Largest Retailer Furniture Firm In The World

IKEA is the largest retailer furniture firm in the world and also the most successful mass-market retailer, selling Scandinavian-style home furnishings in the world (Innovaro.com, 2012). The company is selling the ready and assembled furniture as well as the home accessories (Ikea, 2011). IKEA is founded by 17 years old man, Ingvar Kamprad in Sweden in 1943 (Ikea, 2011). In the past six decade, IKEA went from wood of southern Sweden to being a major retailer experience over 40 countries around the world (Chaletanone, 2008). The vision of IKEA is “To create a better everyday life for the many people” and their business idea is “To offer a wide range of well designed, functional home furnishing product at prices so low that as many people as possible will be able to afford them (Ikea, 2012).”

IKEA has a total of 325 stores in 40 countries from Europe, North America, Asia and Australia and IKEA Group itself wholly-owned 267 stores (IKEA, 2011). It is using two main expansion strategies which are wholly-owned and joint venture along its 54 years of operations. Furthermore, IKEA also selling their product online and by mail order (Innovaro.com, 2012).

In addition, IKEA is using the wholly owned strategy to enter into Japan (Chaletanone, 2008) because there is increasing of purchasing power of the country. IKEA is using wholly owned strategy because it can have the full power and control over decision making. In ASIAN, Japan is the first country IKEA entered into, but IKEA was not successful at the first time of entry due to differentiation of lifestyle and behavior (Stolba, 2009). While IKEA is using joint venture in China, they have faced challenges in China due to the differences of culture and lifestyle compared to Europe country (Steve Burt, 2008).

Franchising is a cheaper way to enter into a foreign countries and markets; IKEA acts as a franchiser and is setting up a franchising contract to give out the power and right to the franchisee in other countries. IKEA exercises this to save the cost and to enter the market in more local way, because the franchisee was local people, they know the culture of the countries, lifestyle and the citizen needs and wants. IKEA needs to set up a set of rules and regulations and the franchisee must agree and follow the rules in doing business.

2.0 Current Expansion Strategy

2.1 Wholly-Owned

In Asia, IKEA entered into Japan twice where its first entry in 1974, through joint venture with a local partner was a big failure to the company (IKEA, 2012). The second entry was made after 20 years through establishing wholly-owned stores (Wannapa & Wanee, 2008). The use of joint venture as an entry mode into a host country is said to have benefited the foreign company (IKEA) from a local partner’s knowledge of the host country (Japan). However, significance cultural differences are the critical failure factor to IKEA in the first entry. Rather than solely depending on the local partner and to avoid profit sharing, IKEA establishes its fully-owned stores in Japan after extensive market research and planning (The Local Sweden’s News In English, 2006).

Another reason that attracts IKEA’s attention to expand into Japan is the country’s infrastructures on transportation and logistics. IKEA involves itself in global sourcing. The integration of operations, procurement, and logistics, referring to the entire supply chain is critical for IKEA’s operation (Hultman, Johnsen, Johnsen, & Hertz, 2011). IKEA ships its furniture to the distribution center in Kuala Lumpur and Shanghai before sending them to Japan (Capell, 2006). According to International investors’ perceptions (2008), Japan ranked the top in Asia in the attractiveness of its transport and logistics infrastructures with a rate of 33% (Ernst & Young, 2008). Quality transportation and logistics infrastructures benefit IKEA to ease their expansion in Japan and thus make Japan an attractive country to IKEA.

In North America, IKEA entered into the United States by opening its first wholly-owned store at Philadelphia in 1985 (IKEA, 2011). Low net sales margin is the main driving factor for IKEA to establish wholly owned stores in U.S. The gross sales margin for the furniture retailing industry is high, around 50%. However, due to high expenditure related to the cost of sales such as advertising expense and cost to purchase real estate, it pulls the net sales margin low at a level up to only 5% (Industry Overview, 2012). Thus, maintaining wholly owned stores allow IKEA to retain all the profits generated in the country without having to share the profits with joint venture partners.

