Archive for July, 2006|Monthly archive page

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).

US employment by economic sector

German employment by economic sector

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.