IKEA with Chinese Characteristics

The Swedish furniture retail giant is bringing its unique style—and sales model—to Chinaby Paula M. MillerFor a truly global experience, try stepping off the streets of Shanghai into one of IKEA’s largest outlets. Though the first item you see may have been made in China, it was more likely made in Vietnam, or if it is a piece of furniture, in Europe.

IKEA Group, a franchisee of Inter IKEA Systems BV, entered China in 1998 when it opened its first store in Shanghai. IKEA’s mainland China stores belong to the IKEA Group and operate as joint ventures. (IKEA Hong Kong and IKEA Taiwan are separate franchisees.)

A new, redesigned Shanghai store opened in 2003, replacing the original outlet. At 33,000 m2, the two-story Puxi district outlet is four times larger than the first store and is now IKEA’s second-largest in Asia, after the one in Kuala Lumpur, Malaysia. Shanghai’s new IKEA, which attracted roughly 80,000 visitors on its opening day, offers more than 7,000 products and features a 170 m2 children’s playground and a 500-seat restaurant.

IKEA opened its first Beijing store in early 1999. A second Beijing store is currently under construction in the city’s northern Chaoyang district, and the company plans to enter Shenzhen after 2005. IKEA expects to have 10 large stores up and running in China by 2010.

Important to this physical expansion, of course, is revenue expansion. After lowering prices nearly 10 percent, IKEA’s China sales rose 35 percent in 2003. Sales were up 50 percent in the first three months of 2004 alone.

In fiscal year 2003, PRC factories produced nearly a quarter of IKEA’s goods; the company aims to produce more than a third of its goods locally in the next four years. In early 2004, 66 percent of the company’s merchandise was produced in Europe, 31 percent in Asia (mainly Vietnam), and 3 percent in the United States. In China, IKEA currently uses 362 suppliers and employs several hundred thousand employees, directly and indirectly.

Who shops at IKEA?

Ulf Smedberg, marketing manager of IKEA China, described IKEA’s mission as “to provide smart solutions for homes by implementing three criteria: good design, functionality, and low price.” But, he explained, “When IKEA first entered China, the store was considered too expensive for its target consumers–young, professional couples–and the company lowered its prices. The store’s prices are now considered mid-range in Shanghai.” A typical IKEA customer earns about Yen3,300 ($399) per month–the national average is Yen1,000 ($121)–and buys Yen300 ($36) of merchandise per visit.

Most of IKEA’s China customers are 20 to 35 years old, but the stores now attract an increasing number of customers closer to age 45, most likely a result of the store’s market repositioning. Many customers are families with children or are double-income, well-educated couples with no children. IKEA’s customers are generally better educated, earn higher incomes, and travel more than the average Chinese. And, as is true in IKEA shops around the world, roughly 70 percent of IKEA customers are women.

Adapting products and services

IKEA offers the same product range in all countries–8,000 to 10,000 products depending on the store’s size. But the company adapts the layout of the store, presentation of the goods, home solutions offered, and prices according to national economic and cultural conditions. In China, the store layouts reflect the layout of many Chinese apartments, and since many Chinese apartments have balconies, the stores even include a balcony section.

Smedberg, who has worked for IKEA for nine years, says that Chinese tend to spend most on their living rooms, which he terms the heart of the home where many people “show off” and entertain. Many Chinese living rooms contain a dining table as well, so dining room purchases are also common. Because Chinese kitchens are generally small, customers spend less on them. At one time, bedroom furniture and decorations were the least popular purchases in China, perhaps because the room is the most private and thus least visible place in the home. But IKEA has recently witnessed an enormous increase in bedroom sales–especially in Shanghai. Next year, the company plans to launch a global campaign that targets the complete bedroom.

“In terms of housing, the average square meters per person in China has been increasing considerably. Until recently, apartments averaged 40 m2; now Beijing and Shanghai apartments average 80 m2. This means several things: Chinese residents need more furnishings and, because consumers are buying more gadgets, they need more storage containers and facilities. It also means IKEA needs to keep its home-life study up-to-date because change happens so fast,” says Smedberg.

