Case based Assignment on IKEA in China: - Problems faced and strategies

Submitted to, by, Mr. ee!a" Sharma $erma %&'() E'*+, ++*+'*-( Submitted #aresh

Introduction: In This case, I've Studied the internationally known home furnishing retailer, which is (IKEA) The largest furniture retailer in the world The !ur"ose of the case study is to analy#e the "ro$lems faced $y IKEA in %hina and its strategies used $y IKEA, Analy#e the com"any financially, S&'T analy#ing and discuss ma(or issue that the com"any faced About: IKEA Is a "rivately))*held, international home "roducts retailer that sells flat "ack furniture, accessories, and $athroom and kitchen items in their retail stores around the world The com"any, which "ioneered flat))*"ack design furniture at afforda$le "rices, is now the world's largest furniture retailer IKEA was founded in +,-. $y +/))*year))*old Ingvar Kam"rad in Sweden 0e $egan $y selling "ens, wallets and watches $y going door to door to his customers &hen he started selling his low) "riced furniture, his rivals did everything to sto" him 1ocal su""liers were $anned from "roviding raw material and furniture to IKEA, and the com"any was not allowed to showcase its furniture in industry e2hi$itions &hat did IKEA do3 It innovated to stay in $usiness It learnt how to design its own furniture, $ought raw material from su""liers in !oland, and created its own e2hi$itions Today, IKEA is the world's largest furniture retail chain and has more than .44 stores glo$ally The %om"any that was originated in Sm5land, Sweden, distri$utes its "roducts through its retail outlets As 'f August 644,, the chain has .44 stores in ./ countries, most of them in Euro"e, 7orth America, Asia and Australia Problems faced by IKEA in China and strategies In +,,8, IKEA started its retail o"erations in %hina It is more im"ortant what customers think a$out the com"any rather than the other way around IKEA faces three main challenges in %hina9 "ricing, high duty rates, and the !:% $ureaucracy So following

are the ada"tive strategies made $y IKEA in china + .a/ and legal issues9 ) IKEA has $een hit with heavy im"ort ta2es in %hina, though the com"any aims to relocate "roduction of many items to %hina to solve this "ro$lem The country already su""lies glass, tim$er, te2tiles, hardware, "lastic, and almost anything else the store needs IKEA faces strict ;uotas and has difficulties im"orting food to its Swedish restaurant The com"any now has a food)im"ort agent that handles all related issues, including la$eling IKEA<s mainland %hina stores $elong to the IKEA =rou" and o"erate as (oint ventures The venture served as a good "latform to test the market, understand local needs, and ada"t its strategies accordingly 6 Changes in si0es of furniture due to small si0es of ty!ical Chinese a!artments: - It understood early on that %hinese a"artments were small and customers re;uired functional, modular solutions The com"any made slight modifications to its furniture to meet local needs The store layouts reflected the ty"ical si#es of a"artments and also included a $alcony !reviously, when it entered the >nited States it faced similar "ro$lems The com"any initially tried to re"licate its e2isting $usiness model and "roducts in the >S ?ut it had to customi#e its "roducts $ased on local needs American customers, for instance, demanded $igger $eds and $igger closets IKEA had to make a num$er of changes to its marketing strategy in the >S The challenges it faced in %hina, however, were far $igger than the ones in the >S ?ut now,In terms of housing, the average s;uare meters "er "erson in %hina has $een increasing considera$ly >ntil recently, a"artments averaged -4 m 6@ now ?ei(ing and Shanghai a"artments< average 84 m6 This means several things9 %hinese residents need more