Despite the main advantage of creating wholly owned subsidiary, it fails to lower the business risk of IKEA operating in U.S. in terms of the country’s long term demographics. The main target for most of the furniture retailers in U.S. is said to be the baby boomer, which have higher purchasing ability to purchase houses (Industry Overview, 2012). This segment in U.S. is retiring in 2010 and the next generation of this market segment is only half of its current size (Industry Overview, 2012). This possesses a business risk to IKEA which will restrict their long term growth potential in the country. If IKEA were to establish its stores through franchising or joint venture with local firm, it would have helped to decrease such business risk in the country.

Canada is another focus of IKEA in North America. IKEA owns a total of 11 fully-owned stores in Canada. IKEA Canada had a major expansion in Ottawa in 2011. In years to come, IKEA is planning to expand its business to Montreal, biggest store in North America (Moot, 2011). IKEA is so popular and successful because they value their customers and deliver good services. Satisfaction from customers contributed to the increasing level of inventory as they will purchase more and thus increases sales and profits of IKEA furniture.

Besides, IKEA investing heavily in the Canadian market as an announcement had been made by the Federal Finance Minister Jim Flaherty in the proposed Federal budget where a tax credit up to $1,350 will be given on home improvement projects in order to stimulate the economic growth (IKEA, 2009). Canadians’ interest in investing their homes especially on new kitchens projects gives IKEA a strong indication and vitality of Canadian Market. This is a good opportunity for IKEA to capture this particular market as more customers will purchase their furniture from IKEA because of the tax credit implementation. Increased in demand for kitchen products will boost the sales of IKEA in Canada. IKEA provides satisfaction to Canadians in terms of their product quality, design, delivery of services and competitive prices to enhance the customers’ loyalty in providing a sustainable life at home in an easy, affordable and accessible way to them.

2.2 Joint Venture

In Asia, IKEA is like a fresh air entering into new target markets such as China market with new strategies bringing the new lifestyle and services to customers (Albarrak, 2012). IKEA aims to further expansion in China because China served as an attractive and a potential largest market for IKEA in 10 to 15 years later. IKEA joint venture with Chinese companies in China because it represent cultural and economical differences from its previous market IKEA had entered before (Wisesaputri, 2010).

The policy of Chinese government in achieving principal of equality and mutual benefits attract IKEA to enter China. Business freedom by China government to open their gate to the outside world to set up business in China such as supermarketization and opening market to multinationals companies enhancing the growth for IKEA as the world’s fastest growing major retail market (IKEA entrying China and Japan, 2012). IKEA has the intention to achieve economic of scale whereby producing large volume of furniture with low price to compete with other competitors in Chinese market. IKEA successfully convert Chinese visitors into customers driven by their commitment and determination. Increase in demand provides good opportunity for IKEA to achieve economic of scale.

In addition, IKEA China reported sales revenue of over RMB 4.9 billion of sales in 2011 with an increase of 20 percent and China is believed to be the largest IKEA sales market in future (Times, 2012). Thus, accelerated expansion by IKEA is necessary to promote long-term growth. The retail sales are expected to reach $5 trillion by 2016 and be the largest consumer market before 2020. Growing of sales in China offers long-term sustainability for IKEA in terms of innovation and growth. Besides, this encourages the minimum degree of dependence on exports and investments by the Chinese government (Hays, 2008).

Joint venture increases more interaction with local customers and competitors where IKEA has greater responsiveness towards the China market. In China, the word “Family” is important because it connects the collectivist culture of China. Therefore, the character is important whereby Chinese customers depend more on visual representation and this leads to the reason why IKEA’s Chinese name is consists of two characters defining comfortable and family representing their products and corporate identity (IKEA entrying China and Japan, 2012). By understanding the Chinese culture and lifestyle, it serves as a key positioning strategy to provide competitive advantage for IKEA in Chinese market since there is a fast-changing economic environment in China.

