colossal failure

Colossal failure

Why Wal-Mart Did Not discount shop in

Arkansas to one
$62.7 billion and operating profits at
$3.3 billion, these strategies gave the

Succeed in South Korea

of the world’s company excellent market penetration
most powerful and effectively positioned them for
and successful future growth. With more than 500,000
By Franco Gandolfi, Mindy Braun, Phil Nanney & Ki-Jun Yoon corporations, associates in its international markets
there were two alone, Wal-Mart sees its rapid expansion
occurrences in throughout North America, Latin America,
No matter the controversy that has 2006 that deeply impacted Wal-Mart’s Asia, and Europe as a solid foundation
surrounded Wal-Mart Stores Inc., the unrelenting quest to expand globally with many promising areas for further
retail giant remains a tremendous success – Wal-Mart was forced to withdraw growth. While store development and
story. It is the largest private employer international operations in both Germany in-country expansion are significant, it is
in the world and with sales revenues and South Korea. While the pull-out from not the only measurement of Wal-Mart’s
surpassing $350 billion in 2007. Wal-Wart Germany was highly publicized, the South stunning achievement.
is America’s largest retailer and boasts Korean withdrawal or failure received
an estimated 20 percent market share of almost no media attention in the United Wal-Mart International also has an ability
America’s retail grocery and consumables States. to transport and transfer the company’s
markets. As of September 2007, Wal- unique culture and effective retailing
Mart was represented through more Wal-Mart’s global expansion is the result concepts to each new market. Wal-Mart
than 2,700 wholly-owned operations and of green-field investments, acquisitions of International claims that it makes a
joint ventures in 14 countries outside the existing stores, and joint-ventures. With concerted effort to embrace and adapt to
US. Despite Wal-Mart’s unprecedented impressive financial results during the local cultures and become deeply involved
success, from its humble beginnings as a 2006 fiscal year with end sales reaching in the local community. Associates
© 2008 School of Global Leadership & Entrepreneurship 23 April 2008
respond to local customer needs, Wal-Mart International 2007*
merchandise preferences, and local
suppliers. By serving each new market Argentina El Salvador Mexico
in the same way, Wal-Mart International
has realized considerable efficiencies and Brazil Guatemala Nicaragua
synergies.
Canada Honduras Puerto Rico
Wal-Mart in South Korea
China India United Kingdom
In August 1998, Wal-Mart acquired
four stores and six undeveloped sites in Costa Rica Japan
South Korea. At the time, the units were Source: Wal-Mart Stores, Inc. - *Represents more than 500,000 associates
operated as Makro stores, a chain of
Netherlands-based membership clubs.
Three of them were located in the capital a subsequent press conference in Seoul, food rather than dry products and the

