IKEA: Building Itself up in China?

The furniture icon looks beyond fame to fortune

By LIU YUNYUN

WINNING COLORS: Increasing Chinese homeownership has made home furnishing an exuberant market

No free home delivery---what kind of furniture company is IKEA? One that seldom encounters large-scale criticism, actually. Despite an implicit dog appendage image in its 2007 catalogue and the involvement of seven of its former employees in a bribery case in Germany, the Swedish furniture giant is doing just fine in the Chinese market, at least judging strictly by revenues.

The Shanghai-based Dongfang Daily reported that IKEA's China operations brought in about 1.2 billion yuan in sales in its 2005 fiscal year, increasing 21 percent compared with a year before. From 2000 until fiscal year 2005, the sales revenue of IKEA China increased by over three-fold.

In the world’s fastest-growing economy where more people are joining the ranks of the middle class, IKEA’s creative home furnishing ideas fascinate the younger generation and have intrigued their interest in IKEA’s “ready-to-assemble” furniture. Fang Fang, a senior guide with the China Youth Travel Service, became a big fan of IKEA after she bought a semi-furnished apartment in Beijing.

“I have the impulse to go to IKEA at least once a week,” Fang said. “The price is reasonable and the furniture is creatively designed, simple and comfortable. The frequently changed layout of the store as well as IKEA’s do-it-yourself [DIY] goods have always inspired me in life and work.”

“IKEA is ready to provide state-of-the-art products for those who enjoy life,” said Chang Yang, human resources manager of IKEA China, “In Beijing, we define the middle class as drinking Starbucks coffee and buying IKEA furniture.”

Even though it provides neither free delivery nor installation, an IKEA representative said its new Beijing store, located away from the center of the metropolis, boasts a daily client flow of over 10,000 people in spite of stagnant performance of neighboring shops.

Against all odds

RED IS IN: Ikea has been striving to attract Chinese customers by adding Chinese features, like the popularity of the color red, in their products

“Fierce” is the word Ian Duffy, CEO of IKEA Asia Pacific, uses to describe the Chinese furniture market. IKEA’s first Chinese outlet opened in Shanghai in 1998 and its second opened in Beijing the following year, but IKEA has been lagging behind its counterparts like B&Q in opening up new shops. B&Q, a British company, sells furniture as well as other home essentials like flooring. Not until late 2005 did IKEA start a new outlet in Guangzhou. Analysts suspected that the unsatisfactory performance might lead to IKEA’s hesitation in tapping the thriving Chinese market.

“I think IKEA really needs to speed up its effort in seizing the market share and expanding its business network,” a business insider who preferred to remain anonymous told Beijing Review. “You see, in the past eight years, IKEA only opened three outlets, while its rival B&Q shops are sprouting everywhere.” He added that if IKEA does not hurry up to grab a “promising business area,” soon the “golden area” will be carved up by others including B&Q, and domestic furniture retailers like QM Furniture and Orient Home.

Despite the fact that IKEA reaped a lot last year from the Chinese market, the total sales revenue of IKEA China only accounted for 1-2 percent of IKEA’s world total.

According to Credit Suisse Group’s estimation, China makes up 3.8 percent of the total consumption of furniture in the world and will become the second largest furniture consumption market in 2014 only after the United States. The total consumption volume of China will likely reach $3.7 trillion by then, taking up 11 percent of the world’s total.

Confronted with the white-hot competition and intrigued by an increasing number of spenders, in July this year, Duffy said that IKEA plans a total of 10 stores within five years, including expansion into west China’s Chengdu of Sichuan Province. Duffy announced IKEA China’s blueprint at a press conference in April when its new outlet in northeast Beijing came into use. Occupying about 43,000 square meters (almost equaling six standard football fields), it is the second largest IKEA outlet in the world.

“It is only in a store of this size that we can offer what we want to offer and differentiate ourselves from our competitors in this changing market,” Duffy said.

Meanwhile, a production base of IKEA furniture, with an investment of $20 million, is taking shape in northeast China’s Dalian City, and is now undergoing a trial production period.

According to Duffy, IKEA will streamline its resources in the Asia-Pacific region and will move its purchasing, financial, operation, security and other functional departments from Singapore to Shanghai.

Service really matters

In Europe and America, IKEA prides itself in a vast variety of good-quality home furnishings and a relatively low price. Its target market is the middle and low-income groups of people.

In the West, with large-scale purchase, its own logistic network, DIY assembling, and fewer shop assistants, IKEA has successfully cut down its cost, leading to a price edge in the competitive market. Further, “the Western society pays great attention to environmental protection and IKEA’s culture is just in line with the society,” said Zhou Zhimin, marketing professor with Shenzhen University.

However, after entering China, IKEA found that even the “relatively low price” in Western society was high for the Chinese consumers and its goods even became a luxury for average people. Moreover, even though the Chinese customers have accepted the environment-friendly concept and cost-cutting effort of IKEA, many still complain that no free home delivery and installation doesn’t match IKEA’s position as a furniture giant.

“There is no doubt that the product value, employee value and the image of IKEA can get a high score,” said Zhou. “However, its service is not as satisfactory as we demand.”

For instance, Zhou noted that the fashionable DIY mode couldn’t work well in China where the customers are used to the free home delivery and installation. They tend to believe those are the most basic services that have to be offered by retailers, and are common practices of many domestic retailers. To Chinese customers’ disappointment, IKEA charges to provide delivery.

“People may get an impression that IKEA is mean,” Zhou said. What’s more, according to Zhou, the DIY mode, though innovative and stylish, adds to customers’ cost of time, strength and energy.

Simplicity is a virtue. But additionally, as China keeps opening up its market and more high-end furniture pours into the country, the growing Chinese rich are looking for more luxurious home furnishings.

Fang Shan, a director with CCTV International, described IKEA’s furniture as “shaky” and low rank. “The furniture materials are thin and easy to break down,” said Fang, “How can you trust the quality of a 4,000-yuan bed?” To her, IKEA lingers between the low-end market and the middle-end market. Many of her colleagues visit IKEA just for the purpose of observing the layout of its sample rooms and get some fresh ideas about home furnishing and decoration. However, “few of us buy things there,” said Fang.

“IKEA needs to redefine itself,” said He Jiaxun, assistant professor with East China Normal University. “As the nature and competition structure of the Chinese market are changing rapidly, the extensive and vague market positioning strategy of IKEA has been out of date.”

Fang Shan said for small commodities like swabs or dust cloth, she would rather go to small commodities wholesalers, where prices are much lower than those of IKEA.

But Duffy said he has been working on changing Chinese perceptions that Western-branded goods are normally more expensive. In order to be more competitive, IKEA has been trying to cut prices.

“In recent years, the price of IKEA’s goods has decreased an average 10 percent each year,” stated Linda Xu, Public Relation Manager of IKEA China. Xu noted IKEA is striving to make its goods affordable to the average Chinese people and change people’s perception that IKEA is white-collar privilege.

But He Jiaxun said, “Cutting price is not a priority. The basic change should take place in its brand positioning which suits the local customers.”

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