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case study IKEA

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Everything under the sun: Local shoppers at an IKEA furniture store in China’s Chengdu city

ExEcutivE Summary

IKEA is known globally for its low prices and innovatively designed furniture. In China, however, it faced peculiar problems. Its low-price strategy created confusion among aspirational Chinese consumers while local competitors copied its designs. This case study analyses how IKEA adapted its strategies to expand and become profitable in China. It also assesses some lessons the company learnt in China that might be useful in India, where it plans to open its first store by 2014 and 25 stores in 10 to 15 years.

By Valerie Chu, alka Girdhar and rajal Sood

S wedish furniture giant IKEA was founded by en-

t r e p r e n e u r I n g v a r Kamprad in 1943. He be- gan by selling pens, wal-

lets and watches by going door to door to his customers. When he started selling his low-priced furni- ture, his rivals did everything to stop him. Local suppliers were banned from providing raw mate - rial and furniture to IKEA, and the company was not allowed to show- case its furniture in industry exhibi- tions. What did IKEA do? It inno - vated to stay in business. It learnt how to design its own furniture, bought raw material from suppliers in Poland, and created its own exhi- bitions. Today, IKEA is the world’s largest furniture retail chain and has more than 300 stores globally. In 1998, IKEA started its retail operations in China. To meet local laws, it formed a joint venture. The venture served as a good platform to test the market, understand local needs, and adapt its strategies ac- cordingly. It understood early on that Chinese apartments were small and customers required functional, modular solutions. The company made slight modifications to its furniture to meet local needs. The store layouts reflected the typical sizes of apartments and also in - cluded a balcony. IKEA had faced similar problems previously when it entered the United States. The company initially tried to replicate its existing business model and products in the US. But it had to customize its products based on local needs. American customers, for instance, demanded bigger beds and bigger closets. IKEA had to make a number of changes to its market- ing strategy in the US. The challenges it faced in China, however, were far bigger than the ones in the US. As the company opened more stores from Beijing to Shanghai, the company’s revenue grew rapidly. In

2004, for instance, its China revenue jumped 40 per cent from the year before. But there was a problem – its local stores were not profitable. IKEA identified the strategic chal- lenges and made attempts to over- come them. One of the main prob-

and raw materials, and because their design costs were usually nil. IKEA built a number of factories in China and increased local sourc- ing of materials. While globally 30 per cent of IKEA’s range comes from China, about 65 per cent of the vol-

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How IKEA’s Strategies Differ in Europe and China Europe China V A lu E Pro P
How IKEA’s Strategies
Differ in Europe and China
Europe
China
V A lu E
Pro P os I t I on
Good quality, stylish furniture at
prices so low that everybody can
afford it
Good quality, Western-styled
aspirational brand for the middle-class
population
V A lu E d
n E t W or K
Product
stylish, functional products and
home furnishings
slight modifications to products to suit
the local market and reflect Chinese
apartment sizes
store location
the suburbs, next to highways so
that access by car is easy
the outskirts of cities, next to rail
networks as most customers use
public transport
Price
low-cost
Affordable prices
Promotion
IKEA catalogue is the
main marketing tool
Advertising on Chinese social media
and micro-blogging website Weibo has
been popular
logistics
Products are sourced and made in
developing nations like China and
Malaysia, and then shipped
to Europe
raw material and products are
sourced locally. IKEA also built two
factories in shanghai to
avoid high import
taxes

lems for IKEA was that its prices, considered low in Europe and North America, were higher than the aver- age in China. Prices of furniture made by local stores were lower as they had access to cheaper labour

ume sales in the country come from local sourcing. These local factories resolved the problem of high import taxes in China. The company also started performing local quality in- spections closer to manufacturing to

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case study IKEA

case study IKEA

save on repair costs. Since 2000, IKEA has cut its prices by more than 60 per cent. For instance, the price of its “Lack” table has dropped to 39 yuan (less than five euros at current exchange rates) from 120 yuan when IKEA first came to the Chinese market. The company plans to reduce prices further, helped by mass production and trimming supply chain costs. High prices were one of the big- gest barriers in China for people to purchase IKEA products. IKEA’s glo- bal branding that promises low prices did not work in China also because western products are seen as aspirational in Asian markets. In this regard, IKEA’s low-price strategy seemed to create confusion among Chinese consumers. The company realised this and

case study IKEA save on repair costs. Since 2000, IKEA has cut its prices by more

The main problem for ikea was that its prices, considered low in europe and the uS, were higher than the average in China

started targeting the young middle- class population. This category of customers has relatively higher in- comes, is better educated and is more aware of western styles.

