standard. Tujia aims to offer their guests the same standards of service that they could expect in a 5* hotel, which is a different expectation than the premise of AirBnB.
The typical way of building trust with consumers in China is to offer speedy customer support. Potential buyers expect to be able to instant chat with a real person 24/7 in order to find out additional details about the services on offer. AirBnB failed to offer this – contact with landlords was via the website/app and would be forwarded. Consumers complained of a lack of Chinese speaking customer support services. This made the whole process pretty clunky, especially when compared to Tujia who publish the phone numbers of landlords so that they can be contacted directly for swift replies.
As touched upon above, whilst AirBnB made retrospective efforts to improve the brand position in China, the consumer journey was simply not localised enough.
It wasn’t until 2018 that AirBnB integrated Alipay and WeChat pay into their app, resulting in 15% growth overnight. This lack of recognising HOW Chinese consumers purchase contributed to the poor results in China and is one of the frequent mistakes in international expansion.
Regulatory and Tech Challenges
One challenge that all foreign brands face in China is navigating the regulatory environment, and here it is critical to take advice. This was difficult for AirBnB to manage, also in the light of the tech crackdown last year, it wasn’t always clear what the outcome would be for the homestay industry. As so often in China with a new sector, the government didn’t heavily regulate in the beginning but left things open to see how they developed. Hard to judge as a foreigner…
One point which has often been quoted in western media since the announcement that they will leave the Chinese domestic market is the question of sharing data with the government about guests. I’ve not found anyone who could tell me whether something more than “usual” was transferred here, however ALL hotels, guesthouses and homestays have to register the details of their guests with the authorities. China isn’t the only country in the world with this requirement – it used to be common in many parts of eastern Europe too in the past.
International Case Studies of this kind can highlight some of the most Frequent Mistakes in International Expansion
To some extent, all of these examples come down to the summary “don’t assume things”.
Firstly, make sure you research the legal requirements in any market you want to enter – this is a basic must have to allow you to operate there.
Ask yourself, is your company culture suited to the country you intend to enter. In the case of Walmart, their company culture seems to have been so totally toxic wherever they were based that this question almost becomes irrelevant for international expansion – they needed to do some introspection also domestically.
Investigate what are the customer preferences surrounding branding, the customer journey, user experience etc. It’s not as simple as translating your product and changing two pictures – you need to really consider HOW your target clients consume products or services such as yours.
Doing your research up front can save you from many if not all of the disasters mentioned above, but of course things don’t always go according to plan. If you are involved in an international expansion project, it’s really critical to analyse constantly when things are going wrong so that you can adapt as soon as possible. Making one mistake will seldom cost you a market, failing to learn from that and change accordingly might however well do so.
These 3 international expansion failures are simply high profile examples amongst many. I could have also looked at Fosters (Australian beer) in Vietnam, Tesco (UK supermarket) in Japan, Barbie in China, Gerber (US baby food) in Ethiopia or many other examples. These all go to show that careful brand localisation to consumer tastes are one of the most important aspects of an international expansion project. Huge household names are not immune from making mistakes of this kind, but at least it gives the rest of us high profile international case studies to learn from!
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