EXPM511-18GM (HAM) - Global Business

Group Report on IKEA

Group 3 Members

Ao Dong - 1297734
Liuxuan Li - 1327626
Mercedes Isasmendi - 1354305
Shanza Evanson - 1117345
Shiv Arpit Shukla - 1365256
Pooja Gonjari - 1354468
Xiaojuan Yang – 1346924

Words- 1,996 (excluding tables/charts)

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Table of Contents
Introduction ............................................................................................................................................ 3
Background and Operations ................................................................................................................... 3
Competitors ........................................................................................................................................ 5
Key Markets and First Market Entry ....................................................................................................... 5
First Market: Norway .......................................................................................................................... 7
China: a successful case for IKEA ............................................................................................................ 7
Risks .................................................................................................................................................... 8
Future Market: New Zealand .................................................................................................................. 9
Opportunities ...................................................................................................................................... 9
Risks .................................................................................................................................................... 9
Conclusion ............................................................................................................................................. 10

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Introduction (Ao Dong)

IKEA is a Swedish-founded multinational group that designs and sells ready-to-

assemble furniture, kitchen appliances and home accessories, among other useful goods and
occasionally home services. IKEA has been the world’s largest furniture retailer since 2008.
Since its inception, IKEA positioned itself as a home furnishing supplier, which aims to meet
many different consumer needs, tastes, dreams and financial resources; while at the same
time, hoping to improve the home condition and create a better daily life. In targeting this
market, IKEA’s products are marketed as ‘low price, exquisite and durable’ household goods.
Because of its high quality and low price, new style, good service, and other characteristics, it
is welcomed by the majority of low-income families. The purpose of this report is to identify
IKEA’s home country market, key markets, and potential future market. The operations and
risks involved in doing business in these markets will be examined. In addition, the
attractiveness of these markets will be evaluated according to the analysis of the market
potential.

Background and Operations (Shiv)

IKEA, was founded in 1943 by Ingvar Kamprad and was virtually unknown outside
of Scandinavia 25 years ago. The company was established to serve price-conscious
neighbours in the southern Swedish province of Smaland (IKEA, 2018a). IKEA operates in
50 countries and is a global destination store for home furnishings, ready to assemble
furniture, home accessories and kitchenware. It is the world’s largest furniture retailer with
422 stores. The largest market for the company is Germany with 44 stores, followed by the
United States with 37 and France with 26 (IKEA, 2018). IKEA is a private enterprise and
most of its operations, management, design and manufacture of furniture is run by a trust,
INGKA Holding, headquartered in Delft, Holland. While most of the designs of IKEA
products are made in Sweden, manufacturing has been outsourced to China and other Asian
countries (Loeb, 2012).

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Source: Statista, 2017

Suppliers, including its own IKEA industry units, manufacture products and either send them
directly to the store for sale, or onto a distribution centre. IKEA have 1,220 suppliers in 55
countries: China, France, Hungary, Lithuania, Poland, Portugal, Russia, Slovakia, Sweden
and the US. The greatest number are based in China (20%), Poland (18%), Italy (8%),
Germany (6%) and Sweden (5%) (IKEA Facts & Figures, 2018).

Region No. Store Distribution No. Customer No. Industry

Centre Distribution centre Production Unit

Europe 16 18 34

North 8 8 1
America

Russia 1 0 6

Asia 5 0 2

Australia 1 0 0

Source: IKEA yearly summary FY17.

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Competitors

Zara Home, founded in 2003, is part of the Spanish Inditex group and focuses on
selling a variety of homewares. It has approximately 408 stores in 44 countries (Inditex - Zara
Home, 2018).
Walmart is headquartered in San Francisco and has over 11,200 stores in 27 countries.
Furniture is one of the many products sold by Walmart and includes office, lounge, kitchen
and children’s furniture (Walmart Location Facts, 2018).
Amazon’s extensive range of goods makes it a key competitor of IKEA. Amazon
Home offers a variety of indoor and outdoor furniture at low prices and all with the
convenience of online purchasing (Amazon, 2018).

Key Markets and First Market Entry (Pooja)

IKEA is a global company with operations all over the world. Germany, United
States, France, United Kingdom, and China represent its five key markets regarding sales
volume and revenue (IKEA, 2018b).

Source: IKEA Yearly Summary, 2017

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 (Mercedes)
Key
Risks Opportunities
Market
 Shortage of skilled labour force  Low corruption country
 Aging population -Ranked as the 12th less corrupted country in the
-Perceive the products as low quality (Reuters, world (Transparency International, 2018)
GERMANY

2016)  Open investment framework

 Migrations -There are opportunities to invest in any desired
-Increasing cross cultural risks industry
 Terrorism  Stable and resilient economy
 Attractive to new competitors -Potential economic growth of aprox 1,5% for 2019
 Political uncertainty (Global Edge, 2018)
-Potential collapse of negotiations to form a  Increasing housing sector
coalition between conservatives, liberals  Aging population
and greens. Calling for new elections is an -It is a new market target for the company (Reuters,
option. 2016)
 Strategically located/Well connected with
Eastern Europe
-3 international ports: Hamburg, Bremerhaven and
Kiel

