IKEA is the world’s largest furniture store. Phase 1 of its internationalization involved expanding from its home in Sweden to most of Europe whereas Phase 2 looked to expand in the North America and Australia markets. Having successfully achieved these phases, the company set out implementing Phase 3 that looked to expand to the Asian market, especially the Far East (Ringstrom, 2013).
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This paper is an analysis of IKEA’s expansion into China and Japan, its first stops in the Phase 3 expansion strategy. It looks at the opportunities and challenges inherent in the markets, the company’s market entry strategies, marketing mixes decisions and adoptions to these markets and also suggests IKEA’s marketing strategy for increased market share and profitability.
Opportunities and challenges for IKEA in China and Japan
IKEA views the Far East as an important emerging market, with sales in the region increasing gradually to cater for the company’s turnover. It has big and small outlets in various cities in the region, with big stores in such cities as Shanghai, Beijing, Tokyo and Yokohama. (Class notes, undated).
IKEA has stuck to its concept of having its own warehousing and retailing stores, rather than franchising. Notably it had started with franchising in the Japanese market in 1976, but this business model did not work. It consequently reentered the Chinese (1998) and Japanese (2006) markets by opening its own distribution and retail stores. Some of IKEA’s major competitors in these emerging markets retail their products at such platforms as Tmall.com.
IKEA started with small outlets in the Chinese market by opening small stores in Shanghai and Beijing, but the nature of the Far East market as well as the company’s repositioning has led to expanded, bigger stores not only in China but the rest of the region (IKEA, 2017). IKEA’s outlets are located on the outskirts of the region’s major cities with room for expansion.
Research and development (R & D) are cornerstones of IKEA’s expansion. It offers the company an opportunity to research various Far East markets and develop products customized for these markets. After failing as a franchise in the Japanese market, IKEA took time out from 1986 and did research on the lifestyles of over 100 Japanese families for a period of five years. The company also did research on the Chinese and other Far East markets. The research looked at the lifestyles and needs of its various market segments, especially young families who constitute the bulk of the company’s customers in many of its markets. Consequently, IKEA developed products suitable for the Japanese, Chinese and indeed the entire Far East markets. It consequently launched its big stores for retailing and distributing in China and Japan in 2003 and 2006 respectively (Class notes, undated).
New Japanese legal requirements are stringent with regard to earthquakes, among other challenges facing the society. For example, all cabinets are required to be able to withstand earthquakes. This offers an opportunity for IEKA to be a catalyst for cultural change, offering furniture and appliances that are guaranteed to withstand climate disasters. IKEA’s R & D can research and develop products that set the trend regarding household furnishing and decoration.
A major challenge in Japan was to make the home an important place for the Japanese. Most Japanese homes are small spaces where the person does not invite their friends and or families. Because of space and time, most Japanese entertain outdoors with the home being viewed as a storage and sleeping place (Class notes, undated).
Another major challenge for IKEA stores in the Far East is to ensure profitability in markets where price is no longer the company’s competitive advantage. There are many factories and retailers in China and other neighboring countries offering items at very low prices in the Far East market because of the low production costs caused by cheap labor, low cost of materials and low transportation costs. This has led to IKEA selling its products at lower prices in the region despite huge capital and management outlays (Ringstrom, 2013). The major reason for closing IKEA’s franchise in Japan in 1986 was the lackluster financial performance over the period of twelve years. In China, the company went without profits for about a decade despite huge sales turnover. IKEA has since developed better business models for the Far East markets that are leading to improved profitability.
Another factor that contributes to low cost of many of the products developed and sold in most of the Far East is that most companies hardly invest in research and development. Many factories and distributors copy the designs of major brands, including IKEA. They even use the brands’ names in marketing. For example, searching “IKEA product” in Tmall.com brings up counterfeits that are produced by Jiayimei, a factory that used to manufacture for IKEA (Ringstrom, 2013). This is a situation that poses copyright and trademark challenges for IKEA and other leading brands.
Another challenge for IKEA is designing new products for the Far East markets. Unlike in Europe and North America where products that vary from the products fond in the international catalog are about 1%, the products that are unique for China make up 5% of the international catalog. For example, sprung mattresses for China have different sizes from the international brands in consideration of the Chinese Fengshui culture where couples cannot sleep on two separate adjoined beds since this is viewed as bad luck. Japan’s small living spaces also posed a challenge in product development.
IKEA concept of do-it-yourself met resistance from the Japanese and Chinese markets. There is a huge group of Asian buyers of foreign furniture and appliances that has disposable incomes and is looking for quality and good customer service. Associating IKEA’s imported products with low quality and do-it-yourself delivery, assembly and installation flew in the face of these buyers’ perspective. Customer surveys in Japan showed low rating of the stores’ staff attitude (Class notes, undated).