3.0 Future expansion strategy

3.1 Expansion to Egypt

Egypt is a country where it has political uncertainty that keep foreign investors away. A net outflow of foreign direct investment of $163mil in the first quarter of year 2011 (The Economist, 2011) shows clearly the political uncertainty in Egypt. In years back, IKEA expanded its business to Middle East / North Africa region in partnership with its franchise holder Al-Futtaim Group (Maierbrugger, 2012). Since IKEA chooses to be in a partnership with its franchise holder Al-Futtaim Group as an expansion mode to Middle East / North Africa region at the early stage, we recommend that IKEA should continue using this mode, franchising to expand their business to Egypt.

Egypt is a country where majority of Egyptians practiced Islam as their key religion. This religion plays an important role in almost all the aspects of the Egypt society. It has been a critical element that influences Egyptians’ personal, political, economic and legal decision making as well as the day-to-day conduct. In this country, whenever it is dealing with problem solving, it is often governed by faith and the interpretation of Islamic law (Communicaid, 2009). From this particular point, it indicates that partnership with Al-Futtaim Group as a franchise holder to expand their business to Egypt is the best choice as the group knows Islamic law well and understand the culture.

Besides, there are some benefits where IKEA can get as they partner with their franchise holder. In Egypt, having a franchise business will have the potential to grow faster and at the same time lower the cost and get higher profits. Building the brand internationally can be done as IKEA has their business in Egypt. According to an Egyptian Business Expert (2010), he stated that there is a tremendous growth potential for franchising market in Egypt. This market is expected to continue growing at an annual rate of 10 to 20 percent (Fathalia, 2010).

Furthermore, economy of Egypt is becoming one of the most open, resilient and internationally integrated markets in the region. As Egypt has a unique geographic location, it located in the heart of Middle East and formed the crossroad of Arab culture for more than hundred years (Fathalia, 2010). It is also estimated that there are 300 million consumers in this region which has a great potential. Based on the report, in just six years, franchising ventures have grown by 800 percent in Egypt. According to Egyptian Franchise Development Association (EFDA)(2007), one of the future planning of franchising in Egypt is that government will adjust laws and regulations to conform with new activities and evolvement of the market to free-market economy (Fath, 2007)

According to the store manager of IKEA Abu Dhabi, James McGowan (2011), the group, Al-Futtaim is going to have other project abroad where a new IKEA store will be opened in Cairo in late 2012 or early 2013. Egypt has become a target market for retailers because of its growing in the middle-class population and economy. At the same time, Mr McGowan believed that this market has its potential to grow especially in Cairo (Bundhon, 2011).

With a question appears that why IKEA choose to open their new store in Cairo but not other places, AFGRE’s Director Commercial and Retail Leasing, Mr Philip Evans commented that the store opened in Festival Centre is important in catering the needs of Cairo Festival City’s residents and also the large residential communities surrounding the development. It is also shown that the primary and secondary trade areas have a community of more than 5.4 million residents. It is believed that this number is expected to increase to 7.1 million by 2020 (Odiabat, 2010). There is why it is said that Cairo is a potential market.

According to the World Factbook (2012), the population in Egypt is estimated to be 83,688,164 while the population in Cairo where the place IKEA’s new store will be opened is 10.902 million (Central Intelligence Agency, 2012). With a population growth rate of 1.922% in Egypt, this has been clearly shown that the number of population in Egypt as well as in the major city, Cairo has the potential for IKEA to have their store there. On the other hand, according to the International Monetary Fund (IMF) (2012), the implied Purchasing Power Parity (PPP) conversion rate in Egypt was reported at 2.21 national currencies per US dollars in 2009. In the future, Egypt’s implied Purchasing Power Parity (PPP) conversion rate is expected to grow to 3.08 national currencies per US dollars (Trading Economics, 2012). This clearly indicates that residents in Egypt have the purchasing power over the finish goods. This indicates that expanding business to Egypt in Cairo is encouraging.

