Mighty Wal-Mart admits defeat in Germany

Wal-Mart, the world's largest retailer, admitted its one-size-fits-all business model had failed in Germany as it announced its withdrawal from the country at a cost of $1bn (£540m).

The company has been forced into a firesale of its 85 loss-making German superstores, selling them to its rival Metro at significantly less than the value of the assets.

The humiliating retreat means that Wal-Mart's sole remaining European outpost is in the UK, where it owns Asda and where it has also been struggling to compete with domestic-owned rivals.

It will also serve as yet another warning to ambitious retail executives - not least Sir Terry Leahy at Tesco - that dominance in one market is not always easy to replicate overseas.

Wal-Mart's business model, which has been increasingly criticised even in the US, involves driving down the prices of groceries and other general merchandise through putting pressure on suppliers and keeping out unions.

But in Germany, where domestic "value retailers" already dominate the grocery market, it found customers were turned off by the early designs of its stores, by a too-narrow range of produce, and by the famous "greeters", who welcome shoppers to the store and are instructed to smile when within a certain distance of a customer. It also became embroiled in labour disputes that led to strikes.

Robert Buchanan, a retail analyst at the US brokerage AG Edwards, said he was pleased Wal-Mart had decided to cut its losses. "They sent a lot of expats over who didn't know the German market, so it makes sense to focus on countries where they have had more success," he said.

Wal-Mart bought into Germany eight years ago, but its vice-chairman, Michael Duke, said the German market was already highly competitive and Wal-Mart had proved unable to generate the economies of scale it needed to drive prices below those of competitors. The company also blamed high unemployment and weak consumer spending in Germany for making the market even harder to crack.

"As we focus our efforts on where we can have the greatest impact on our growth and return on investment strategies, it has become increasingly clear that in Germany's business environment it would be difficult for us to obtain the scale and results we desire," Mr Duke said.

Although the terms of the sale to Metro were not disclosed, analysts said the scale of the write-offs indicated that Wal-Mart had sold the business at a knock-down price.

The retreat from Germany is Wal-Mart's second international capitulation this year, after it sold its South Korean stores in May. There is speculation it may also sell out of Argentina.

The company has 2,700 stores in 14 countries outside the US, representing 40 per cent of the group's total stores but only 20 per cent of revenues. Lee Scott, the chief executive, has promised expansion abroad as the company reaches saturation in the US.

A spokeswoman reaffirmed Wal-Mart's commitment to Asda, saying the business had clawed back some market share in recent months. It has managed to hold off J Sainsbury, which came within a whisker of regaining the number two spot earlier this year. However,Asda, which has missed sales and profit targets in the past year, has not lived up to Wal-Mart's hopes. The US group's dream of mounting a challenge to Tesco's market leadership petered out when it was barred from bidding for Safeway in 2003 by the competition authorities.

Ben Miller, the senior international business analyst at IGD, the industry think-tank, said: "Asda may benefit from the knowledge and experience of some key personnel from Wal-Mart Germany, such as its English chief executive David Wild."

Mr Wild recently came close to taking the helm at Wm Morrison but lost out to Heineken's Marc Bolland.