IKEA: The World's Largest Furniture Retailer

Introduction

According to KeyNote, 2008, IKEA is the world’s largest furniture retailer. IKEA sells a lifestyle to its middle-class global consumers through cheap contemporary flat-packed designs. The Swedish based company has 237 stores around the world and it is the world leader in home furnishings (Mintel, 2006). IKEA is responsible for a global strategy that concentrates on cost management, efficiency and quality.

However, there is much more to IKEA than just its cheap stylish furniture. As Eberhard-Harribey (2006) states, regardless of its openly aggressive focus on cutting costs, IKEA is a leading company when it comes to Corporate Social Responsibility (CSR) matters (see more on Appendix 1). IKEA has managed to combine a cost focus strategy with CSR issues as opposed to companies such as Starbucks and The Body Shop, which is considered to be high CSR-oriented but that charge a premium-price for its sustainable products. IKEA has respectable policies on child labour and has strong partnerships with UNICEF, and the WWF.

Moreover, IKEA has a transnational strategy. The business maximise its global strategy of product standardisation whilst responding to, consumer local needs. Globalisation, factors like economic growth, deregulation, more disposable income and rising housing market have created many opportunities for growth in which IKEA have continuously taken advantage of in many countries. In spite of its global presence, it is worthy to point out two facts. First fact is that Europe accounts for 82% of IKEA’s total revenues and North America accounts for 15% (Datamonitor, 2009). Second fact is that in both Europe and North America regions, as a result of the economic downturn the furniture retail industry is under a lot of competition.

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In order to reduce the political-economical and social-demographical risks inherent with such regions, IKEA needs to concentrate on diversifying its operations into other markets promptly and efficiently. Moreover, by expanding into other markets, IKEA can also take advantages of opportunities that these new markets offer that current markets no longer do. For example, in the past when China opened-up its policy to FDI, it eventually led to the Chinese economic improvement, the rise in the housing market and subsequently the demand for home furnishings in China. These events have unmistakable allowed IKEA to successfully enter this market. The current strategy mode that IKEA undertakes when entering a new market is International Franchising whereby products, limited rights, operating systems and the use of IKEA’s brand name are sold to the foreign franchisee for a sum fee and share in the profits.

It seems sensible therefore that IKEA continue on expanding into new markets. Nevertheless, before IKEA chooses another market to enter, IKEA needs to follow some steps: (1) Assess potential markets, (20 Evaluate the respective risks and benefits, (3) Choose the most appropriate market that not only match the Furniture Industry but ultimately complement IKEA’s vision and Corporate Social Responsibility.

In this work IKEA’s plan will be to further its global expansion into the South American Market, having Brazil as a target. Brazil is the largest country in South America and according to Datamonitor (2009), it is characterises the most attractive country for the Furnishing Industry.

The following analyses have as an aim to critically determine whether or not IKEA can successfully enter the Brazilian Market and how it should best endeavour such move

Industry Overview: Global Home Furnishing Retail

The home furnishings retail sector includes furniture, floor coverings and household textiles. Furniture sales dominate the global home furnishing retail sector, with 63.9% of the sector’s value. IKEA has the largest share in the global home furnishing market. Its share accounts for 2.3% (MarketLine, 2009).

Europe accounts for 43.1% of the retail sector’s value and the compound annual growth rate of the sector in the period 2004-2008 was 2.6%. Moreover, according to Datamonitor, 2009, sector’s value reached a value of $663.4 billion in 2008 and it is forecasted to grow by 24.9% in 2013 (MarketLine, 2009).

Moreover, according to Mintel (2008) the UK is IKEA’s most successful market. However is being held back by the difficulty of getting new stores, low consumer confidence due to the economic slowdown.

The UK housing market has slowed dramatically and with house prices and the number of transactions forecast to fall this year, this must be bad news for furniture retailers. Already in 2008 there have been a number of casualties, including Sleep Depot and New Heights, and most recently Ilva and ScS.

At the same time furniture retailers are facing unprecedented levels of competition from outside of the specialist market from the likes of Tesco, Asda, Woolworths, Argos, Homebase, B&Q, and even Next and M&S. Is it all doom and gloom for the furniture specialist?

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The UK housing market has slowed dramatically and with house prices and the number of transactions forecast to fall, furniture retailers are facing exceptional amount of competition from outside of the specialist market from the likes of Asda, Argos, not to mention M&S and Next.

