problems faced by ikea in china.. case study

Case

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IKEA in China: -

IKEA in China: - Problems

Problems

faced and strategies

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Introduction:

In This case, I've Studied the internationally known home furnishing retailer, which is (IKEA) The largest furniture retailer in the world The !ur"ose of the case study is to analy#e the "ro$lems faced $y IKEA in %hina and its strategies used $y IKEA, Analy#e the com"any financially, S&T analy#ing and discuss maor issue that the com"any faced

About:

IKEA Is a "rivately*held, international home "roducts retailer that sells flat "ack furniture, accessories, and $athroom and kitchen items in their retail stores around the world The com"any, which "ioneered flat*"ack design furniture at afforda$le "rices, is now the world's largest furniture retailer IKEA was founded in +-. $y +/*year*old Ingvar Kam"rad in Sweden 0e $egan $y selling "ens, wallets and watches $y going door to door to his customers &hen he started selling his low "riced furniture, his rivals did everything to sto" him 1ocal su""liers were $anned from "roviding raw material and furniture to IKEA, and the com"any was not allowed to showcase its furniture in industry e2hi$itions &hat did IKEA do3 It innovated to stay in $usiness It learnt how to design its own furniture, $ought raw material from su""liers in !oland, and created its own e2hi$itions Today, IKEA is the world's largest furniture retail chain and has more than .44 stores glo$ally The %om"any that was originated in Sm5land, Sweden, distri$utes its "roducts through its retail outlets As f August 644, the chain has .44 stores in ./ countries, most of them in Euro"e, 7orth America, Asia and Australia

Problems faced by IKEA in China and strategies

In +8, IKEA started its retail o"erations in %hina It is more im"ortant what customers think a$out the com"any rather than the other way around IKEA faces three main challenges in %hina9 "ricing, high duty rates, and the !:% $ureaucracy So following

are the ada"tive strategies made $y IKEA in china

+ a/ and legal issues9  IKEA has $een hit with heavy

im"ort ta2es in %hina, though the com"any aims to relocate "roduction of many items to %hina to solve this "ro$lem  The country already su""lies glass, tim$er, te2tiles,

hardware, "lastic, and almost anything else the store needs IKEA faces strict ;uotas and has difficulties im"orting food to its Swedish restaurant The com"any now has a foodim"ort agent that handles all related issues, including la$eling

IKEA<s mainland %hina stores $elong to the IKEA =rou" and o"erate as oint ventures The venture served as a good "latform to test the market, understand local needs, and ada"t its strategies accordingly

6 Changes in si0es of furniture due to small si0es of

ty!ical Chinese a!artments: - It understood early on that

%hinese a"artments were small and customers re;uired functional, modular solutions The com"any made slight modifications to its furniture to meet local needs The store layouts reflected the ty"ical si#es of a"artments and also included a $alcony !reviously, when it entered the >nited States it faced similar "ro$lems The com"any initially tried to re"licate its e2isting $usiness model and "roducts in the >S ?ut it had to customi#e its "roducts $ased on local

needs American customers, for instance, demanded $igger $eds and $igger closets IKEA had to make a num$er of

changes to its marketing strategy in the >S The challenges it faced in %hina, however, were far $igger than the ones in the >S ?ut now,In terms of housing, the average s;uare meters "er "erson in %hina has $een increasing

considera$ly >ntil recently, a"artments averaged -4 m6_@

now ?eiing and Shanghai a"artments< average 84 m6_{ This}

furnishings and, $ecause consumers are $uying more

gadgets, they need more storage containers and facilities It also means IKEA needs to kee" its homelife study u"to date $ecause change ha""ens so fast

. Slashing costs to !ro1ide affordable !rices: ne of the

main "ro$lems for IKEA was that its "rices, considered low in Euro"e and 7orth America, were higher than the average in %hina !rices of furniture made $y local stores were lower as they had access to chea"er la$or and raw materials, and $ecause their design costs were usually nil

