IKEA’s Path To Success in China

Simplicity is beauty

The concept “Simplicity is beauty” is popular in artistic circles, while it becomes impracticable when the art of business management is concerned. For these international enterprises that have to seek global expansion, they are facing rising business management costs and decreasing growth rate due to the global market diversity which results in enlargement of products varieties, longer circulation terms, clog of information delivery and horsy institutions. However, we will find that IKEA is perfect in every aspect when we are getting to know it. IKEA’s beauty originates from its simplicity. IKEA turns complicated enterprise management into simple principles: to design products according to consumption demand, spare no efforts in reducing costs to create significant low price, create smooth global supply chain and experiencing-style sales terminal. Probably, with its home on a Peninsula in northern Europe, Sweden-based IKEA obtains its particular qualities from the national characteristics which seek simplicity and perfect.

IKEA s achievement

Brand name value – According to a brand survey conducted by American Business Weekly, IKEA ranks forty-three on the list of the fifty world’s most famous brands with a brand value of 56 billion crown (US $ 7 billion). Another Sweden company Ericsson ranks eighty.

Sales performance – IKEA has 76,000 employees and runs business in 43 countries. Its sales reached Euro € 11.3 billion in the financial year 2003.

Design, Purchase, Distribution and Sales – IKEA is the only enterprise in the world which successes in both channel and products operation. Swedwood, the industrial group within IKEA, manufactures wooden furniture and accessories. Swedwood owns 32 industrial departments in 9 countries. Älmhult-based IKEA of Sweden is in charge of developing IKEA line of products covering 10,000 varieties. IKEA boasts 43 trade companies (TSO) in 33 countries and 1,600 suppliers in 55 countries. IKEA stores are supplied by 27 distribution centers in 16 countries. Currently, there are 186 IKEA stores in 31 countries and regions, among which 165 stores are company-owned in 22 countries and the other 21 stores are operated by franchisees in 14 countries and regions. It’s said that there were 310 million visitors to IKEA stores globally last year.

(The above figures were from IKEA Chinese website.)

Charm of IKEA

IKEA entered Chinese market in 1998. It has brought tremendous influence despite it has opened only two stores in China, which is located in Shanghai and Beijing. Chinese customers’ traditional concept of household goods purchasing was strongly challenged. It’s considered a fashion to go shopping in IKEA, even if for people living in cities other than Beijing and Shanghai.

Now let’s experience the shopping journey to IKEA. The store boasts: simple appearance but with strong contrast, spacious retail space, innovative and various sample rooms with nice color blend, vivid and cozy children’s playground, Sweden style restaurant to take a rest in, the secure feeling of fetching goods directly from warehouse and most important, products with practical and delicate design. They use wood to make most of the products, other materials including clay, metal, glass and paper. The distasteful feeling of industrial products is removed with IKEA’s people-oriented products, which have nice shape and rich color making you feel warm at home.

The products are various but not pretentious, simple but not coarse. Surrounded by the simple and romantic North European music, buyers’ mind gets calmed and feel as if they have returned to nature.

IKEA has its own trouble in China.

The first trouble is price. IKEA household goods get prevailed in European market by the low price, but not in China. A small wooded table costs several hundred yuan and a paper lampshade costs about a hundred. IKEA is still only the choice of some middle-class people in China despite its lower and lower price year by year. Most of the visitors are to buy small household goods or just to experience the atmosphere. This is the reason why Chinese IKEA is small in sales and just regarded as a potential market.

IKEA’s purchase volume in China accounts for 18% of the global amount and exceeds all the other countries. The transport and producing costs are decreasing. However, the price still can’t beat that of domestic products in a short term. So it’s not the low price that attracts Chinese consumers. Of course it would be better if the price were lower.

The second is design. The design is simple, delicate and special in IKEA. When the Beijing and Shanghai stores were opened, you could hear such voices like “Fantastic! I will buy all the furnishing things from IKEA for my new house”, “Well, what’s this? Is it used to contain flavor?” or “The corner of this cabinet is well-designed.” etc. But now we can hear another voice: “ I will only buy some small daily household goods in IKEA instead of furniture. There are dozens of and hundreds of same things in IKEA. There is nothing special if everyone else buys the same furniture.” The products of IKEA are regarded as short-term consumer commodities in European market, but as durable commodities which can be used for a long term in China. Chinese consumer wants to buy special designs from IKEA and is willing to pay higher price for this special design. But with too many people purchasing the same thing, it’s no more special.

The third is service. Chinese customers, who used to inquiring, usually can’t find service staff in IKEA store. There are always some customers walking here and there to look for the promotional shoe shelf or vase. Moreover, customarily IKEA doesn’t make delivery and do the installation. The service is cut down to reduce costs. IKEA’s price in China is the lowest among its stores all over the world, but still considered to be higher than that of domestic products, in which delivery and installation fee is included.

These are the troubles, resulted from global market differences, faced by the perfect-pursuit IKEA. Among IKEA’s global retail network, most stores are company-owned, which are mainly located in markets like Europe. Franchising format is applied in markets which are pole apart from European market. It’s a wise policy since by franchising, it can explore an unfamiliar market rapidly and without many troubles.

However, IKEA owns the store by itself in China, the most strange and complicated market. During the years of business in China, IKEA “makes compromise” again and again by setting the price to the lowest point, extending the goods return time limit to 60 days and locating the Shanghai store on Xujiahui area, where the land is extremely expensive. We might say that if IKEA managed well its stores in China, then it would be able to get rid of all the disturbances created by regional differences and expanded globally further.

IKEA could have done better.

When we look back on IKEA’s business in China over the past years, we would say IKEA could have done better. IKEA impressed customers as innovative, fashionable, and expensive on its entry of Chinese market, which decided that its target customers were those high-end customers such as white-collar, entrepreneur and foreigner. If it employed membership system at that time to fully exploit those customers’ favor of innovative and fashionable things and concentrated promotion on those potential families, it could be able to stimulate customer’s purchasing desire and save costs as well. During that period, IKEA should display some classic designs in the two stores and go with the membership system. After getting familiar with the characteristic of Chinese regional market, it can decrease the purchase and sales price and cancel membership system to release its sales potential to a full degree, so as to fulfill its ideal of serving common customers.

By looking ahead, IKEA will inevitably encounter various challenges on its exploring of Chinese market. IKEA has refined products and fine purchasing environment. We will wait to see its future in China.

Translated by Grace

Source:
Editor: Grace
Date: 2005-4-4 14:10:00

|Close|