Targeting this segment helped IKEA project itself as an aspirational west- ern brand. This was a massive change in strategy, as IKEA was tar- geting the mass market in other parts of the world. IKEA also had to tweak its mar- keting strategy. In most markets, the company uses its product catalogue as a major marketing tool. In China, however, the catalogue provided opportunities for competitors to imitate the company’s products. Indeed, local competitors copied IKEA’s designs and then offered sim- ilar products at lower prices. IKEA decided not to react, as it realised Chinese laws were not strong enough to deter such activities. Instead, the company is using Chinese social media and micro- blogging website Weibo to target the

urban youth. IKEA also adjusted its store loca- tion strategy. In Europe and the US, where most customers use personal vehicles, IKEA stores are usually lo- cated in the suburbs. In China, how- ever, most customers use public transportation. So the company set up its outlets on the outskirts of cities which are connected by rail and metro networks. The China expansion came at a cost. Since 1999, IKEA has been working on becoming more eco- friendly. It has been charging for plastic bags, asking suppliers for green products, and increasing the use of renewable energy in its stores. All this proved difficult to implement in China. Price-sensitive Chinese consumers seem to be annoyed when asked to pay extra for plastic

case study IKEA save on repair costs. Since 2000, IKEA has cut its prices by more

Chinese competitors copied ikea’s designs from its catalogue and then offered similar products at lower prices

bags and they did not want to bring their own shopping bags. Also, a majority of suppliers in China did not have the necessary technologies to provide green products that met

IKEA’s standards. Helping them adopt new technologies meant higher cost, which would hurt business. IKEA decided to stick with low prices to remain in business. As IKEA prepares to enter India, its China experiences will come in handy. It understood that in emerg- ing markets, global brands may not replicate their success using a low- price strategy. There always will be local manufacturers who will have a lower cost structure. It is more important what cus- tomers think about the company rather than the other way around. IKEA wanted to be known as a low- price provider of durable furniture, while Chinese consumers looked at IKEA as an aspirational brand. It is likely that Indian consumers will also look at IKEA in a similar way.

ikEa’s india rollout will bE slow in India has been T he success of IKEA in
ikEa’s india rollout will bE slow
in
India has been
T he success of IKEA in China is an
interesting adaptation example
Prof nI r MA lyA Ku MA r,
by a global retailer. Yet, it may not
be much of a predictor of IKEA’s
fortunes in India. This may have less
to do with IKEA and more to do with
the economic policies of India.
A well-designed foreign direct
investment (FDI) policy should have
resulted in a rush of much-needed
foreign investment to India,
upgrading of the supply chain,
modernisation of the retail sector, as
well as more choices for consumers
with lower prices. Instead, FDI in
retail, like in higher education, has
been a non-starter, hopelessly mired
in special-interest politics. The rules
are so onerous that a mass retailer
such as IKEA will find it hard to meet
them without penalising customers
with higher prices and lower choice.
Also, it will be difficult for IKEA to
find the type of location (size, off a
highway, with great links to a major
metropolis) that is crucial to the
success of its business model. This
will mean the first store will take
much longer to open than Indians
expect and the rollout will be
painfully slow. Fortunately, as a
privately held company with a long-
term orientation, IKEA will persevere
where more impatient publicly held
firms may have given up.
For India to kick its economy
back to the growth rates necessary
for meeting the aspirations of its
citizens, we need to roll out the red
carpet for foreign investors instead
of red tape. Competition law and
trade policies are supposed to
ensure that a free competitive
marketplace exists, with easy entry
and exit, not protect existing
competitors from new entrants.
Capitalism without failure is like
religion without sin.

