Wal-Mart fails in Germany due to poor service mindset of its German employees

I admit, the headline is a little bold, but let me explain my hypothesis, which starts with poor service mindset in Germany, leads to poor service levels typically offered by German employees, and ends with foreign companies losing their service advantage in Germany. 

As discussed in this post, the poor service mindset among the German population impacts not only German companies, but also foreign companies operating in Germany and relying on German employees. Wal-Mart was mentioned there as an example of an US company that initially paid attention to good customer service, when it established presence in Germany. Over time, though, it lost that focus and let its German employees provide the poor customer service typical for Germany. 

Now that Wal-Mart is leaving Germany without making any profit after eight years, one may wonder how much of that failure is driven by the poor customer service provided by its German employees. When Wal-Mart entered Germany and took over stores from its German competitors in 1997 and 1998, it proclaimed that it will steal market share from established players through good service, friendly employees, and low prices.  

Initially this strategy was apparently well executed since customers were pleased with attractive prices and exceptional customer service. That service was even better than service offered by Wal-Mart in the US where Wal-Mart is notorious for the poorest customer service in comparison with other US retailers. Later though, Wal-Mart must have lost attention to execution of its strategy, since the service levels declined and customers were treated with the typical German inattentive customer service. 

Another potential explanation for Wal-Mart’s failure would be if German customers didn’t care about good customer service when it comes to grocery and department stores. If German customers wouldn’t pay much value to good service, then Wal-Mart’s strategy would have been simply the wrong one for the German market. This sounds doubtful though since there are more pricy grocery and department stores, which are successful, so it’s not only price that matters to German customers. 

Whether it was poor strategy execution or simply the wrong strategy, Wal-Mart ended up competing only on price. Here though it run into other discounters like Aldi, Lidl, or Plus, which have already a very strong position in the German market. And, competing only on price is difficult and usually not sustainable in almost every industry. Wal-Mart couldn’t benefit here especially from its usually efficient supply chain, since it didn’t have the buyer power in Germany as it has in the US.  

Finally, German shopping habits are different than what Wal-Mart is used to from the US. German customers are accustomed to shop in their neighborhood and without any additional benefits are not inclined to drive shopping at city outskirts where Wal-Mart stores were located. The German discounters, on the other hand, usually operate smaller stores located throughout many neighborhoods.

Wal-Mart’s failure in Germany should be a lesson for foreign companies operating in Germany and depending on customer service as their competitive advantage. That service is offered in Germany typically through German employees. Hence, companies need to understand the service mindset prevalent in Germany and proactively train and manage their employees if they want to deliver satisfactory customer service.

Implications for Germany-based companies

In a closed economy, the low customer service levels offered by many German companies may have been sufficient to satisfy the apparently low customer service levels expected by German consumers. In the global economy, however, German companies are competing with foreign companies in Germany and abroad. Foreign companies from service-minded societies like the US or Japan have a clear advantage to better satisfy customer needs and show German consumers what they are missing. 

The German economy has been lagging the economies of other developed nations for a while. Although there are several drivers of this situation, one needs to consider the – in a global comparison – poor service levels that are impacting the German economy. These poor service levels may be one of the reasons for the relatively low share of service jobs in comparison with the US (see charts below).

In the US, 85% of employees work in the service sector, in Germany only about 65%. In the US, the service sector has been the source of most new jobs as industries like health care, consulting, and food service have grown rapidly. In Germany, on the other hand, the slightly growing service sector has not been able to make up for the declining manufacturing jobs.  

According to a Deutsche Bank research, Germany’s GNP per capita has been declining and the decline is expected to continue since Germany missed to develop and follow a consequent growth strategy. Could there be a correlation between only slowly growing service sector and declining GNP per capita?

Is it German companies or companies in Germany?

In general, service levels offered by companies depend on the service mindset of their employees. As discussed in this post, German mentality leads to poor service mindset in the average German population. This would imply that companies with German employees offer poor service wherever they operate. However, there isn’t always such a clear cut. Service level depends also on the value that company’s management puts on customer satisfaction by providing for example appropriate training to employees or tying compensation to customer satisfaction. 

Let’s take Lufthansa as an example. The German airline employs mostly German employees and operates world wide. Since it competes with other airlines world wide, it cannot afford poor service levels. Hence, it offers now good service, even exceeding that of some US airlines. This wasn’t always the case but Lufthansa’s management must have realized that customer satisfaction is a profit driver and has significantly improved its customer service over the past ten or so years. 

Siemens Business Services (SBS), the former IT service unit of the German industry conglomerate Siemens, could be an example for German management not realizing the importance of customer satisfaction. According to Siemens, SBS has been struggling for years due to competitive and cost pressures. Could these competitive pressures come from SBS’ lower service levels in comparison with its global competitors? And are lower service levels also the reason for poor performance of other European IT service companies like T-Systems, Atos Origin, or Cap Gemini? Although the IT service market is growing, it is also becoming more global, exposing European companies to another service playing field. 