Five Forces Analysis

Retailers of furniture, floor coverings and household textiles are the players of the home furnishing retail sector and the main buyers are taken as end-users, and manufacturers of furniture, floor coverings and household textiles as the key suppliers.

(Table bellow adapted from Datamonitor, 2009)

IKEA Swot Analysis

IKEA’s Corporate Social Responsibility

According to Maon, Swaen and Lindgreen (2007) IKEA receives pressure from various external stakeholders. This pressure mainly exists because IKEA’s business is modeled on cost leadership the majority of its raw materials are originated from developing countries. Since the end of the 1980s, IKEA’s policies have been under constant scrutiny, particularly from NGOs. For example, IKEA was under the public eye over child labour in Asia, working conditions in Eastern Europe and Asia, and wood from questionable forests in Indonesia and Russia. Some critics argue that IKEA’s sustainable practices took too long to be implemented and others question why the company do not place social and environmental labels on its products, even though the products meet criteria for products made of tropical wood materials.

However, for IKEA, the brand itself should “be a guarantee of environmental consideration and social responsibility” Moreover, as a result of such pressures, the company is more actively involved in its CSR than ever. See next for examples of IKEA’s current practices:

(Source: IKEA Group, Panda.org, UNICEF and SaveTheChildren.com, 2009).

Identification of a New Market

Whereas the North American furniture and floor coverings market is currently going through difficult times, South American has kept strong growth in value, a trend that according to Marketline, 2009 is meant to carry on rising.

As for 2010 IKEA will enter the South American market. The first IKEA store will be allocated in Santo Domingo, Dominican Republic (Reference?). However, as it is shown bellow there are other countries within South America in which IKEA could be successful.

Furniture & Floor Coverings in South America

Industry Profile

The South American furniture & floor coverings market generated total revenues of $19,801.3 million in 2008, representing a compound annual growth rate (Datamonitor, 2009) of 7.5% for the period 2004-2008.

Market Segmentation

“Living room furniture sales has proved the most lucrative for the South American furniture & floor coverings market in 2008, generating total revenues of $7,420.1 million, equivalent to 37.5% of the market’s overall value. Brazil” (Marketline, 2009) however, Brazil leads the South American furniture and floor coverings market, accounting for 63.3% of the market’s value.

Factors Influencing the Likelihood of New Entrants and New Entrants in the Furniture Market in South America

As shown above, there is a lack of brand strength in the Latin American furnishing market. This is turn shows that somewhat easy for new businesses to enter the market. Examples of such business however, are those well established diversified retailers, such as supermarkets and department stores entering the market.

Advantages for retailers occur within the market on a small scale with either one or several outlets, for which fixed costs and entrance barriers are fairly low.

However, the impact of the current global economic recession on the retail environment can discourage the entrance of new furniture businesses into the high-street in the medium term. There is however little government regulation which only concentrates on health and safety of the products. Overall, Datamonitor (2009) sees that the threat of new entrants to the furniture market in South America is considered to be strong. It is therefore important that establishes its presence in the region before other multinational companies decide to enter the South American. By being a entering such region, IKEA can be as successful as Telefonica has been since 1990 (Griffin and Pustay, 2009). It can generate more sources of revenue as well as establishing new customer base before competitors.

There are a large number of different retailers of different sizes from small independent retailers to large chain-stores operating within the furniture and floor coverings retail market. Many players within the market are diversified retailers, such as department stores, supermarkets and DIY stores, which are not critically reliant upon furniture sales, which in turn ease rivalry. However, there are many small specialist stores, where the sale of furniture and floor coverings products is critical to success.

These companies need to compete intensely with the supermarkets, which is becoming increasingly difficult in terms of price without compromising product quality; as the supermarkets can afford to make smaller margins over a wide range of products. The current economic downturn is adversely affecting retail sales, reducing growth potential and increasing exit barriers, which enhances rivalry. Overall, rivalry with respect to the furniture and floor coverings retail market is moderate. (Please refer to Appendix 2 for further analyses).

Brazil

The Brazilian economy was not affected by the global financial crisis as the country’s economy is tightly regulated with orthodox macroeconomic policies. The country’s growth rate increased in 2008 to reach 5.9%. Moreover, Brazil is the founder member of Mercosul regional integration which for instance, are responsible for 75% of South America’s GDP and it is the world’s fourth-biggest integrated market. The economic reforms, liberalized foreign investment to most sectors have been considered to be responsible for the current economic.

