IKEA and growth strategies
It is business as usual at IKEA’s Helsingborg office in southern Sweden, where wall signs highlight the company’s latest cost-saving initiative: Kill-a-watt. Staff is urged to turn off lights, taps and computers when they are not being used. In fact it is a competition: whichever IKEA store or office round the world saves most electricity between November and January will win a prize. IKEA’s Spartan corporate culture stems from Ingvar Kampar, its founder, who famously drives an old Volvo and buys his fruit and vegetables at afternoon markets when prices are cheaper. IKEA staff always travel economy class and take buses rather than taxis. But cost-cutting is more necessary than usual now. The Swedish home furnishings group has just had its toughest year in 2003 for a decade and Anders Dahlia, chief executive of IKEA group, is not just blaming weak economic conditions internationally. ‘The truth is that this year we have not stretched ourselves to the limit. We are less than fully satisfied with what we have achieved,’ he says. IKEA’s sales rose 3% to e11.3bn (£7.9bn) in the year to 31 August 2003 – but that was after including the impact of 11 new stores. Like-for-like sales growth was zero. The privately owned group never comments on its profits but it is a reasonable guess that they were affected. Mr. Dahlia, 46, says the stronger euro had an impact, as sales at constant currencies were 6% higher. He also blames the economic downturn in central Europe, where the group makes about half its sales. But there were also other issues. There was a greater than expected impact from cannibalization: the impact that new stores have on the sales of existing stores in countries where IKEA is already present. For example, last year IKEA opened a fourth store in Toronto and second stores in Washington and San Francisco. In a year-end report, Mr. Dahlia also highlighted three other areas where IKEA needed to do better: range, service and product availability. ‘Customers should never come to our stores only to find that the product they want is temporarily out of stock. The lines of customers at the check-outs … should never be so long that they deter people from visiting the store,’ he wrote. IKEA has faced a constant barrage of criticism for the quality of service in its UK stores but Mr. Dahlia insists that the complaints are specific to that market. In any case, the early parts of the 20034 financial year show a better sales trend. Sales have been running 10% higher than a year ago, excluding currency effects. But Mr Dahlvig is cautious: ‘My personal feeling is that the economies are not picking up right now. We are not counting for any help from the economy for the next 12 to 18 months. If things pick up it will be a positive.’ Notwithstanding difficult market conditions, IKEA’s relentless expansion goes on. It had 165 stores in 22 countries at the end of August, excluding 21 franchisees. It will open 16 new stores this financial year and, further ahead, is planning a big expansion in Asia, which will include its first store in Japan in 2005. ‘In a five-to-ten year time frame, China and Japan could be our main growth engine,’ he says. The group already has two Chinese stores and is looking at further sites in Beijing and Shenzen. Russia, where there are two stores, is also becoming more important. In 2004 the group will open its first store outside Moscow and St Petersburg, at Kazan. ‘This will give us a good indication of the potential for expansion in the Russian provinces,’ Mr. Dahlia says. He admits that competition is hotting up. He says the group is increasingly being challenged by hypermarkets and DIY retailers – companies such as Wal-Mart and B&Q. In addition, supermarkets such as Tesco of the UK are expanding outside their core areas, while dedicated home furnishing groups such as Conforama of France are developing a regional presence. ‘It’s understandable. At some point these companies become saturated in food or clothing and they need to expand in other segments if they want to grow,’ he says. IKEA is responding with its store expansion programmed and with more aggressive pricing. ‘We have reduced our prices by 15 to 20% on average over the last five years,’ Mr. Dahlia says. In any case, he is confident that the IKEA concept is hard to imitate. ‘Many competitors could try to copy one or two of these things. The difficulty is when you try to create the totality of what we have. You might be able to copy our low prices, but you need our volumes and global sourcing presence. You have to be able to copy our Scandinavian design, which is not easy without a Scandinavian heritage. You have to be able to copy our distribution concept with the flat pack. And you have to be able to copy our interior competence – the way we set out our stores and catalogues.’ And what about the long-term challenges facing the group? Mr Dahlvig admits that as the group grows bigger it will become harder for it to remain ‘quick, lean and simple’. Being big has advantages – in purchasing, for example – but it can also lead to bureaucracy and slow reactions to consumer change. Something else is looming. In most countries, IKEA still has plenty of room for growth, with market shares in the 5–10% range. But in some countries the company is now so big that it may be nearing saturation point in terms of its appeal. For example, in Germany, the group’s largest market, the group has 31 stores. In Sweden, where it has 13 stores, it has 20% of the home furnishings market. ‘The more stores we build and the more we increase our market share, the more we have to find ways to appeal to a broader public. Scandinavian design and style is a niche and it is not to everyone’s taste. But we don’t want to be just another supplier of traditional furniture. Scandinavian design is what makes us unique. We have to find a balance.’ A weekend trip to an IKEA store is hell, if you believe some sections of the UK media. Long queues and poor product availability in the UK are in danger of overshadowing the company’s reputation for low prices and Scandinavian design, critics say. Anders Dahlvig admits that the ‘UK experience is not what we would like it to be’. But he says the UK is a special case and there is one overriding reason for the problems. ‘Retailing laws in the UK have made it impossible for us to expand because of the restrictions on building out of town. If we had the same situation as in Germany, France and the US, we would have more stores and bigger stores in the UK and the situation would be different.’ IKEA’s Brent Park store in north London has acquired a particularly bad reputation – although Mr Dahlvig refuses to describe it as the worst store in the group. He insists that IKEA is doing everything it can to improve things: staying open longer, adding check-outs and encouraging shoppers to come on weekday evenings rather than at weekends. But, he adds, ‘More stores or extended stores are the only really good way to satisfy fully the capacity problem that we have. The other things just put plaster on the wound.’ A new store has just opened in Cardiff, Wales and two stores are being expanded – at Croydon and Thurrock. The last new store to open in England, where the planning problems are particularly acute, was in Bristol in 1999. None is under construction. Mr Dahlvig says the UK does not appear to be under-performing when it comes to sales. But he adds, ‘If a lot of people are disappointed, I am sure they are avoiding our stores at weekends. Those are sales that we would otherwise have.’
Again you could remind yourself of extra detail on IKEA by re-reading Case Study 14.4 (p. 562) before answering the following questions.
1 Use as many of Porter’s ‘five forces’ as you can in analysing the situation facing IKEA.
2 What growth strategies might you recommend at a corporate (enterprise) level for IKEA?
3 What strategies might you recommend at the business level for IKEA, where the business unit in question is IKEA UK?