IKEA $uilt a num$er of factories in %hina and

increased local sourcing of materials &hile glo$ally .4 "er cent of IKEA's range comes from %hina, a$out B "er cent of the volume sales in the country come from local sourcing  These local factories resolved the "ro$lem of high im"ort

ta2es in %hina The com"any also started "erforming local ;uality ins"ections closer to manufacturing to save on re"air costs &hen IKEA first entered %hina, the store was

considered too e2"ensive for its target consumersCyoung, "rofessional cou"lesCand the com"any lowered its "rices  The store<s "rices are now considered midrange in

ShanghaiD A ty"ical IKEA customer earns a$out en.,.44 (F.) "er monthCthe national average is en+,444 (F+6+)C and $uys en.44 (F.) of merchandise "er visit

Since 6444, IKEA has cut its "rices $y more than 4 "er cent Gor instance, the "rice of its H1ackH ta$le has

dro""ed to . uan (less than five Euros at current

e2change rates) from +64 uan when IKEA first came to the %hinese market The com"any "lans to reduce "rices

further, hel"ed $y mass "roduction and trimming su""ly chain costs

0igh "rices were one of the $iggest $arriers in %hina for "eo"le to "urchase IKEA "roducts IKEA's glo$al $randing that "romises low "rices did not work in %hina also $ecause

western "roducts are seen as as"irational in Asian markets In this regard, IKEA's low"rice strategy seemed to create confusion among %hinese consumers

The com"any reali#ed this and started targeting the young middleclass "o"ulation This category of customers has relatively higher incomes, is $etter educated and is more aware of western styles Targeting this segment

hel"ed IKEA "roect itself as an as"irational western $rand  This was a massive change in strategy, as IKEA was

targeting the mass market in other "arts of the world IKEA will likely have ho"es of attracting India's ur$an

middleclass $uyers who are keen on decorating their homes with stylish international $rands

- Com!any changed its image as a lo2 cost !ro1ider to an as!irational brand: -IKEA wanted to $e known as a

low"rice "rovider of dura$le furniture, while %hinese consumers looked at IKEA as an as"irational $rand It is

likely that Indian consumers will also look at IKEA in a similar way As IKEA "re"ares to enter India, its %hina e2"eriences will come in handy It understood that in emerging markets, glo$al $rands may not re"licate their success using a low "rice strategy There always will $e local manufacturers who will have a lower cost structure

B Changes in mar"eting strategy resulting due to counterfeit IKEA !roducts from catalogues by local com!etitors: - IKEA also had to tweak its marketing

strategy In most markets, the com"any uses its "roduct catalogue as a maor marketing tool In %hina, however, the catalogue "rovided o""ortunities for com"etitors to imitate the com"any's "roducts Indeed, local com"etitors co"ied IKEA's designs and then offered similar "roducts at lower "rices Some furniture stores kee" IKEA catalogues in their store and tell customers that they can re"roduce the

furniture at a lower "rice Stores try to co"y the IKEA conce"t and "roducts, slightly change the name, slightly lower the "rice, and suddenly, home furnishing stores in

%hina are $lue and yellow as well IKEA decided not to react, as it reali#ed %hinese laws were not strong enough to deter such activities Instead, the com"any is using %hinese social media and micro$logging we$site Weibo to target the

ur$an youth

 Store location strategy changes: -IKEA also adusted its

store location strategy In Euro"e and the >S, where most customers use "ersonal vehicles, IKEA stores are usually located in the su$ur$s In %hina, however, most customers use "u$lic trans"ortation So the com"any set u" its outlets on the outskirts of cities which are connected $y rail and metro networks

/ Com!any changed flat !ac" style to 3ready to use4 : -IKEA, famous for its flat"ack furniture which consumers

have to assem$le themselves, reali#ed that understanding the local culture is im"ortant  %hinese "eo"le hate the doit yourself conce"t %om"any came to know that %hinese