The poor service mindset among the German population impacts not only German companies, but also foreign companies operating in Germany and relying on German employees. Foreign companies establishing operations in Germany may initially pay attention to the service levels offered through their German employees. If not carefully managed, however, these service levels may morph to the typically poor service levels offered in Germany.  

Wal-Mart, the US retailer, is a good example. When the company opened its first stores in Germany, the sales clerks were providing service levels common in the US. For example, when asked where to find a product, they actually walked with the customer to the corresponding aisle, which is very typical for US retail stores. Now, years later, it’s the typical silent hand gesture “that way”.

As these examples show, the poor service mindset among the German population may lead to poor service levels offered by companies in Germany and may also impact service levels provided by German companies abroad. However, these situations can be avoided if management is serious about satisfying its customers, which naturally leads to satisfying company’s owners or shareholders.

More on profit drivers

How poorly understood the profit drivers are in Germany, and in Europe for that matter, is evident by the current discussion about the steel conglomerate Mittal acquiring Arcelor. Some people publicly insist that decisions like this are not to be made only by company owners or shareholders, who the company actually belongs to, but by all stakeholders including employees. The former French Prime Minister Michel Rocard goes even so far as to demand a change in the law to give employees a vote in these matters. 

Don’t these people understand the mechanisms of the market economy?  

First of all, there is the claim that Arcelor’s shareholders approved the acquisition based only on the short-term profit offered by Mittal. If that’s true and there are no long-term gains from this acquisition, the market will punish the company and its shareholders. Owners and shareholders need to consider short-term and long-term implications from such decisions, otherwise they may lose at the end. 

Second, some believe that the new Mittal will reduce the quality of its offerings. If Mittal does and quality is important to its customers, customers will switch to competitors and the company will lose over time. So here too, quality as a potential driver of customer satisfaction, which in turn is a driver of profits, needs to be addressed by a well-managed company to keep its owners or shareholders satisfied. 

Finally, the biggest complaint about this acquisition, like it’s the case with basically every merger or acquisition, is the impact on employees in terms of lower wages and reduced job security. This is probably the biggest misconception. Employees impact every aspect of a business and their job satisfaction is over long-term a driver of the bottom line. So, if Mittal’s acquisition of Arcelor will lead to lower job satisfaction, it will naturally then lead to reduced productivity, higher operating expenses, and higher employee turnover. These outcomes are not desired by any company since they lead to lower profits. Hence, management needs to keep employees satisfied in order to keep owners or shareholders satisfied. 

It’s of course typical for European politicians to demand even more laws protecting employees, but they clearly don’t understand profit drivers in a market economy. Unfortunately, this lack of knowledge is not common only to European politicians but also to some business owners and management, which leads to poor customer service.

Customer satisfaction drives profits

Most of the customer-facing employees don’t know that short-term and long-term profit of a company heavily depends on customer satisfaction. This is especially true in Germany.  

By not addressing customer satisfaction, company’s management doesn’t utilize the full financial potential of the company. The management may not provide the right incentives to its employees to foster customer satisfaction, like tying compensation to customer satisfaction. Or even worse, it doesn’t understand this dependency itself. So, if employees know about the relationship between customer satisfaction and profit, they may not care. 

But understanding profit drivers is not rocket science. Since the goal of every for-profit company is to make profit, as the name implies, every company should know its internal and external profit drivers and be able to control at least the internal ones. Since customers are those that through purchase of services and goods generate revenues for the company, making customer satisfied will drive revenues. This satisfaction doesn’t depend only on the services and goods sold to customers, but also on the overall experience they have when dealing with the company before, during, and after purchase. In the service industry it is especially this experience that drives customer satisfaction. 

Every company has processes in place for how to develop and deliver goods and services to customers. These internal processes are developed by company’s employees, as are the actual goods and services. While developing the goods and services and the processes behind them, employees need to keep customers in mind to ensure customer satisfaction. 

This concept of employees driving internal processes, these processes driving then customer satisfaction, and customer satisfaction driving at the end company’s profit is best captured by the balanced scorecard framework. The balanced scorecard framework has been developed in 1992 by two Harvard professors, Robert Kaplan and David Norton, and has been implemented in thousands of organizations worldwide. 

In addition to not realizing how customer satisfaction drives profits, most companies also don’t realize that poor service experienced by a customer doesn’t impact only the future life time business with that customer, but also may impact the business with other customers. A customer shares his or her service experience, especially the poor one, on average with seven other people within immediate circles of family, friends, and colleagues. Hence, a company not fixing a negative service experience is running the risk of losing life-time business with eight existing or potential customers. 

It is advisable for German companies to understand how customer satisfaction drives profit. And they should then pay attention to all drivers of customer satisfaction in order to fully utilize the financial potential of the company.