 Highly competitive market  Potential US tax reform

-Strong players such as AMAZON & -Simplifying the US tax system to encourage
WALMART investments (PWC, 2018)
-Emerging competitors such as ZARA Home  Low regulatory barriers (Hogan Lovells, 2018)
& H&M Home  Transparent and well developed legal system
USA

 Potential new protectionist policies (Hogan Lovells, 2018)

 Cyber attacks, natural disasters
 Uncertainties on International Trade
Agreements
-United States has withdrawn from the Trans-
Pacific Partnership (TPP) and is seeking a
renegotiation of the North American Free
Trade Agreement (NAFTA) (World
Economic Forum, 2018).
 Private labels increasing retail value  Rebounding of housing, construction and real
share (Euromonitor, 2018) estate (Euromonitor, 2018)
FRANCE

 Maisons Du Mond, another big  Steinhoff, IKEA´s main competitor in troubles

competitor increasing presence due to for accounting irregularities.(Euromonitor,
new market strategy and potential 2018)
acquisition of Casa Or Fly  New tax policies targeting business to
 Structural unemployment (Foreign and encourage investments (Foreign and
Commonwealth Office, 2018) Commonwealth Office, 2018)
 High unemployment rate: 9,5%  Potential relocation to France due to BREXIT
 French business culture (TMF Group, 2018)
-Formality and language knowledge are
essential

Germany yields 15%, followed by United States at 14% (IKEA, 2018b). IKEA
generated €5.003 billion from the German market and also achieved a growth of 2.8% in
2017 (Euwid, 2018). It also experienced high online growth at 30.75% in the business year

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2016/2017 (Euwid, 2018). German’s prefer IKEA over other competitors, because they can
identify with the Swedish company, with the brand becoming part of their culture (The
Economist, 2011). In the last year, German customers demonstrated a particular preference
for living room (60%) and bedroom (30%) furniture (Euwid, 2018).

Similarly, in the United States IKEA is the preferred food and furniture brand (US
Today, 2018). It has successfully built a strong network with the US consumers. IKEA
recognises that the market is changing and is adjusting their business model appropriately.
They had planned to open three now stores due to growing sales, but instead shifted towards
online sales, which saw more demand (US Today, 2018).

(Mercedes) France is the third main market of IKEA, with 8% of the total sales in
2017. The company landed in 1981 and today there are 26 stores all over the French territory
(IKEA, 2018c). The success of the company in this market was driven by its ability to
respond to Parisian´s habits and expectations, for example, by creating solutions for small
spaces. In 2019 IKEA plans to open its first retail store in an iconic location in the centre of
the city, and an investment of €450 million is projected for new stores in the next three years
(The Local, 2018).

First Market: Norway

In 1963, IKEA opened its first store outside of Sweden, in Norway (Inter IKEA
Group, 2016). Due to the intensive price of IKEA, many competitors forced suppliers to stop
the supply for the IKEA group (Inter IKEA Group, 2016). To deal with this IKEA, went in
search of suppliers to Denmark and Poland and began its first international operations in
Norway (Inter IKEA Group, 2016). Norway was a growing economy after the start of
industrial era and many changes and growth opportunities were expected, which made it a
good opportunity for foreign entities (Global Tenders, 2016). Today, the scenario is different
wherein IKEA has closed its three service centres in Norway, due to a decline in demand for
furniture (Business Insider, 2018). IKEA slashed its prices by 10%, but the centres still
closed (Business Insider, 2018).

China: a successful case for IKEA (Xiaojuan Yang)

The Chinese name of IKEA is “宜家”, which means comfortable home. This name
appropriately delivers the company’s vision to its Chinese consumers “create a better
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everyday life for the many people” (IKEA, 2018, para.1). IKEA entered China in 1998 as a
joint venture and placed its headquarters in Shanghai and opened the first store there in the
same year. With China’s rapid growth, IKEA opened 21 stores by 2016. There are 10,624
IKEA employees across China and sales revenue was approximately RMB 12.5 billion in
2016 (IKEA, 2016). The investment to the Chinese market will continue to increase.
IKEA entered China as a joint venture which is a good approach for learning local
consumer needs, competitors and market operations. In order to adapt the market in China,
IKEA adjusted its strategy on marketing position, pricing, sourcing, service and design. In
China, IKEA targets the young, middle-class group living in cities with affordable prices,
instead of a low-price strategy. IKEA keeps cutting product prices to cater to the
characteristics of price sensitive local people, through increasing the percentage of local
sourcing. In addition, it provides assembly services and changes the design of the furniture to
fit apartment sizes, whilst also maintaining a western-style- which is favoured by the
Chinese. The success of IKEA in China is the result of effectively merging globalization and
localization to create value in the local market.