3.2 Expansion to India

We recommend IKEA to expand its business into India by establishing wholly owned subsidiary. The opportunity is here when India’s government makes an announcement about removing a law that limited foreign ownership of stores selling a single brand in November 2011. India is now opening 100 percent equity single brand retail market to foreign direct investment (FDI) to expand the business in the country (English.news.cn, 2011). This means that a single-brand retailers like IKEA can have a full ownership of their business in India and this legislative development is said to have given IKEA a potential entry opportunity (The Journal Gazette, 2012). IKEA is said to have a high opportunity to pass the India’s government approval in using wholly owned subsidiaries as an entry mode into the country since IKEA has been sourcing many materials from India for a long time and it also supports UNICEFs water and sanitation program and funds programs in the carpet and cotton regions in India (English.news.cn, 2011).

By using this mode of entry, IKEA, the parent company, can maintain direct operational control over its wholly owned subsidiaries. Meanwhile, establishing wholly owned subsidiaries gives IKEA the tight control over operations in India that is necessary in managing global strategic coordination. In addition, secrecy surrounding proprietary operation can be maintained. Besides, by establishing wholly owned subsidiaries, it eliminates problems such as conflicts and battles for control between investing companies which associated with joint ventures (Carter, 2012).

On the other hand, India’s economy continues to grow from strength to strength. In terms of maximum opportunity for rapid growth among emerging market economies, India has emerged as the second most promising market after China (Agencies, 2012). As shown in Graph 1 (refer to appendix) plotting India’s GDP, the nominal GDP of India is increasing over the past decade (VMW Analytic Services, 2011). Meanwhile, GDP of India is forecasted at $1.858 trillion, a 7.82 percent increase from 2011 and India is predicted to become the third largest economy in the world by 2035, just behind United States and China (Lin, 2011).

Besides, Although it has shown in Table 1 (refer to appendix) that the real GDP growth of India is decreasing (Euromonitor International, 2011), according to a report by World Bank (2011) titled “Global Economic Prospects”, India will see a growth increasing to 6.9, 7.2 and 7.4 percent in fiscal year 2012-2013, 2013-2014 and 2014-2015.

Meanwhile, the home furnishing industry in India has witnessed unprecedented growth over the last few years. The home furnishing market in India is driven by growth in the real estate and hospitality sector (Netscribes (India) Pvt. Ltd., 2011). Overall demand for home furnishing products in India has increased with the increase in disposable income as shown in Table 1 (refer to appendix) and willingness to spend on contemporary design and high quality furnishing. Besides, there is a niche market present in India for good quality household furnishing. There have been significant increases in the number of High Networth Individuals (HNIs), who have the money to spend and the taste in spending. There is an increasing trend towards using branded, and preferably international, furnishing products (Valsan, 2011). Thus, it is a good expansion of IKEA into the Indian market as the economy and home furnishing sector in India is booming and the country’s government is encouraging Foreign Direct Investment.

3.3 Expansion to Indonesia

The furniture and furnishing market of Indonesia is very fragmented, open and have a moderate competitive (Wisesaputri, 2009). Based on Euromonitor International (2009) report as cited in (Wisesaputri, 2009) said that the furniture and furnishing in Indonesia have an average growth rate of 9.2% per year from 2003 until 2008, especially in Jakarta and Surabaya. IKEA is planning to expand its businesses into Indonesia market from 2014 by enter into a franchise agreement with Here Supermarket which is largest retailers in Indonesia (Nangoy, 2012). Inter IKEA System has signed the agreement with Hero Supermarket on 22 March 2012 and giving the authority to Hero to open and operate IKEA stores in Indonesia (fitri, 2012).

