Case study: How IKEA is thinking strategically to take on the world’s biggest market 

At the two-storey IKEA in the prosperous Chaoyang area of Beijing, everything is super-sized. The Swedish furniture-maker’s flagship Chinese store is its second largest in the world. Families, migrant workers and students flock to take advantage of hot dogs priced at a bargain 3RMB, 1RMB ice creams and refillable soft drinks in the spacious cafeteria.

In the display area, couples queue to pose for snapshots among the furniture and picnic on the showroom sofas. Others doze on the famously comfy beds. The only part of the store where there’s room to maneuver is the checkouts. Although IKEA attracts 23 million visitors to its eight Chinese stores each year (it first opened in Shanghai in 1998), it admits sales had until recently been disappointing. But unlike some Western competitors – which are largely pulling out of the country – IKEA (known in China as ‘Yi Jia’) seems determined to find new ways to tap into Chinese spending power.

In March 2011, newly formed Inter IKEA Centre Group (IICG) announced plans to partner with French supermarket chain Auchan, Chinese electronic chain Suning Appliance and cinema operator Jin Yi Film to develop three super-malls in first- and second-tier cities, thanks to a US$1.2bn investment over five years.

It is an ambitious move, and marks a totemic shift into the property market. IKEA will act as both landlord and anchor tenant for the malls, renting space to other brands targeting the Chinese middle class. IKEA’s phenomenal ability to draw footfall will virtually guarantee a crowd, and the chain plans to double the number of stores it has in China by 2015.

The market, however, remains puzzling. China has experienced a huge home ownership boom over the past two decades, hitting 80% in urban areas from a standing start. Foreign home furnishing brands have piled into the country, but many failed to foresee problems ranging from pricing and government bureaucracy to rampant counterfeiting and high duty rates.

China’s consumer mentality has also proved challenging. With cheap labor readily available, home-buyers are not attracted to ‘do-it-yourself’ decorating, while chains face stiff competition from local stalls and independent warehouses that sell a wide range of furnishings. Kingfisher, the British owner of the B&Q chain, closed stores in the country after two consecutive years of losses.

IKEA – the world’s largest furniture retailer by sales – has fared better, becoming a desirable brand for China’s aspiring white-collar classes. Crucially, it has adapted its strategy to suit the market. One example is the company’s self-assembly products, which have little resonance in China. IKEA now offers delivery and assembly services – attracting customers who might be put off by instruction manuals.

Another issue is pricing. Many shoppers come armed with cameras, measuring tapes and catalogs. Eager to own functional IKEA designs, but unable to afford them, they customize cheaper versions from local shops. IKEA has slashed its prices dramatically in response, with an almost two-digit annual percentage drop.

That has increased sales but led to brand issues, says Ben Cavender, Associate Principal for China Market Research Group. “IKEA came into the market fairly early, before any other brands, and it positioned its products relatively high,” he says. “But the market has grown in terms of quality and design expectations, so it has run into a real brand identity problem. Either it is going to have to go mass-market and compete better on cost or it’s going to have to find a way to move up market.” Despite this, IKEA has the distinct advantage of being a private company, giving it the space for a ‘wait and see’ approach to a difficult market and allowing a more phased expansion than its competitors.

“It takes a long time to build relations in China, but once you do you can capitalize a lot on them,’ says Per Gustafsson, a KPMG retail partner in the Swedish firm. ‘IKEA does not have to consider shareholder value in the short run. It can build the business in the long term, rather than satisfy the stock market every month.”

At a time when the Chinese government is encouraging an economy driven by domestic consumption, rather than exports, “the timing of its expansion might be excellent,” he adds, although many fear inflation could dampen growth.

China has a haphazard approach to mall development, with frequent poor management and little attention to planning or tenant-matching. At the extreme end of the market, some malls offer pirated items on one floor and upmarket brands on another, while layouts can be chaotic and unappealing. IKEA can now control the way its brand is presented and managed.

Paul French, Director of Shanghaibased retail consultancy Access Asia, believes IKEA is “creating the retail park concept which hasn’t developed in China as it has in Europe,” following the lead of Tesco’s Lifespace shopping centre, which opened in early 2010 in Qingdao. Tesco is the anchor tenant and developer, renting retail space to specialty retailers, restaurants and entertainment concepts.

Fifty thousand people alone visited on the opening weekend, and there are plans for 23 similar developments. But Tesco, like IKEA, is still chasing the holy grail of Chinese retail – turning browsers into buyers.