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.
Swedish furniture giant IKEA was founded by entrepreneur Ingvar Kamprad in 1943. He began by selling pens, wallets and watches by going door to door to his customers. When he started selling his low-priced furniture, his rivals did everything to stop him. Local suppliers were banned from providing raw material and furniture to IKEA, and the company was not allowed to showcase its furniture in industry exhibitions. What did IKEA do? It innovated to stay in business. It learnt how to design its own furniture, bought raw material from suppliers in Poland, and created its own exhibitions. 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 accordingly. 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 included 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 marketing 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's India rollout will be slow: Prof Nirmalya Kumar|
The success of IKEA in China is an interesting adaptation example 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 longterm 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.
Prof Nirmalya Kumar, Professor of Marketing and Director of the Aditya Birla India Centre at London Business School
The main challenge is to adapt: Yelena Zubareva
There 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 onesize-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.
Yelena Zubareva, Regional Marketing Manager, FWS/OEM SHELL