furnishings and, $ecause consumers are $uying more gadgets, they need more storage containers and facilities It also means IKEA needs to kee" its home)life study u")to) date $ecause change ha""ens so fast . Slashing costs to !ro1ide affordable !rices: )'ne of the main "ro$lems for IKEA was that its "rices, considered low in Euro"e and 7orth America, were higher than the average in %hina !rices of furniture made $y local stores were lower as they had access to chea"er la$or and raw materials, and $ecause their design costs were usually nil IKEA $uilt a num$er of factories in %hina and increased local sourcing of materials &hile glo$ally .4 "er cent of IKEA's range comes from %hina, a$out AB "er cent of the volume sales in the country come from local sourcing These local factories resolved the "ro$lem of high im"ort ta2es in %hina The com"any also started "erforming local ;uality ins"ections closer to manufacturing to save on re"air costs &hen IKEA first entered %hina, the store was considered too e2"ensive for its target consumersCyoung, "rofessional cou"lesCand the com"any lowered its "rices The store<s "rices are now considered mid)range in Shanghai D A ty"ical IKEA customer earns a$out Een.,.44 (F.,,) "er monthCthe national average is Een+,444 (F+6+)C and $uys Een.44 (F.A) of merchandise "er visit Since 6444, IKEA has cut its "rices $y more than A4 "er cent Gor instance, the "rice of its H1ackH ta$le has dro""ed to ., Euan (less than five Euros at current e2change rates) from +64 Euan when IKEA first came to the %hinese market The com"any "lans to reduce "rices further, hel"ed $y mass "roduction and trimming su""ly chain costs 0igh "rices were one of the $iggest $arriers in %hina for "eo"le to "urchase IKEA "roducts IKEA's glo$al $randing that "romises low "rices did not work in %hina also $ecause

western "roducts are seen as as"irational in Asian markets In this regard, IKEA's low)"rice strategy seemed to create confusion among %hinese consumers The com"any reali#ed this and started targeting the young middle)class "o"ulation This category of customers has relatively higher incomes, is $etter educated and is more aware of western styles Targeting this segment hel"ed IKEA "ro(ect itself as an as"irational western $rand This was a massive change in strategy, as IKEA was targeting the mass market in other "arts of the world IKEA will likely have ho"es of attracting India's ur$an middle)class $uyers who are keen on decorating their homes with stylish international $rands - Com!any changed its image as a lo2 cost !ro1ider to an as!irational brand: -IKEA wanted to $e known as a low)"rice "rovider of dura$le furniture, while %hinese consumers looked at IKEA as an as"irational $rand It is likely that Indian consumers will also look at IKEA in a similar way As IKEA "re"ares to enter India, its %hina e2"eriences will come in handy It understood that in emerging markets, glo$al $rands may not re"licate their success using a low) "rice strategy There always will $e local manufacturers who will have a lower cost structure
B

Changes in mar"eting strategy resulting due to counterfeit IKEA !roducts from catalogues by local com!etitors: - IKEA also had to tweak its marketing strategy In most markets, the com"any uses its "roduct catalogue as a ma(or marketing tool In %hina, however, the catalogue "rovided o""ortunities for com"etitors to imitate the com"any's "roducts Indeed, local com"etitors co"ied IKEA's designs and then offered similar "roducts at lower "rices Some furniture stores kee" IKEA catalogues in their store and tell customers that they can re"roduce the

furniture at a lower "rice Stores try to co"y the IKEA conce"t and "roducts, slightly change the name, slightly lower the "rice, and suddenly, home furnishing stores in %hina are $lue and yellow as well IKEA decided not to react, as it reali#ed %hinese laws were not strong enough to deter such activities Instead, the com"any is using %hinese social media and micro)$logging we$site Weibo to target the ur$an youth A Store location strategy changes: -IKEA also ad(usted its store location strategy In Euro"e and the >S, where most customers use "ersonal vehicles, IKEA stores are usually located in the su$ur$s In %hina, however, most customers use "u$lic trans"ortation So the com"any set u" its outlets on the outskirts of cities which are connected $y rail and metro networks / Com!any changed flat !ac" style to 3ready to use4 : -IKEA, famous for its flat)"ack furniture which consumers have to assem$le themselves, reali#ed that understanding the local culture is im"ortant ) %hinese "eo"le hate the do)it) yourself conce"t %om"any came to know that %hinese "eo"le don<t want to assem$le themselves $ecause they think assem$ling as cum$ersome "rocess and if anything wrong occurs they will end u" reducing aesthetics of furniture 8 Com!any changed store layout to reflect Chinese a!artments: ) In %hina, the store layouts reflect the layout of many %hinese a"artments, and since many %hinese a"artments have $alconies, the stores even include a $alcony section %hinese tend to s"end most on their living rooms, which he terms the heart of the home where many "eo"le Ishow offD and entertain Jany %hinese living rooms contain a dining ta$le as well, so dining room "urchases are also common ?ecause %hinese kitchens are generally small,

