Ikea Group Development and Prospects in China

IKEA was founded by a Swedish entrepreneur Ingvar Kamprad in Almhult, Sweden in 1943. He started his business by selling pens, wallets, and watches. The IKEA Group of companies has grown into the largest furniture retailer across the globe, running 303 stores in 26 countries. This paper aims to explore the IKEA Group’s development and prospects in China.

The headquarter of the IKEA Group is located in Sweden, but its parent company is a Dutch-based INGKA Holding B.V., which belongs to a non-profit Stichting INGKA Foundation established by Kamprad in Leiden, Netherlands. The IKEA Group franchises the IKEA retail system from Inter IKEA Systems B.V., which is the owner of the IKEA concept and the global IKEA franchisor. Inter IKEA is owned by Interogo Foundation registered in Liechtenstein. The IKEA Group is the biggest franchisee and pays 3% of its annual sales to Inter IKEA Systems B.V. as franchise fee. At the end of Fiscal Year 13, there were 345 IKEA stores in 42 countries operated under franchise agreements with Inter IKEA Systems B.V.

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Source: IKEA Group Yearly Summary FY13

 Kamprad claimed that he executed such a complex maneuver to prevent from controlling IEKA solely by his family or destroying IKEA. It is believed that Kamprad was managing to get away from tax burdens. Such a complicatedly devised structure would prevent the company from being split and the brand diluted (Tarnovaskaya & de Chernatony, 2011). Being a furnishing giant, IKEA is not listed in any stock exchange, because Kamprad is thinks that going public cannot secure IKEA’s growth.  

IKEA offers a comprehensive selection of furniture, home appliance, and furnishing solutions. The IKEA range consists of about 9,500 products. Approximately 2,000 new products are launched annually. IKEA has embedded its design in distinctive Scandinavian design which focuses on simplicity and functionality. Therefore, it intensively advocated the idea of Democratic Design, which values a product’s form, function, quality, sustainability, and its price. (IKEA Website)

Aiming at creating a better everyday life for the many people, it formulated its business mission as: to give as many people a chance to furnish their homes in beautiful and functional way. The most remarkable feature of IKEA is its low price strategy. Therefore, it is pivotal to keep various costs at minimum. Innovative design, global purchasing, outsourced manufacturing, retailing, and all other components of its supply chain are devised to serve the purpose of lowering costs. For example, flat packs can allow important savings in transportation and production costs, and the “showroom-warehouse” concept helps save cost on retailing (Baraldi, 2008).    

According to IKEA Group Yearly Summary FY13, its total sales increased to €27.9 billion, up 3.1% from 2012 to 2013. Total revenue reached at €28.5 billion, an increase of 3.2% compared to FY12. Net income increased by 3.1% to €3.3 billion. The most notable growth was its gross margin, as a percentage of sales, increased by 1.5% to 43.3%. This positive increase is attributed to improved efficiency in its supply chain enabled by close cooperation with suppliers.

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Source: IKEA Group Yearly Summary FY13

IKEA’s effective low-cost strategy helped enhance its sales dramatically. Its domestic counterparts were so jealous that they tried to strangle IKEA’s purchase resources by barring local producers from supplying IKEA in 1960s. As a result, IKEA had to turn to overseas suppliers instead. Geographical location and regional specific resources are taken into considerations seriously when selecting suppliers. Different effects costs, competences, and delivery times are thoroughly examined. Top managers of the IKEA group paid a visit to China in 1973, and were determined to expand the business in China, which currently accounts for the largest proportion of IKEA’s total purchase. Chinese suppliers rank first for the cost-efficiency. It is noteworthy that technical competences of current Chinese suppliers are almost as advanced as the European ones; thus product quality can be guaranteed (Baraldi, 2008). According to IKEA Group Yearly Summary FY13, China is a key country for timber sourcing and manufacturing of wood-based products.

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Source: IKEA Group Yearly Summary FY13

Compared with other retailers such as Walmart and Carrefour who have grown rapidly in China, IKEA has expanded on a very modest scale. 16 stores (three in Shanghai; two in Beijing; one in Guangzhou, Chengdu, Chongqing, Shenzhen, Nanjing, Dalian, Shenyang, Tianjin, Wuxi, Ningbo, and Wuhan) in 16 years can be seen as a fairly conservative step. Johansson and Thelander (2009) argued that compared to expansion elsewhere in the world, expansion in China has been fairly slow, but the company views it as successful. IKEA is so discreet that it is likely to take many things under control.

China has always been a huge market because of largest population in the world. The economic reform and opening up of Chinese market have attracted numerous foreign firms to seek low-cost production and labor. IKEA first entered into China in 1998, setting up its first store in Shanghai by renting land from the government. (This store was replaced by a new store in 2003, which was restored to IKEA’s standardized outlook.) IKEA translated its brand name into Yi Jia in Chinese, which means desirable/suitable for home (Johansson & Thelander, 2009). The second store was opened in Beijing in 1999. To build these two stores, IKEA formed a joint venture with a local entity called Beijing Northern Sweden Limited Company, due to Chinese government’s coercive regulations (Wei & Zou, 2007).

The partnership equipped IKEA with knowledge of the local market and local people’s needs. At that time, Chinese apartments were small. Functional and modular home appearance solutions were in demand. Thus IKEA made slight modifications to its furniture in order to cater to potential consumers. The layouts of the show rooms were modeled on the typical sizes of apartments with a balcony attached (Chu, Girdhar & Sood, 2013). However, it still took eight months for settle and gain in-depth insights into Chinese market in the beginning. An expansion manager admitted that coming to China was not very well-organized, due to the managerial belief that general human needs have no vast differences across markets (Tarnovaskaya & Chernatony, 2011).

 The subsequent 14 stores are wholly owned by the IKEA Group. Since China joined World Trade Organization in 2001, regulations regarding foreign enterprise entries have become less stringent than before. Once foreign entities were allowed to be wholly foreign owned, IKEA soon bought out the entire shares of its original partner, and brought the entity under its utter control. The IKEA Group thus established a subsidiary called IKEA (China) Investment Company in Shanghai.    It is rather uncommon of IKEA to buy lands from the government. Rather than dealing with uprising rental expenses and administrative regulations, IKEA were definitely not hesitant to build its own stores and present standardized stores to its visitors (Wei & Zou, 2007).