Business Failures

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.

Table of Contents
• International Business Failures: Walmart in Germany
o Company Culture
o Legal Issues
o Sales Tactics
o Withdrawal
• Brands that Failed Internationally: Starbucks in Israel
o Coffee to go?
o Prices
o Taste and Quality
o Failed to Research the Market and Customer Preferences
o Local Partnership didn’t work
• Companies that failed internationally: AirBnB in China
o Brand localisation
o Cultural Differences
o Consumer journey
o Regulatory and Tech Challenges
 • International Case Studies of this kind can highlight some of
the most Frequent Mistakes in International Expansion

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).
Company Culture
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.

Legal Issues
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.

Sales Tactics
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.

Withdrawal
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.

Prices
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?

Brand localisation
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.

Airbnb was often praised for their localisation

strategy, but they ultimately couldn’t evolve
fast enough.

Ashley Dudarenok

Cultural Differences
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.

Another challenge for Airbnb in China was the

lacking liability framework in the country. In
fact, guests might take advantage of the fact
that Airbnb only requires them very basic
information and feel free to damage the house
without any further consequence. As a result,
hosts felt the need to raise the prices of their
properties to mitigate the potential risk. In fact,
although Airbnb has a Host Guarantee policy
providing a million-dollar property protection
for hosts, they will only compensate hosts when
 they can prove that guests are directly
responsible for the damages.
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.

Consumer journey
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.