The market of furniture in Brazil has three main segments: home (60%), office (25%) and institutional organisations (15%). Analyses show that (reference) this last segment is on the growth and imports should increase. This change in demand for foreign designs can certainly benefit IKEA in Brazil.

The market is also restrained by high interest rates (18.3% per year in 2001) which prevent people from demanding bank loans, and thus maintain their purchasing power at lower levels than if they could borrow money easier. It then has a bad impact on house purchasing and in series, lowers the buying of house furnishings too.

However, despite its high profile, Brazil still suffers from corruption. According to Transparency International’s Corruption Perceptions Index for 2008, “Brazil is ranked in the 80th place out of 179 countries”. Because corruption is perceived to be very strong in Brazil, the majority of businesses are expected to encounter corruption when proposing contracts to governments. Moreover, deforestation caused by multi-nationals is making serious harms to the Brazilian rainforests. As the demand for environmentally friendly companies in Brazil and around the world continues to rise, companies such as IKEA can certainly expect to have its CSR scrutinised before receiving any license for operation.

PESTLE Analysis of IKEA in Brazil

Brazil has come out to be of the best market to invest (Griffin and Pustay, 2009) the economic reforms implemented after 2003 led to increases in real per capita income, and an improved income distribution. Real per capita income increased 14% from 2004 to 2007 and the inequality in the distribution of income, measured by the Gini coefficient (which ranges from 0, which reflects equality, to 1, which indicates inequality), diminished from 0.6 in 2000 to 0.5 in 2007.

Although the political stability in Brazil does not have the same standard of security as other OECD’s, the political stability in Brazil is improving steadily. Brazil’s president is considered to be more sensible than other South American leftist leaders. And Although Lula obviously seeks to protect national companies, He is also aware that many Brazilian businesses are not very efficient. After being re-elected, Lula has welcomed FDI in Brazil with open arms (Reference)

Additionally, as the poverty situation in Brazil is still high, the Brazilian government and its population are in turn very active when it comes to social programs. There are major government programs that aim to tackle the problems of income inequality and access to credit. Programmes such as “Zero Hunger” (Projeto Fome Zero) provides low-income families conditional cash transfer bases reach nearly one quarter of Brazil’s population (MDS).

Such programs can be seen as an opportunity for IKEA. Since IKEA has such renounced CSR programs in place, it can certainly work with partnership with the Brazilian government. Also, as more people are acquiring houses, the demand for furniture will eventually increase.

With emerging markets capturing investors’ attention, many are turning their focus towards South American markets. Strong exports, high commodity prices and increased investments have been contributing factors to growth within many of the Latin American markets (Fleming, 2007).

Amongst its neighbours, Brazil is the country that provides its population the highest average purchasing power (IMF, 2006) Thus, Brazil seem a very attractive market for IKEA, especially since the its furniture imports have experienced a growth of 16.27% during the third quarter of 2006. The imports of furniture in Brazil are controlled by the United States with 39% of the share, followed by Germany with 36% and Italy with 10% (ABIMOVEL, 2008).

Because Brazil’s income gap between the rich people and the poor people is very high, “The 10% richest people earn 50% of the totally income and the 10% poorest people only get less than 1% (source?) social status are very meaningful, especial for the middle-classes. As IKEA has been very proficient in selling lifestyles to its customers (KeyNote, 2008) the status importance amongst Brazilians could turn out to be advantageous for IKEA. Nevertheless, credit option is extremely limited among most consumers who are expected to pay for their goods in instalments. Very ofte, consumers opt for a certain product not because if its quality, but because of the payment facilities. Consumers can pay for a TV of the equivalent of £300 in 10 instalments and without any added interest. IKEA should certainly be aware of consumer’s buying behaviour in order of to have problems with its liquidity ratios.

As the telecommunication penetration rate in Brazil remains low, IKEA would not be able to rely in online sales in Brazil in the middle future and its online advertising should be very efficient

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Laws requiring pre-sale disclosure by a franchisor are in place in Brazil

Brazil shelters dense forests in northern regions including Amazon Basin that can be use for wooden furniture: half of the country is covered by forests. However, over the past couple of years, the government has been very cautious about global warming caused by MNC’s deforestation. So IKEA would need to ensure the Brazilian government that its practices are very sustainable to be able to use Brazil’s endowments.