Indonesia was the third fastest growing economy among the G-20 for 2009 and has a strong economic growing of projected rate (6.4%) in 2012 (Doing business in Indonesia 2012, 2012). Furthermore, based on Doing Business 2012, it said that the economies improving in Jakarta of Indonesia is the top 50 in global and top 5 within the East Asia and Pacific in closing their gap with the top performance (Doing business in Indonesia 2012, 2012). According to Organisation for Economic Co-operation and Development (OECD) (2012) it forecast that Indonesia’s economic growth in 2012 will grow from 5.8% to 6.1% and from 6.0% to 6.5% in year 2012 (Jones, 2012). Economic growth means there is an increase in national output and national income as well as the real Gross Domestic Product (GDP).

According to International Monetary Fund (IMF) (2009) the Purchasing Power Parity (PPP) per capital GDP of Indonesia in 2009 was reported at 4156.70 U.S. dollars. While it expects the Purchasing Power Parity (PPP) per capital GDP will increase to 6198.74 U.S. dollars in 2015 as shown in the Graph 2(refer to appendix) and these mean that the purchasing power of Indonesia’s resident is increasing and they will spend more in consume the goods and services (Trading Economics, 2012).

IKEA is using franchising strategy to enter the Indonesia market like what it previously done successfully in China, because both market provided similar distant culture challenge and lower purchasing power (Wisesaputri, 2009). In China, IKEA is open its stores in less expansive areas and sold its furniture on the do-it-yourself (DIY) principle and this makes them successful. Therefore IKEA can adopt this do-it-yourself (DIY) principle in Indonesia because based on Euromonitor International (2009) report as cited in (Wisesaputri, 2009) said that Indonesian consumer like to purchase the furniture in specialists furniture shops, thus IKEA can introduce this principle for Indonesian consumers allow them to DIY their own furniture.

By using franchising as the entry mode into the Indonesia, IKEA just need to invest in low capital in Indonesia and the market provides the potential for rapid growth (Kreutzer, 2012). This might help IKEA to reduce the risk of investment and franchise can help IKEA to better understand the local market culture as well as their needs and wants. In addition it also helps IKEA to retain a significant level of control over the use of their brand and the quality of their product (Kreutzer, 2012).

4.0 Conclusion

IKEA is currently using the wholly owned strategy, franchising and joint venture strategy to expand their market globally. Before IKEA enter into a country, IKEA needs to form a research group to learn the local culture, opportunity in the market, political factors and the consumer’s needs and wants.

We recommend IKEA to enter into Egypt’s markets by using franchising strategy. According to Egypt Business Expert (2010), he stated that there is a tremendous growth potential for franchising market in Egypt (Fathalia, 2010). Economic of Egypt are being most open compare with other country. Moreover, IKEA has formed a partnership with its franchise holder Al-Futtaim Group.

Besides, we also recommended IKEA to expand their market to India by using wholly owned strategy because India’s government is deregulating the trade restriction and welcoming the single equity brand retailer to expand their business in India (English.news.cn, 2011). IKEA has the opportunity to get the expansion approval from India government as it has been sourcing many materials from India for a long time and it also supports many development programs in India (English.news.cn, 2011).

Furthermore, we also recommend IKEA to expand business to Indonesia by using franchising strategy. Indonesia is the third fastest growing economy among the G-20 for 2009 and the Purchasing Power Parity (PPP) of Indonesia is expected to increase US$6198.74 in year 2015, it shows the purchasing power of Indonesia resident are increasing year by year and they can spend more on consumer goods and services. IKEA seeks the opportunity to enter into Indonesia market and have signed the franchise agreement with the Hero Supermarket, the largest retailer in Indonesia.

Through the report, we have gained knowledge on the pros and cons on the strategy and how the expansion strategies have been chosen by the company to expand their market to overseas. Before enter into a particular country, we recommend the company to do research on the country they want to enter, to analyze their economies, purchasing power parity of the country, market opportunity, consumer taste and preference and the country political system. These factors will determine which entry mode a company should adopt to enter into a country.