Risks (Cassie)

An obvious risk to IKEA's operations in China is commercial risk. In 2013, IKEA’s

suppliers of more than 10 years decided to stop delivering products to the supply chain, due
to increased raw materials and labour costs; but IKEA lowered product prices so that
suppliers could not break-even (China.org.cn, 2013). IKEA has always been committed to
improving environmental protection and sustainable business, and requires suppliers to
provide ‘green’ products; however, this is difficult to implement in China. When customers
are asked to pay extra for plastic bags, price-sensitive consumers think this is unreasonable.
Finally, IKEA has to compete with a number of local competitors. IKEA was late to enter
Chinese furniture market, with more than 100,000 domestic furniture markets already in
China and more than 40 furniture stores in Beijing. Local rivals include Qumei group, Royal
Furniture and Chengdu QuanU furniture. All of these competitors exercised a heavy pressure
on initial prices as they were selling at lower prices in IKEA (Giunta, 2016). One example is
the price has dropped from 120 RMB to 39 RMB when IKEA first came to the Chinese
market (Hansegard, 2012).

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Future Market: New Zealand (Shanza)

For more than a decade, consumers have been pushing for IKEA to open its doors in
New Zealand and whilst the company claims to be continuously looking to increase
accessibility to more people, its focus has been on expanding the chain in existing markets
(Abano, 2018). A proposition to open its first New Zealand store in Mount Wellington was
dashed in a 2008 Environment Court ruling, over concerns that the brand’s popularity would
wreak havoc on the city’s already congested roads. A second offer from Hamilton in 2009
was also dismissed, although the brand’s popularity remains strong with over 19,000 people
joining the Facebook page ‘Bring IKEA to New Zealand’ (Molin, 2018).

Opportunities

New Zealand has long held the reputation for being a safe country to do business with
and consistently ranks highly for integrity and honesty. It is currently ranked first for being
the least corrupt and easiest country to do business with, and its open and competitive
economy means that there are few barriers to entry (Export.gov, 2018; Transparency
International, 2018). The housing market has contributed to a relatively robust economy and
spending power is strong, with overall consumer spending reaching an all-time high of
$37833 million NZD in the second quarter of 2018 and $2,332 million NZD being spent on
furniture, furnishings and floor coverings (Abano, 2018; Trading Economics, 2018;
Euromonitor International, 2018). Demand for IKEA products is evident with New
Zealanders willing to pay up to three times the regular price for imported IKEA goods and
Trademe searches for IKEA furniture averaging 100,000 per month (Abano, 2018). Unlike
other markets such as India, which showed reluctance to the idea of building your own
furniture, New Zealand’s Do-It-Yourself [DIY] culture is likely to embrace the concept
(Chaudhuri & Abrams, 2018). Clifton (2012) explains that DIY is ingrained in the New
Zealand psyche, largely due to the nation’s geographical isolation and reluctant dependence
on imported goods. As housing prices continue to rise, the shift towards smaller living spaces
increases the need for multi-functional, compact furniture and this is something only IKEA
appears to making.

Risks
Despite its small size, New Zealand’s furniture market is relatively competitive. The
market consists of numerous high and low end brands, although smaller boutique and
custom-style businesses also appear to be prominent (First Digital, 2015). A report from First

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Digital (2015) found that consumers were less concerned about whether their furniture was
New Zealand made and were happy buying cheaper, imported goods. This has resulted in an
influx of primarily budget Chinese brands that would inevitably be a big source of
competition for IKEA, who would not be able to compete with such low costs. Another
primary concern of the furniture giant when researching the New Zealand market has centred
on the ability to achieve economies of scale in a widely dispersed, low density population.
Typically, IKEA is found in areas of at least one million people who are within an hour’s
drive of the store- making Auckland the only possible contender for one of its 25,000 square
meter hyper-marts (Breitnauer, 2018). There is also debate surrounding whether demand
exists for stores of this size and by not having the benefit of scale, IKEA would not be able to
provide its full range of products or services and prices would be significantly higher, due to
the cost inefficiencies of shipping smaller volumes of goods (Breitnauer, 2018). For IKEA to
succeed in the New Zealand market, a smaller scale approach like what is currently being
trialled in Australia, would be necessary. In response to changing consumer needs, the
company has modified its business model by opening small-format stores and pick up points
where shoppers can buy top-selling items and collect online purchases (Mitchell, 2015).
While not providing the full IKEA experience, this would extend purchasing opportunities to
consumers who would have otherwise been excluded.

Conclusion (Mercedes)

Innovation is at the heart of IKEA’s success and its focus on making easily transportable,
affordable, quality furniture means that it remains unrivalled by any other furniture company.
What led IKEA to becoming the world’s largest furniture retailer was its ability to analyse the
risks and opportunities of potential markets, whilst also adapting its business model to local
cultures in order to meet the needs of prospective consumers. This facilitated sustainable
business growth and even enabled the brand to become part of the culture in many of its
current markets. The Chinese market clearly exemplifies this point. IKEA is a highly
progressive, glocal company that is constantly in search of new markets. New Zealand was
chosen as a potential market, due to IKEA’s success in Australia, increasing kiwi demand for
the brand and most of all, its highly resilient business model.

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