Yet there is a majority of customers in the Asia market for whom price is a major consideration in their buying decision. These opt for local products that are priced cheaper than IKEA products. Consequently it was a challenge for the company to redefine its market segment and adapt its production, selling and distribution operations accordingly.
A challenge to IKEA’s distribution and logistics is the transportation infrastructure in the Far East. For example, in China only a few places are efficiently accessible by road. Most people use public infrastructure, unlike in IKEA’s traditional markets. This has made IKEA stores to be located in more accessible, upmarket, expensive properties; a factor that could be contributing to low profitability (IKEA, 2017).
Market entry strategies that IKEA adopted in China and Japan
According to Edvardsson and Edquist, expansion into the Far East, especially Japan and China, was the third phase in the growth to global success of IKEA. The company could hence apparently tap from its prior experience of expanding into the European and North America markets to adapt the best practices for the Far East market (Ringstrom, 2013).
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After its franchising failure in the Japanese market, IKEA researched and reentered the market as a stronger company in 2006, setting up retail outlets at Tokyo and Yokohama. It set up more retail outlets at Kobe and Osaka in 2008. Rather than the franchise method, having an outlet brought IKEA’s distribution and retail concept to the Japanese market. This was a concept bringing moderate success for the company in the Shanghai and Beijing IKEA stores.
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The warehousing and retailing stores in these markets were designed with ample showrooms. For example, there are displays of enchanting, furnished, Japanese households that use the “tatami” measurements. The furniture and appliances also meet Japanese stringent legal requirements (e.g. all cabinets being able to withstand earthquakes). The large stores also took consideration of the compact population concentration in the region. Having IKEA’s largest store design in the world, all the stores opened in Japan occupied about 40,000 square meters with in-store restaurants that have over 700 seats (Class notes, undated). The restaurants cater for the Japanese culture of entertaining outside the home. IKEA Funabashi had 35,000 visitors on the opening day. It has maintained 30,000 to 40,000 visitors every weekend. Like in many other of its markets, IKEA targets Japanese and Chinese families with household incomes of 40,000 to 45,000 Euros per year.
In China, IKEA started by opening small retail stores in the major cities of Shanghai and Beijing in 1998 and 1999 respectively. The company took its time to understand the Chinese customers, listening to them at their homes when delivering, assembling or installing furniture and appliances. Despite IKEA’s established do-it-yourself approach in European and North American markets, the Japanese and Chinese customers preferred the store to deliver, assemble and install the furniture and appliances. The company took all these concerns on board, adapting to have more suitable retail processes for the Far East market.
IKEA opened a fully-fledged retail store in Shanghai that occupies 33,000 square meters in 2003. The Shanghai store offers ample space for children to play and free parking. It attracted 80,000 visitors on the first day of business. The company has since opened a distribution and logistics center in the city as well as in Beijing. It now has many retail outlets throughout various Chinese cities.
The company adapted a long-term strategy in China and Japan by gradually rolling out stores in mid-sized cities. This strategy also extended to other cities in the region including in Kuala Lumpur, Singapore and Hong Kong (IKEA, 2017). The stores adapted to the needs of the respective, new markets. They required huge capital outlay in terms of buildings and staff, with the company repositioning itself to cater for the middle class. The huge outlay and low margins affected the company’s profitability for several years, with the Far East branches being the only loss-making stores among IKEA branches. However, the strategy saw sales increase drastically, with sales in China increasing by over 500% in the five-year period from 2000-2005.
One of the experiences IKEA adapted for the Far East market was its unique organizational culture and retail strategies. These included having stores that looked similar to its other stores in the established markets of Europe and North America, including a prominent logo outside the stores and having warehouses on the ground floors. The IKEA retail experience was also transplanted to the stores in the Far East; including customers browsing the showrooms, buying flat-packed products, paying, and collection or shipping (Ringstrom, 2013). The do-it-yourself concept was retained with associated lesser prices, though more customers were asking for assembly and installation regardless the extra prices for these services.
IKEA was viewed as modern, elegant and representing the aspired Western lifestyle. It not only offered furniture, but the “complete solution” that included cooking appliances, lighting and bedding. Despite the customizing or individualizing approach of the store that went against the societies’ traditions of the collective, this foreign culture in home-making was embraced by the Chinese and other Far East markets. These changes in retailing processes and perception by the society led to IKEA repositioning itself to cater for the middle class, rather than the usual mass market it caters for in Europe, North America and Australia (Ringstrom, 2013).