city of Seoul and one in Taejon. Each it was revealed that the company had type of clothing that Wal-Mart sells. The
store was a single level unit with more operating losses of nearly 9.9 billion won South Korean culture is also very tied into
than 100,000 square foot space. Since ($10 million) in 2005. its markets; they are one of the largest
Makro had only been operating in South countries that are deeply involved in local
Korea for two years, the stores were On May 22, 2006, Wal-Mart, the world’s markets.
fairly new. largest retailer, added their name to
a list of multinational firms (Nokia, Some individuals commented that the
Wal-Mart’s international division Senior Nestlé, Google) that failed to adjust to location of Wal-Mart was poor and
VP and COO, Carlos Perez, was also part the taste of South Korean consumers. miscalculated. A South Korean professor
of Makro’s entry into South Korea when Wal-Mart sold its 16 stores to Shinsegae Byung-Chul Shin commented, “The most
he was executive VP of Makro. At the for 825 billion won ($882 million), which important mistake of Wal-Mart South
time, South Korea’s economy was on a constituted a considerable loss. Wal- Korea was its location.”
rebound and its currency had declined Mart was the second Western retailer to
sharply in 1997 along with all other Asian retreat from South Korea in less than a Most Wal-Mart outlets in South Korea
countries. After a new president took month. were placed outside instead of in
office in 1998, the currency recovered the cities. South Koreans expect easy
much of its value in the wake of Asia’s France’s Carrefour, the world’s second accessibility to shopping facilities within
financial crisis. The new government largest retailer behind Wal-Mart, had the larger cities without the need to
pledged to let market forces, rather sold its 32 South Korean outlets to local travel. Also, South Korean consumers
than the government itself, dictate the retailer E-Land on April 28, 2006 for shop more frequently than most
process of reconstruction. $1.85 billion (1.75 trillion won) – also at a Americans do. They may not purchase
significant loss. As an alternative strategy, many things at once, but they will usually
Wal-Mart believed that the long-term Wal-Mart focused on those foreign get at least one item. Some individuals
potential for South Korea’s operations markets that were most profitable for felt that Wal-Mart should have been
to contribute to the sales of Wal-Mart’s the firm and its stakeholders and its located in the center of the cities where
international division was considerable. focus turned back to Latin America, a consumers felt more comfortable with
While the geographical size of South booming economic zone. their shopping needs.
Korea is comparable to the size of
Florida, the population is three times as South Korean Consumer Preferences South Koreans do not distinguish between
large. At the time, there were 135 Wal- discounts and normal prices. Thus, they
Mart stores and 33 Sam’s Club stores Most individuals believe that Wal-Mart may not see a compelling reason to shop
in Florida. There was an underlying failed to understand South Korean’s at Wal-Mart. Gen Kanai, a South Korean
expectation that the successful business consumer preferences. Wal-Mart had marketing professional observed, “Wal-
model in Florida could be replicated in relied on its proven business model and Mart put off South Korean consumers by
South Korea. its strategy in offering low prices for sticking to Western marketing strategies
products. However, low prices alone that concentrated on dry goods, from
However, prior to Wal-Mart’s withdrawal, were insufficient to make a successful electronics to clothing, while their local
Wal-Mart was ranked in the mere business case in South Korea. South rivals focuses on food and beverages,
bottom five major discount stores in all Koreans have different consumer the segment that specialists say attract
of South Korea. According to Wal-Mart’s preferences than Americans do; they South Koreans to hypermarkets. South
spokesperson, Wal-Mart South Korea are not necessarily interested in the Koreans really like fresh vegetables and
had sales of about 750 billion won ($787 same products. For instance, South beverages.”
million) in 2005, when in fact, at Koreans like fresh vegetables and fresh

Regent Global Business Review 24 www.regent.edu/rgbr

South Koreans are also visually-oriented firm, it is subject to relentless market, E-Mart because of the localized feel.
customers. They tend to purchase environmental, and business pressures
products not just because of the product and continually exposed to localized Moving Forward from Failure
itself, but also because of its appearance cultural expectations. The retailer learned
or the service the customer receives in that local customization, flexibility, and What lessons can be learned? The
the store. “In fact, some South Korean adaptation are essential ingredients in most important aspect for firms going
ladies do not like the warehouse-like the successful pursuit of international global is that they must know what the
atmosphere of Wal-Mart, which the business operations. Consequently, Wal- local consumers really want, desire,
American consumers seem not to mind Mart’s view on its own failure was that and need. American commentator,
since the products are still cheap. They South Koreans simply preferred their Ray Bracy explains that Wal-Mart was
prefer the department store-like, neat, own domestic shopping centers. A similar unable to connect with South Korean
clean, and sophisticated atmosphere. situation occurred in Germany where Wal- consumers because of bad strategy and
If you go to E-mart which is the biggest Mart withdrew its 85 stores. overlooked “adapting its business model
South Korean supermarket, you never to the complexities of foreign markets.”
think of it as a discount market,” said Hye- An External Perspective on Wal-Mart’s Others, such as Young-Gu Ham believe
Won Jang, of the Korea Times. Failure that Wal-Mart’s lesson in South Korea
is salvageable, “If they change their
These and other characteristics seem Unsurprisingly, various constituencies strategies and make an effort to satisfy
subtle and intricate to the foreign have speculated about Wal-Mart’s failure local customers, Wal-Mart will definitely
observer, yet are obvious, even standard in South Korea. While not widely exposed succeed anywhere in the world.”
to local marketers. As a result, local in the U.S. media, international business
perspective among Koreans is that Wal- analysts had no shortage of perspective, As firms expand internationally the
Mart’s failure in South Korea was primarily “Wal-Mart is a typical example of a virtues of flexibility and adaptability
due to its inability to understand the global giant who has failed to localize its become of primary significance. However,
shopping preferences of local consumers operations in South Korea,” said Na Hong these areas of strengths are by design,
and to adjust its business model to the Seok, an analyst at Good Morning Shinhan rather than by accident. They need to be
prevailing domestic culture. Securities in Seoul. incorporated into the strategic thinking of
firms intending to go global. Said best by
Wal-Mart’s View on its Economic Byung-Chul Shin, “Firms need to focus on
Failure the differences between countries; Wal-
Mart will be a good example for other
Wal-Mart is a corporation unaccustomed firms wanting to go global. And, with the
to failure. In contrast, Wal-Mart is used exception of core values he concludes, “it
to success, and not just any success, is essential for companies to change their
but success on a colossal scale. When strategies… to succeed in international
financial failure struck at Wal-Mart, there markets.”
were many stunned constituencies. Mike
Duke, Vice Chairman of Wal-Mart Stores, Wal-Mart International Executives at the New York Stock
Inc. oversees international operations. Exchange. Courtesy of Wal-Mart Stores, Inc. Dr. Franco Gandolfi serves as the MBA
His perspective was that in the existing program director and associate professor of
environment at that time “it would be South Koreans strongly believe that human resources management (HRM) in the
difficult for us to reach the scale we Wal-Mart brought over its Western sales School of Global Leadership & Entrepreneur-
desired.” tactics and company culture. South ship at Regent University. He holds degrees in
Korean consumers are generally not Commerce and Adult Education from the Uni-
versity of Sydney and doctoral qualifications in
Wal-Mart also believed the pursuit of its interested in shopping in a store that has
Business Administration from Southern Cross
Western market strategies that mainly distinctly American flavor and style. In University, Australia. Dr. Gandolfi consults with
focused on dry goods, electronics, and fact, South Korean consumers expect to international corporations and is also an ac-
clothing hurt them while in South Korea. see local products presented in a localized complished researcher with published articles
For example, E-Mart used techniques, fashion; this is probably the main reason in numerous international journals. His recent
such as megaphones and hand clapping why South Koreans did their shopping at book, Corporate Downsizing Demystified: A
along with fancy displays, while Wal-Mart E-Mart rather than Wal-Mart. Even when Scholarly Analysis of a Business Phenomenon
sold products out of boxes. Wal-Mart Wal-Mart first arrived in South Korea it published by ICFAI University Press (2006) has
designed its South Korean stores based was not in a position to capture greater received great acclaim. Dr. Gandolfi can be
reached at [email protected].
on US customer preferences, but different market share nor to force competitors to
cultures have different idiosyncrasies. sell its products at lower prices. Wal-Mart
could not offer what localized stores, such Mindy Braun, Phil Nanney & Ki-Jun Yoon are
Wal-Mart has come to realize that as E-Mart had. Thus, many consumers MBA students at Cedarville University in Ohio.
even though it is a very large, powerful stated that they preferred shopping at

