Emily Zhang

Professor Cattani
ISP Lisbon
February 1, 2017
Walmart in Germany Reaction Paper
Introduction:
Despite being the largest retailer in the world, Walmart has encountered its fair share of
problems during its international expansion. Of these cases, one of the most notable is their
operational expansion into Germany in the 1990s, which up until 2004 had yet to post profits.
This is largely because Walmart chose to adhere to its U.S. strategy, and failed to adapt to the
economic, social, cultural, political and legal environment that is unique to the retail sector in
Germany. This paper will use Porters Five Forces Framework to analyze and discuss the
German retail sector, and finally, attempt to draw a conclusion regarding the attractiveness of the
sector to potential entrants.
Intensity of Rivalry Amongst Established Firms:
There is intense rivalry amongst established firms within the German retail sector; this
conclusion is apparent after consideration of the competitive structure, industry demand, and
barriers to exit that exist amongst firms. First, the retail sectors competitive structure in
Germany is highly concentrated, as the top 10 retailers make up 30% of the entire market,
meaning that the industry is relatively competitive amongst retailers. Likewise, industry demand
is high as most consumer goods sold at stores like Walmart are highly commoditized. The costs
of exist are also relatively high due a high emotional attachment in the industry; Walmarts
largest competitors in Germany are all family owned and bound by familial obligation over stock
market pressures.
Risk of entry by Potential Competitors:
Barriers to entry are relatively high in Germany, meaning that the risk that new, smallfirm entrants pose to profits are relatively low. The main reason for this is because of the laws
that prevent any corporations from selling products for under the production costs in order to
prevent large corporations from threatening smaller ones by selling at a temporary loss to drive
out competition. There is an absolute cost advantage that is ingrained in German culture, and this
actually skews in favor of the smaller firms as they dont need to spend as much on large
operating costs and can pass those benefits along to consumers. Likewise, consumer switching
costs are extremely low in the German retail sector, as zoning laws require retailers to stay within
the urban areas, making them all easily accessible and concentrated in similar areas.
Bargaining Power of Buyers:

Buyers are considered powerful in Germany because the laws in Germany make the
companies relatively weak. Again, this is because companies are not allowed to price match or
sell for anything lower than their production costs, which places a lot of emphasis on who has the
lowest manufacturing price. Culturally speaking, German buyers also prefer lower costs over all,
which places more power on them, and switching costs are extremely low due to the
commoditized nature of consumer goods as well as the zoning laws.
Bargaining Power of Suppliers:
The bargaining power of suppliers in Germany relative to the retailers is high because of
the relationship driven nature of the environment. Walmart was unable to seal lower prices
relative to its competition because it lacked the reputation as well as the relationships that the
other retail players had.
Threat of Substitutes:
The threat of substitutes in the German retail sector is extremely high, as the products are
highly commoditized, and the competitors are located very close together due to zoning laws.
German customers can also easily find substitutes as prices cannot vary by that much due to the
strict pricing laws.
Conclusion:
Upon analysis under Porters Five Forces Framework, the German retail sector appears
relatively unattractive. Four out of the Five forces that impact profits and bargaining power are
prevalent in Germany due to the social, economic and legal environment. Furthermore, there are
other macroeconomic factors that do not fall under the Five Forces Framework but still have a
substantial impact on the overall attractiveness of the retail sector. Factors such as labor union
strength, political and religious lobbyists, and German cultural skepticism towards service based
differentiation in the retail industry simply further the unattractiveness of the industry.