The company has also adopted Chinese and Japanese local traditions in its marketing mix activities. For example, it has special products and designs for the Chinese New Year, which is the most important festival in the Chinese calendar. It has had various symbols of the various Chinese years on its products. These include red roosters and red pigs, with the color red denoting good luck in the culture. IKEA Shanghai also has three kinds of meat cleavers and three kinds of chopsticks as well as Western-style knives and forks.
Streamlining of distribution and logistics are crucial to IKEA’s operations. Towards this, the company set up two distribution and logistics centers in China. These centers are important to the company’s supply chain since they assure the quality of IKEA products by minimizing costs and enhancing customer satisfaction (Class notes, undated).
IKEA product, pricing, marketing communication and distribution decisions in the two Asian markets and adapting of the marketing mixes to the markets’ preferences and needs
IKEA’s products offer it a competitive advantage in the Asian market. This is because they are unique furniture branded as modern, elegant and western. The company also offers various home necessities such as cooking appliances, lighting and beddings; promoting itself as offering the “complete solution”. Apart from offering maybe the widest range of home decoration products in China, the “do-it-yourself” concept leads to customized decorations and services, a differentiation from the local traditions and culture that the Chinese and Japanese markets appreciate; viewing it as experiencing a new culture (Class notes, undated).
That the do-it-yourself concept did not catch on among most of the population means IKEA made a decision to extend its production and retail experience to delivery, assembly and installation of the products. In addition to selling the flat-backs, the company offers the extra services at extra costs.
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The company has also built designed products that are unique to the Far East markets. Examples include chopsticks and cleavers tailored for the Chinese market. It also includes products for special occasions such as the Chinese New Year. Indeed 5% of the Chinese catalog consist of products unique to the Chinese market. Further, the sizing of Japanese furniture, appliances and bedding took into cognizance the small living spaces in Japan.
Product development in the Far East is usually low cost. In a bid to offer affordable products, IKEA adapted local production. It sources local material, uses local labor at local factories and reduces transportation costs by limiting to domestic transportation. It is able to pass some of these cost savings to the customer through competitive pricing (Ringstrom, 2013) .
Notably, low prices are a major competitive advantage for IKEA in European and North American markets. However in China and most of the Far East markets, IKEA found that its prices were higher than the prices of most of the local furniture retailers. Apart from reducing production costs so as to reduce the prices, IKEA also reduced its margins on many of its products; a factor that impinged on the company’s profitability. The company also charged extra for the extra services of delivery, assembly and installation that are preferred by the Japanese and Chinese customers.
Further the company dropped pricing as its major competitive advantage, repositioning itself to target a different demographic group, the middle class as opposed to its usual mass market. The company hence rebranded itself as the knowledge bank and brand of choice for the big urbanizing population aspiring for Western lifestyles (Ringstrom, 2013).
That the company is a big multinational that established itself in Europe and North America during phases 1 and 2 of its global expansion. As such, despite not making profits in China and Japan, the company could sustain itself in these markets without accruing any profits for several years. This made it to be able to painstakingly acquire local market knowledge that would turn into profits over time. IKEA Chief Executive Mikael Ohlsson noted that “we visit thousands of homes round every store in the world every year… We sit down in the kitchen and talk to them… That is the way we try to learn and understand” (Ringstrom, 2013). Hence the company engages on one-to-one market communication that makes it deliver products and services suitable for each market.
Other marketing communication involves distributing its catalogs. The catalogs are tailored to the needs, products and language of each market. The catalogs are updated frequently to include new designs and products for special occasions (IKEA, 2017).
After the failure of franchising in Japan, IKEA adapted a distribution method that involved starting with small retail outlets in China with a view to understanding the markets first before expanding into fully fledged stores that offered wide range of products. Notably the numbers of visitors to stores in China and Japan are big, making IKEA to build bigger stores in the Far East unlike those in its traditional markets. The stores adhere to IKEA’s traditions of warehousing, showrooms and after-sales services. They have also adapted to cater for the many visitors to the stores and the local culture by offering big restaurants at the premises where the customers can dine out.
In addition to the stores, the company has set up distribution and logistics centers, for example in Shanghai and Beijing in China. All the products distributed in these markets pass through these centers for quality control. This streamlines the supply chain, reducing the distribution costs and enhancing customer satisfaction.
The company has also tweaked its distribution and selling model from the strictly do-it-yourself model it has adopted in mature markets such that it is more involved with its middle-class customers in the emerging markets. This has seen its staff more involved in getting goods off shelves for the customers as well as in delivery, assembly and installation of the furniture and appliances (Class notes, undated).
Moreover IKEA is tapping into the huge online market, with over 25 million Chinese people per year visiting its website. Its website, ikea.com, is structured in a way that it caters for the various markets, with the customer having the option to switch to their local store and local language from the homepage. IKEA has also hastened ecommerce as a sales channel (IKEA, 2017).
