The Story behind IKEA entering the Chinese market
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At the Financial Year 2020 media conference, Anna Pawlak-Kuliga, President of IKEA China, said that IKEA would invest 10 billion yuan(1.5 billion dollars) in China for store and service upgrades, product development, and digital system. This is also the largest investment year since IKEA has entered China for 22 years.
Today, IKEA has been regarded as the most successful household consumer brand entering the Chinese market. This case study analyze how IKEA integrated into China, and how IKEA broke through the siege of local home furnishing competitors and became the TOP 1 home furnishing brand of Chinese consumers. IKEA's experience in the implement localization strategy are worthy of reference and learning by consumer brands.
Chapter 1 The Inadaptation of IKEA
In 1998, the first IKEA store appeared in Shanghai China. IKEA came with a set of mature product specifications and service standards. This "blue box" refreshed consumers’ mind. Just like IKEA's usual site selection requirements, China's first store opened next to an overpass far from the city. In China at that time, people did not use private cars extensively, and most of them travelled by public transportation. Even so, it did not affect this "blue box" receiving thousands of customers every day.
The most appealing aspect of IKEA for Chinese customers is the "experience" every store creates. In the stores, customers can see very eye-catching slogans on the sofa and dining chair: "Please sit down and feel how comfortable it is!" In contrast, most local stores always warn their customers "Don't sit if you don't want to buy it", as the owners are worried that would wear and pollute their products. The straightforward invitation from IKEA made customers who visit IKEA for the first time feel really surprised in a good way.
IKEA’s clearly marked price allows customers not to worry about being fleeced, and only choose products based on their economic strength and preferences. This is in sharp contrast to the fact that Chinese peers never mark prices and need to bargain continuously.
Table 1. Comparison of business models between traditional Chinese furniture company and IKEA
Opposite to the excitement of customers was their weak purchasing power. Restricted by factors such as their own economic strength and the policy of commercial housing, the Chinese have not spent much money on the furniture, which only accounts for 0.4% of total expenditure per capita on average. Many customers were amazed by the atmosphere of the store, but after a visit, most would leave the store without making any purchase.
In the early 1990s, IKEA opened its own purchasing departments in various important countries in Asia, including China. They realized that the prices offered by mainland China manufactuers were among the lowest in the world. Therefore, when IKEA first entered China, it tried to obtain raw materials and produce locally, but most of the suppliers’ environmental assessment grades and process standards failed to meet the standards. And letting these factories use the production technology required by IKEA requires a lot of capital consumption, and it was impossible to control product costs.
Take the IKEA single product "Lack" side table as an example. The initial price is ¥120 yuan, far more expensive than its current price in 2021 (¥49 yuan). Because of the long-term dependence of China's manufacturing industry on low-cost advantages and the formation of an inherent model of "good quality and low price", the Chinese consumers have become extremely price-sensitive. Even if IKEA products are comparably cheap for broad masses in Europe and America, they are unacceptable for ordinary consumers in the China market. At that time, charging for plastic bags at checkout and charging for delivery and packaging still reduced consumers' desire to shop. Under this circumstance, it is difficult for IKEA in China to implement its "low price" advantage in Europe and the United States and open up the consumers market.
Price of Lack side table (from official website)
Beginning in 1998, for 12 years, IKEA did not make a profit in China, nor did it pursue the speed of store opening. During this period, IKEA had made in-depth research on the development potential of the China market as well as developing its local supply chain, and quickly decided to build its own factory.
Introduce core design capabilities and process technology
Seek raw materials and workers from the local area
Establish alliances with Chinese suppliers
A series of measures not only reduced transportation costs and import /export taxes. More importantly, the local supply chain laid a solid foundation for IKEA to satisfy the China market and defeat
Building a strong local supply chain is the ticket for IKEA to "catch" China's economic high-speed train
After the 2008 financial crisis, China introduced several economic stimulus policies that triggered residents' enthusiasm for buying houses, which effectively boosted residents' spending on furniture. IKEA's income in China was growing rapidly. In the 2011-2017, the annual growth rate of IKEA's sales in China was maintained at more than 10%, among which the highest rate was 40%.
Figure 2 IKEA China's Revenue and Growth rate 2010-2017
The acceleration period of IKEA is accompanied by the changes of residents' growing spending power and new consuming habits formed from China's growth miracle. More and more people become willing to spend on their living space. Since 2012, the process of opening new stores has accelerated significantly, reaching an average of 2.6 stores per year.
Table 3 IKEA's opening speed in China
Under the influence and guidance of IKEA, the chinese supplier's production level had increased and the cost had dropped. This is a win-win situation. However, as IKEA's stricter quality and cost control, coupled with the more expensive labor costs and venue rents, local suppliers that have cooperated for many years began to "escape" from IKEA. Local competitors copied IKEA's design and then offered similar products at lower prices.