"eo"le don<t want to assem$le themselves $ecause they think assem$ling as cum$ersome "rocess and if anything wrong occurs they will end u" reducing aesthetics of

furniture

8 Com!any changed store layout to reflect Chinese

a!artments:  In %hina, the store layouts reflect the layout

of many %hinese a"artments, and since many %hinese a"artments have $alconies, the stores even include a

$alcony section %hinese tend to s"end most on their living rooms, which he terms the heart of the home where many "eo"le show offD and entertain Jany %hinese living rooms contain a dining ta$le as well, so dining room "urchases are also common ?ecause %hinese kitchens are generally small,

customers s"end less on them At one time, $edroom

furniture and decorations were the least "o"ular "urchases in %hina, "erha"s $ecause the room is the most "rivate and thus least visi$le "lace in the home ?ut IKEA has recently witnessed an enormous increase in $edroom salesC

es"ecially in Shanghai 7e2t year, the com"any "lans to launch a glo$al cam"aign that targets the com"lete

$edroom

 Increase in costs due to ada!tation of eco friendly technologies: -Since +, IKEA has $een working on

$ecoming more ecofriendly It has $een charging for "lastic $ags, asking su""liers for green "roducts, and increasing the use of renewa$le energy in its stores All this "roved

difficult to im"lement in %hina The com"any also learnt that emerging economies are not ready for environmentfriendly "ractices, es"ecially if they result in higher "rices

!ricesensitive %hinese consumers seem to $e annoyed when asked to "ay e2tra for "lastic $ags and they did not want to $ring their own sho""ing $ags Also, a

maority of su""liers in %hina did not have the necessary technologies to "rovide green "roducts that met IKEA's standards 0el"ing them ado"t new technologies meant

higher cost, which would hurt $usiness IKEA decided to stick with low "rices to remain in $usiness

-Euro!e

China

+ $alue Pro!osition

=ood ;uality,stylish furniture at "rices so that every$ody can afford it

=ood ;uality, westernstyled as"irational $rand for the middleclass "o"ulation ' $alued 5et2or" 

a .

Product

Stylish, functional "roducts and home furnishings

Slight modifications to

"roducts to suit local market and reflect %hinese

a"artment si#es

b .

Store 6ocation

 The su$ur$s, ne2t to

highways so that access $y car is easy

 The outskirts of cities, ne2t to rail networks as most

customers use "u$lic trans"ort

c. Price

1ow cost Afforda$le "rices

d .

Promotion

IKEA catalogue is the main marketing tool

Advertising on %hinese social media and micro$logging we$site &ei$o has $een "o"ular tools

e 6ogistics

!roducts are sourced and made in develo"ing nations like %hina and Jalaysia, and then shi""ed to Euro"e

:aw material and "roducts are sourced locallyIKEA also $uilt two factories in shangai to avoid high im"ort ta2es

Conclusion

There is no formula for success that fits all the marketing strategies when a glo$al $rand decides to try a new market,

e2ce"t unconditional acce"tance and res"onsiveness to changes  The greatest challenge is to ada"t constantly It re;uires

considering the local a""roach rather than glo$al desire for standardi#ation ne si#e fits all is a rare reality

IKEA made all necessary adustments to make sure there was no mismatch in its growth am$itions and $rand value

?ecoming an as"irational $rand is not an easy task IKEA demonstrated courage to get the most relevant changes It

worked with local sources, overcome legal re;uirements etc IKEA is a strong $rand that understands that growing glo$ally re;uires sacrifices and innovation from glo$al teams, and re;uires to

listen, res"ect and learn from local environment The %om"any has learnt that doing $usiness in emerging markets is a different $all game for a multinational com"any IKEA did well to ada"t in %hina, although it took numerous changes to its strategies and more than +6 years for the com"any to $ecome "rofita$le in the Asian nation