IKEA in Brazil

From the analysed above, it can be deducted that there are several attractive aspects for IKEA to invest in the area of furniture industry in the Brazilian market. First of all, the furniture market in Brazil is attractive due to a big value of imported furniture. Additionally, the labour cost is cheaper compared to Europe and America.

Mode of Entry

All IKEA’s stores in foreign countries are managed under international franchising (IKEA, 2009). “Franchising is a special form of licensing where the licensor authorises the licensee to utilize its operating systems, logos, brand names and trademarks in return for a loyalty payment (Griffin and Pustay, 2009). The franchisee needs also to supply capital, personnel, personal involvement and local market knowledge” (Jeannet & Hennessy, 2004, pp.296).

As IKEA has so much experience in setting up franchise contracts, it seems sensible to apply the same when coming to Brazil for the following reasons:

However, International Franchising has its drawbacks as well:

Although the drawbacks of setting up Franchising in Brazil are not too high and IKEA could still be very successful in such a market. Based on the information gathered in this work, a relatively more complex but even more successful mode of entry can be recommended.

Due to Brazil’s endowment factors and government economic stimulus package to attract new investments, IKEA can greater benefit from entering the market through Foreign Direct Investment via than from International Franchising. Moreover, by using FDI as a Strategy, IKEA can acquire national resources and access other South American markets.

According to Dunning’s Ecletic Theory (Griffin and Pustay, 2009), FDI will occur when three conditions – Ownership, Location and Internalisation – are satisfied. By matching IKEA’s Swot analysis and all the other information gathered in this work, it is possible to observe that IKEA enjoys all three advantages in competing in Brazil against local firms.

1. Ownership: Whereas most of Brazilian furniture retails hold low brand image and average technology systems, IKEA has unique competitive advantages such as strong brand name globally, advanced technology and the benefits of economies of scale in other markets.

2. Location Advantage: IKEA can enjoy lower labour costs, avoid tariff walls on goods exported from Brazil to other South American countries and save money on product transportation – instead of importing products from China, Russia and India, the majority of products can be manufactured in Brazil due to its vast resource endowments.

3. Internalisation Advantage: Because of growing concerns related to management of intellectual property rights, deforestation and corruption in Brazil, IKEA will benefit more from controlling its operations in Brazil than from hiring independent local companies to provide such services.

FDI via Greenfield Strategy and Strategic Alliance

As Brazilian Furniture Retailers are relatively small, the possibility to acquire an existing company with the intention of obtaining control over employees, technology and stores is very low. Therefore, IKEA would have to start its operations from scratch. According to Griffin and Pustay, 2010, when companies buy or build new facilities, hires in managers and employees to launch its brand new operations, they do so through Greenfield Strategy.

Given all the facts that influence FDI in Brazil, the Greenfield Strategy can certainly benefit IKEA’s entry to the Brazilian Market for the following reasons:

IKEA can the location that best meets its needs

It can build up-to-date facilities

Brazil’s local and national government gives economic development incentives to attract companies facilities

IKEA would not have to adapt its production systems to any Joint-ventures

IKEA would not have to deal with problems associates with Property Rights that could arise from potential Franchisees/Licensees/ or Joint Venture partners.

However, the Greenfield Strategy also has its disadvantages:

The process of building a new site, hiring new staff and negotiating with government is relatively long and expensive

In order to promote certain regions development, Brazilian government might require IKEA to build its site in a determined place that is not IKEA’s desired location.

Grant to use natural resources might be given under very restrict regulations due to global and national demand for sustainable products

Furthermore, by using Brazil’s endowment resources, particularly in the Forestry sector, IKEA’s CSR would be put under further scrutiny. However, as IKEA has so many projects that have been benefiting the forestry and the cotton sector (refer to IKEA’s CSR) in so many countries IKEA can combine its current CSR practice and form a strategic alliance with the Brazilian government involving the production aspect of the business.

According to Griffin and Pustay 2010, a strategic alliance involving public and private partners can benefit a company if negotiation is handled properly and if the government is relatively stable, by easing market entry, reducing risks, enhancing knowledge and expertise and giving competitive advantage.

Appendix 1

Detailed Five Forces Analysis for the Global Retail Furniture Market

(Adapted from Datamonitor, 2009).

Appendix 2

Continuation of Five Forces Analysis on the South American Retail Furniture (Source: Datamonitor, 2009)

Appendix 3