What's worsen the situation is that China's entering the Internet retail era has led to the rise of home furnishing e-commerce retail, and the amount of online transactions has soared. But IKEA only had off-line stores, the online sales was blank. Under the siege of Chinese home furnishing stores represented by Red Star Macalline, Easy Home, Yuexing Furnishing, IKEA has fallen into a growth trap and a profit crisis. In 2018, IKEA Group data showed that IKEA's sales in China increased by 9.3% yoy. That was the first time since 2011 that the yoy growth rate went down to single digits.
Figure 4 IKEA China's Revenue and Growth rate 2010-2019
22 years after entering China, IKEA opened its 35th store in China. It was the fastest growing market in terms of investment or transaction volume. In terms of market complexity, China was the most challenging and tempting market in the world.
Chapter 2 "Low Price" Strategy
For many Chinese customers, IKEA is no longer just a store selling furniture, it represents the western lifestyle. Visiting IKEA has become a way of adventuring and socializing.
In the history of retail business in China, few foreign brands have been able to continuously impress local consumers while emphasizing its "foreign genes" and keeping its design "non-localized". The majority foreign brands, when entering China, would either choose a niche route or become completely localized. How does IKEA strike an excellent strategic balance between the wave of globalization and the complex Chinese market?
When IKEA entered US, it tried to replicate its existing business models and products in the United States. But it had to customize products according to local needs. For example, American customers requested larger beds and larger closets. IKEA had to make some changes to its marketing strategy. However, the challenges it faces in China are far greater than those in the United States. The scale of China's home furnishing market is enormous. To ensure huge growth in the China market, IKEA has established a joint venture, which sets a good partnership for testing the model in the Chinese market, understanding local needs in depth and adjusting its strategy accordingly. With the help of the local partner, IKEA has established several tactics to succeed in the Chinese market while keeping the brand's nature.
Firstly, IKEA repositioned the consumer group.
In the European and American markets, IKEA’s main target consumer groups are lower to middle classes who want to pursue modern taste with an affordable price. They are willing to DIY to reduce consumption costs. Then, within a few years after entering China, IKEA was regarded as a high-end and luxurious petty-bourgeois foreign brand. This "home convenience store", which was positioned to "create a better life for the public every day", unexpectedly won Petty bourgeoisie white collar advertised as the "middle class" are eagerly sought after. Getting those fashionable, high-income, and willing to spend money white collar means they have achieved a fashionable and high-end brand image.
IKEA positions itself as a high-end Western home furnishing brand and targets at young middle-class consumers. The population density of China's first- and second-tier cities is higher, income is higher than that of urban population, disposable income is also higher, and consumer demand is larger than that of urban population. Therefore, IKEA will select more than 90% of its stores in first- and second-tier cities. By 2020, with the overall progress of China's economy, relying on its supply chain advantages, it will be able to provide more low-priced products to meet the consumption level of third- and fourth-tier cities, and IKEA will begin to deploy more third- and fourth-tier cities.
IKEA determines that the most important strategic challenge is price, price, price.
In order to launch products with competitive prices in the China market, IKEA has established factories in China and at the same time is looking for local Chinese raw material suppliers to increase local material procurement and use local labor. It strives to minimize the cost of product. When IKEA lowered the price of a chair to RMB ¥18, the sales of the two stores in Shanghai and Beijing were more than the combined sales of the 12 stores in France. The IKEA team entrusts the OEM to complete the manufacturing process, but IKEA maintains absolute control over it, including the permanent presence of the team to control production details to optimize efficiency, sign strategic agreements to occupy most of the production capacity, and split product modules into cooperative manufacturers. On the one hand, splitting the production chain help with reducing the risk of "plagiarism", on the other hand, it gains competition advantage by lowering the prices.
Table 5 IKEA‘s supply chain
In terms of R&D, IKEA adopts the pricing-based R&D, breaking through the traditional method of first producing and then considering pricing based on cost. When designing a product, IKEA will first calculate the cost and pricing. Depending on the price strategy, the designer then start with the style and structure. Finally, the designer must work together with the manufacturer that matches the price system to complete the selection of materials, proofing, shaping and packaging and the entire process, which will ensure the low cost advantage of IKEA products.
Allowing customers take the products home and install it by themselves is also a crucial part of IKEA's "low-price strategy". Although most Chinese do not widely accept the "do it yourself" concept. Surprisingly, for younger generation targeted by IKEA, this approach makes them feel fresh and fun. DIY allows products to be packaged in flat form, which maximizes the use of space, and also reduces back-end distribution and installation costs.
Since 2000, IKEA has cut down its prices by more than 60%. In 2021, IKEA stores in China will have more than 250 lower-priced products, accounting for about 5% of the overall SKU. Through industrial chain optimization and technological improvement, IKEA provides the China market with high-quality and low-cost products to enhance its market competitiveness.
Store management makes customers linger.