“FDI in retail

a non-starter, hopelessly mired in special-interest politics”

Professor of Marketing and Director of the Aditya Birla India Centre at London Business School

104 B USINESS TODA y July 21 2013

thE main challEngE is to adapt T here is no formula for success that fits all
thE main challEngE is to adapt
T here is no formula for success
that fits all marketing strategies
when a global brand decides to try a
new market, except perhaps
unconditional acceptance and
responsiveness to changes. The
greatest challenge is to adapt
constantly. It’s essential for
successful marketing campaigns to
take into consideration the local
approach versus the global/regional
desire for standardisation. A one-
size-fits-all approach is a rare reality.
A consistent global brand promise is
a desirable asset but what makes a
real difference is to be brave and
ready to change the target audience
and build a differentiating promise.
IKEA made all necessary
adjustments to make sure there was
no mismatch in its growth ambitions
and brand promise. Becoming an
aspirational brand which is blogging
with the Chinese middle-class youth
is an unexpected twist in its brand
proposition. IKEA demonstrated
courage to get the most relevant
changes. By courage I mean all big
corporations are ready to shift
production, work with local sources,
overcome legal requirements but not
too many of them are ready to adapt
a brand proposition that suits the
level of development the market and
consumer perception require.
IKEA is a strong brand that
understands that growing globally
requires sacrifices and innovation
from global teams, and they are
ready to listen, respect and learn
from the local environment. The
European headquarters’ excitement
to enter new markets with proven
best practices is something of the
past, proving that the real shift in the
global mindset is to recognise that
local versus global can bring
optimum results.
“It’s essential
for successful
marketing
campaigns
to take into
yE l E n A Zub A r EVA ,
Regional Marketing Manager,
FWS/OEM SHELL

consideration the local approach”

July 21 2013 B USINESS TODA y 11

case study IKEA

case study IKEA

The company also learnt that emerging economies are not ready for environment-friendly practices, especially if they result in higher prices. IKEA, famous for its flat-pack furniture which consumers have to assemble themselves, realised that understanding the local culture is important – Chinese people hate the do-it-yourself concept and Indians likely do so even more. IKEA may face some India- specific challenges such as varying laws in different states ruled by dif- ferent political parties. This could make its operations, especially dis- tribution and logistics, a bit chal- lenging. IKEA already has had to wait a long time to get permission to open stores in India. The delay in policy-making at the state level could be even longer.

case study IKEA The company also learnt that emerging economies are not ready for environment-friendly practices,

in india, ikea may face some country-specific challenges such as varying laws in different states

Indian customer preferences and economic environment are similar to the Chinese market. IKEA will likely have hopes of attracting India’s urban middle-class buyers

who are keen on decorating their homes with stylish international brands. The company has learnt that doing business in emerging markets is a different ball game for a multinational company. IKEA did well to adapt in China, although it took numerous changes to its strat-

egies and more than 12 years for the company to become profitable in the Asian nation. ~ (This case study is from the Aditya Birla India Centre of London Business School.) What can we learn from IKEAs brand adaptation in China? Post your comments at www.businesstoday.in/ casestudy-ikea. The best response will win a copy of India Inside by Nirmalya Kumar and Phanish Puranam. Previous case studies are at www.businesstoday.in/casestudy

Best of the lot bt receives scores of responses to its case studies. below is the
Best of the lot
bt receives scores of responses to its case studies. below is
the best one on 7-Eleven in the issue dated May 26, 2013
arjun Sood [arjunsood12345@gmail.com]; Post Graduate in rural
Management (2011-13), institute of rural Management anand
The 7-Eleven case is an apt example of multinational corporations
adopting different strategies to enter and sustain in new markets. The
corporations are shedding their standardised notions and are becom-
ing flexible for local markets. It is interesting to see how 7-Eleven
followed its overall vision (the concept of convenience stores) but
positioned itself differently in Indonesia. That is the power of a brand.
International players across various sectors such as automobiles, fast
food, furniture, banking and finance, clothing and retail are vying for
Asian markets. Entry into these markets may be easy but sustaining
requires in-depth understanding and then adapting to the culture, fashion and spending habits, and
demography of the patron country. McDonald’s followed this adaptive strategy in India when it launched
McAloo tikki burger to attract customers. Since then McDonald’s has been working to add variety to
the India-specific menu (Masala grill being the latest addition).
It would have been enriching had the case study covered the following aspects: Does the company
follow this adaptive strategy in other countries also or does it stick to its original strategy? What are
the possible negatives of such a strategy? Does such a strategy hamper the efforts of an organisation
to create a uniform brand identity?
Arjun Sood wins a copy of India Inside by Nirmalya Kumar and Phanish Puranam

104 B USINESS TODA y July 21 2013