© 2008 School of Global Leadership & Entrepreneurship 25 April 2008

Notes: (Continued from p. 25)
1. Global expansion strategies are discussed in: Jang, H. (2006). Is globalization succumbing to globalization? Retrieved from http://
times.hankoki.com/1page/opinion/200607/kt2006071818021854070.htm
2. Wal-Mart International financial analysis found in: AFX News Limited. (2006, May 22). Wal-Mart exits South Korea with $886M sale
to Shinsegae. AFX News Limited ; Gerrit, W. (2006, July 29). Why Wal-Mart decided to pack. Financial Times; Olsen, K. (2006, May
22). Wal-Mart pulls out of South Korea, sells 16 stores. USA Today; and Troy, M. (1998). Wal-Mart enters South Korea on the ground
floor. Discount Store News, 37, 2-3.
3. Background on Shinsegae department stores referenced in Choe, S.H. (2006, May 23). Wal-Mart selling stores and leaving South
Korea, The New York Times; Hyong-ki, P. (2006, May 22). Shinsegae to take over Wal-Mart South Korea, The South Korea Times; and
Murdoch, L. (2006, May 22). Proof that Wal-Mart's success or failure is determined by its customers.
4. Analysis of South Korean consumer preferences referenced from: Gen, K. (2006, May 24). Wal-Mart leaves South Korea, New York
Times, 2; Jang, H. (2006, July 18). Is globalization succumbing to globalization?; and Shin, B. (2006, June 26). Why Wal-Mart failed.
Retrieved from: from http://blog.naver.com/widtjs54/120025868601.
5. Analysis on Wal-Mart’s strategy provided from: Kottolli, A. (2006, August 15). Trans-cultural business failure: Wal-Mart exits

Germany. Retreived from: http://arunkottolli.blogspot.com/2006/08/trans-cultural-business-failure-wal.html; Murdoch, L. (2006,

May 22). Proof that Wal-Mart's success or failure is determined by its customers; and Shin, B. (2006, June 26). Why Wal-Mart failed.
Retrieved from: from http://blog.naver.com/widtjs54/120025868601.

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