In terms of store layout, IKEA has set a precedent for the Chinese home furnishing store to present sample rooms. The entire store layout and circulation planning are ingenious. To cater to the characteristics of Chinese houses, the sample rooms are designed with different styles and are arranged completely according to the typical Chinese residence. Customers can freely walk in these decorated living rooms, bedrooms, and kitchens, gaining insipirations and stimulating purchasing desires. Displaying the layout of an entire home instead of a piece of furniture, will easily stimulates customers to purchase jointly.
The self-help pattern has successfully made IKEA stores a symbol of lifestyle. Visiting IKEA can give people a convenient and pleasing shopping experience. IKEA has distributed rulers, pencils, trolleys, and other things to customers from the beginning at the door. The intention is obvious to allow consumers to participate in the process of personal home design and planning. You can walk the entire store from beginning to end if you follow the arrows drawn on the floor. You will forget that you are a "customer" but a "visitor". If you don’t need a waiter, no clerk will bother you. If you are tired or hungry, the specially opened restaurant here prepares fragrant coffee and food from various cultures.
Experiential marketing does the magic.
IKEA's experiential marketing is the first in the China market. It has always advocated and insisted on letting customers experience the characteristics of the products firsthand and encourages all customers who come to the store to try household products on site to get the most intuitive experience. On the contrary, in China, many furniture stores worry about the destruction of their products and try to prevent customers from trying or even touching them. Naturally, it goes without saying which kind of experience customers would prefer.
The supply chain makes low prices work.
IKEA has 32 shopping malls, 2 experience centers and 1 city center store, and it's still opening new stores at a high speed. China has also become the only market outside Sweden that has a complete integrated supply chain that includes product design and development, testing, procurement, production, warehousing and distribution, retail, shopping malls, and digital innovation.
Heavily investing China’s supply chain adds wings to experiential marketing and low-price advantages, and refines a successful business model, making IKEA the top 10 most valuable brand in China. In 2019, IKEA’s global retail sales reached 36.7 billion euros. In the China market, in 2019, 28 IKEA stores operated by Ingka China received 108 million visitors, with a total sales of 15.77 billion yuan (equivalent to 2 billion euros), and a sales growth rate of 8%, which was higher than IKEA's global sales growth rate is 5%.
Figure 6 Total Revenue and Revenue in China 2019
Chapter 3 IKEA's Keeping and Breaking
The power of China's internet industry and the improvement of the industrial chain have allowed local platform-based home furnishing suppliers to break industry boundaries. With the entry of overseas brands such as Denmark Hay and Japan’s NITORI, the gaps in mid-to-high-end home furnishings are quickly being filled by new players, breaking the boring and sleepiness that single-brand displays like IKEA.
For young customers who are pursuing speed and convenience, IKEA's offline experience is no longer friendly. The complicated and curvy route has designed the entire store into a maze. In this long experience process, the purchase decision process is lengthened, and the possibility of impulsive consumption is greatly reduced. The requirement to assemble furniture by oneself is too high for consumers spoiled by China's "Internet-style convenience".
Facing new challenges, IKEA is no longer conservative.
China has a vast territory and huge differences in population distribution. "How to make IKEA closer to consumers" is a new problem facing by IKEA. Most of IKEA’s traditional "blue box" stores are in the suburbs of cities, covering an area of about 30,000-50000 square meters. Not only are they costly, but to a certain extent they also limit IKEA’s flexibility and speed to meet consumer needs. Recently, IKEA stores have gradually enriched. In addition to IKEA shopping malls, IKEA has opened smaller front stores and launched IKEA city center mall in China. In terms of site selection, IKEA will explore third-tier cities to reach more consumers.
With the rapid increase in online shopping sales in China and the slowdown in offline sales growth, IKEA only has offline stores and an official website that is outdated in the e-commerce era. The former can reach a limited number of people, while the latter obviously does not conform to the habits of Chinese consumers. They are used to receive the goods within 3 days of placing an order. IKEA must seek channel transformation and digital innovation.
In 2016,IKEA started its e-commerce business project, and in 2018, IKEA launched its online shopping mall in 149 cities across the country. In 2020, it officially entered China's largest e-commerce website-Tmall, becoming the world's first online flagship store on a third-party platform. At the same time, it launched the IKEA app, provided online shopping, and even tried live broadcasting-a way of recommending products through live video that is developing rapidly in China. All-platform e-commerce is the Second Curve of IKEA.
In the past two decades, IKEA has been a miraculous sample of the world's retail sector. In the next decade, it will undergo one after another challenges, and it will also pay the price in constant trial and error.
Not only IKEA, but many overseas giants have had to repeatedly test the balance of adhering to and "breaking" their own rules in the process of entering China. After all, in the business world, there has never been a single pattern that works well in all cultures.
This article was originally created by Silver Hope Investment, welcome to reprint.