For each of these markets, plan, discuss and justify what, in your opinion, IKEA’s marketing strategy should be in the near future to gain market shares and achieve higher profitability.
Despite the many visitors and high sales volume in IKEA’s Far East stores, the company has struggled to break even in these markets. Most of the visitors to the stores are young Chinese who view the stores as exciting and leisurely places to be; hence leading to a big gap between visitors and actual buyers. Most of the items purchased are small decoration products with low profit margins.
IKEA needs to convert the visitors to buyers of the company’s furniture and appliances. This includes ensuring the young visitors continue to visit the stores as they get employed and their purchasing powers increase. It would involve continuing to position the company’s products as exciting and leisurely for the Chinese, Japanese and other Far East markets, despite it targeting low-end buyers in Europe and North America. This means designing a comprehensive range of products and services suitable for the middle class.
IKEA is achieving brand development and market attractiveness through focus on digital marketing in the Asian market, apart from the traditional product catalog (IKEA, 2017). For example, the company is utilizing Chinese social media (e.g. Weibo) and microblogging to ensure that it remains attractive to the young audience. Its website is a good ecommerce portal suitable for purchasing the company’s products. IKEA can further hasten use of internet to ensure that it reaches more customers, especially those that are not catered for by a brick-and-mortar store.
Public transport is the main mode of transport in China, Japan and indeed for the rest of the Far East market. This means that IKEA had to establish its stores in places accessible and convenient for its customers. Unlike in the European and North American markets where the company usually sets up stores in the suburbs, in these emerging markets it has to continue setting up stores on the outskirts of the city centers where it is easily accessible to the majority of people who use train and metro services. This will lead to higher capital costs, but the company should continue to adapt a long-term strategy for the markets where it should aim at long-term profitability.
There is a lot of red tape to establishment of foreign multinationals in many of the countries in the Far East, and Asia in general (Ringstrom, 2013). IKEA needs to effectively overcome the red tape to enhance its profitability. Apart from establishing the quality control centers, this includes gaining approvals for sourcing, operations and transportation in the various areas from the various state governments. This scenario is especially pronounced in such markets as India where the states are quite autonomous. It also has to adhere to sourcing requirements of the various governments in Asia.
IKEA can shorten the period it takes to update its products. This has been a major selling point of one of its main competitors in the Chinese market, Hola, that entered the Chinese market after IKEA yet has grown to be the biggest furniture retailer in that market. Other strategies it can adapt from Hola include quick turnaround for new designs during special festivals, whilst still retaining and adapting its retail concepts to become more suitable for the middle class it targets in these markets (Ringstrom, 2013).
The company needs to also find ways to curb copyright and trademark infringement of its designs and products that is rife in these emerging markets. For example, online searches of IKEA furniture in China is likely to bring up discounted products from Jiayimei, former IKEA OEM factories (Ringstrom, 2013). Jiayimei offers products similar to IKEA’s products at much lower prices on Tmall.com. Through developing new designs and pursuing legislation standardization and adherence at the government level, IKEA can gradually overcome this piracy, a move that will positively impinge on its profitability.
One of the customer complaints about IKEA in Far East is poor staff attitude (Class notes, undated). This has traditionally not being a strong point of IKEA since it has the do-it-yourself concept in its traditional markets. However, it is important that IKEA trains and retains top talent especially in customer service. Staff with better knowledge, skill and attitudes towards customer service will curb customer complaints during surveys.
Conclusion
IKEA has demonstrated courage, market awareness and adaptation as it implements phase 3 of its global aspirations. Despite initial setbacks, the company has shown bouncebackability to reestablish itself in the Japanese and expand its operations in China and other Far East countries. This is by IKEA shifting production from its traditional bases to take advantage of low production costs and low pricing in emerging markets where the countries have a lower GDP than the company’s traditional markets of Europe, North America and Australia. IKEA has adapted local sourcing of raw materials, working with local cheap labor and adapting local transportation methods.
Further the company has developed unique local brands for the respective markets. It has tweaked its do-it-yourself distribution and after-sales service to cater for the local demand and perception, with the company more involved in delivery, assembly and installation in the emerging markets. It has embraced modern technology to better cater for its customers. IKEA needs to continue listening, respecting and learning from the customers in the markets it ventures to so as to ensure sustainable growth and improved profitability. The company will overcome legal hurdles by closely with local governments and industries. Research and development should continue to be at the forefront for innovation and enhanced customer satisfaction. In so doing, IKEA will grow its market share to be the leading furniture and appliance distributor and retailer in the emerging market.
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