customers s"end less on them At one time, $edroom furniture and decorations were the least "o"ular "urchases in %hina, "erha"s $ecause the room is the most "rivate and thus least visi$le "lace in the home ?ut IKEA has recently witnessed an enormous increase in $edroom salesC es"ecially in Shanghai 7e2t year, the com"any "lans to launch a glo$al cam"aign that targets the com"lete $edroom , Increase in costs due to ada!tation of eco friendly technologies: -Since +,,,, IKEA has $een working on $ecoming more eco)friendly It has $een charging for "lastic $ags, asking su""liers for green "roducts, and increasing the use of renewa$le energy in its stores All this "roved difficult to im"lement in %hina The com"any also learnt that emerging economies are not ready for environment)friendly "ractices, es"ecially if they result in higher "rices !rice)sensitive %hinese consumers seem to $e annoyed when asked to "ay e2tra for "lastic $ags and they did not want to $ring their own sho""ing $ags Also, a ma(ority of su""liers in %hina did not have the necessary technologies to "rovide green "roducts that met IKEA's standards 0el"ing them ado"t new technologies meant higher cost, which would hurt $usiness IKEA decided to stick with low "rices to remain in $usiness

ifference in strategies in Euro!e and China: -

Euro!e
+ $alue Pro!osition
=ood ;uality,stylish furniture at "rices so that every$ody can afford it

China
=ood ;uality, western)styled as"irational $rand for the middle)class "o"ulation

' $alued 5et2or"

a . Product Stylish, functional "roducts and home furnishings b . Store 6ocation The su$ur$s, ne2t to highways so that access $y car is easy c. Price 1ow cost d . Promotion IKEA catalogue is the main marketing tool e 6ogistics !roducts are sourced and made in develo"ing nations like %hina and Jalaysia, and then shi""ed to Euro"e :aw material and "roducts are sourced locally IKEA also $uilt two factories in shangai to avoid high im"ort ta2es Advertising on %hinese social media and micro)$logging we$site &ei$o has $een "o"ular tools Afforda$le "rices The outskirts of cities, ne2t to rail networks as most customers use "u$lic trans"ort Slight modifications to "roducts to suit local market and reflect %hinese a"artment si#es

Conclusion There is no formula for success that fits all the marketing strategies when a glo$al $rand decides to try a new market, e2ce"t unconditional acce"tance and res"onsiveness to changes The greatest challenge is to ada"t constantly It re;uires considering the local a""roach rather than glo$al desire for standardi#ation 'ne si#e fits all is a rare reality IKEA made all necessary ad(ustments to make sure there was no mismatch in its growth am$itions and $rand value ?ecoming an as"irational $rand is not an easy task IKEA demonstrated courage to get the most relevant changes It worked with local sources, overcome legal re;uirements etc IKEA is a strong $rand that understands that growing glo$ally re;uires sacrifices and innovation from glo$al teams, and re;uires to listen, res"ect and learn from local environment The %om"any has learnt that doing $usiness in emerging markets is a different $all game for a multinational com"any IKEA did well to ada"t in %hina, although it took numerous changes to its strategies and more than +6 years for the com"any to $ecome "rofita$le in the Asian nation