IKEA alters products to suit the needs of Chinese consumers. “When IKEA first began operations in China, it sold Hong Kong-sized beds, which are shorter than standard-sized beds. But we quickly realized the beds were too short for mainland China and switched to selling standard beds,” Smedberg adds. Many countries require slight product modifications; for example, consumers in the United States generally prefer larger items.

IKEA also had to adapt its location and do-it-yourself (DIY) assembly concept to China. IKEA has built its PRC stores near public transportation lines, offers local home delivery and long-distance delivery to major cities in China for a fee, maintains taxi lanes, and offers fee-based assembly services. Smedberg explained, “Usually IKEA stores open relatively far out in the suburbs, but we knew China had to be different since, for example, only 20 percent of visitors in Shanghai have cars. But the stores also need ample parking so that people can visit with their own cars in the future. The Shanghai store has almost 1,000 parking places.” Smedberg also commented that IKEA’s DIY products are appreciated in the West, because customers know they save money by assembling products themselves and because many customers actually enjoy assembling the furniture. But in China, where labor is cheap, the DIY notion has not taken hold, so Chinese customers use IKEA’s assembly services more than customers in other countries.

Research, education, and marketing

To better understand people’s lifestyles and their home aspirations and frustrations, IKEA conducts home visits, surveys, and focus groups. The company also conducts an annual “Market Capital” tracking study in each continent. The study asks customers in the stores and in the surrounding areas about IKEA’s product range and price and service levels. It also provides helpful information on IKEA’s target consumer groups.

To help Chinese customers understand the IKEA concept, the company posts in-store instructions and design advice, publishes brochures and catalogues, and operates a detailed website. For example, one in-store sign portrays an older couple whose child just moved away from home to attend college. The couple discusses how IKEA helped them to convert their son’s former bedroom into a new room for their use. The store’s room settings are full of furnishing and decor ideas. The IKEA catalogue, which is distributed in the store and through the mail, is IKEA’s main promotional tool. IKEA also produces brief TV spots that show living areas before and after IKEA’s magic touch.

Charles Sampson, CEO of Saatchi & Saatchi China, the advertising firm that creates IKEA’s print ads in China, explained, “Many Chinese consumers follow an ‘all or nothing’ approach to interior design. If they want to redesign their living room they will either completely redo everything or do nothing. IKEA wanted to convey that change can be easy, and that it is okay to make small changes, step-by-step.” Saatchi & Saatchi’s “Small changes, a refreshing new life” advertisements help to convey this message. One advertisement shows an old man sitting on his balcony in his shorts and undershirt, while holding a bird cage and whistling to his bird. The balcony looks like a typical cement-and-tile balcony in China with plants, drying laundry, and a newspaper. But the man is sitting in a red, modern, upholstered IKEA chair–one that is currently on sale.

Trials and tribulations

According to Smedberg, IKEA faces three main challenges in China: pricing, high duty rates, and the PRC bureaucracy. It has been difficult for the company to set prices at a level that is good for both customers and the company. IKEA has been hit with heavy import taxes in China, though the company aims to relocate production of many items to China to solve this problem. The country already supplies glass, timber, textiles, hardware, plastic, and almost anything else the store needs. IKEA faces strict quotas and has difficulties importing food to its Swedish restaurant. The company now has a food-import agent that handles all related issues, including labeling.

IKEA’s China distribution center is in Shanghai. Next year, a new distribution center will open in Shanghai that will distribute to China and Japan.

What about IKEA’s competition in China? UK-based B&Q, the largest DIY retailer in Europe and the third-largest in world, has several stores in China. But IKEA’s biggest worries may be the many international and Chinese chains and companies that counterfeit IKEA products. Smedberg remarked, “The more popular IKEA becomes, the more competition we have. Of course healthy competition is good–it makes home furnishings more popular. But it’s bad that increasingly more companies copy our products.” He believes more products are copied now because more IKEA products are made in China, and some of their suppliers also supply other furniture and home design companies. IKEA’s online catalogue also makes products easy to view and copy. Smedberg continued, “Some furniture stores keep IKEA catalogues in their store and tell customers that they can reproduce the furniture at a lower price. Stores try to copy the IKEA concept and products, slightly change the name, slightly lower the price, and suddenly, home furnishing stores in China are blue and yellow as well. But if we spent the time, money, and energy required to chase copycats there would be no time to focus on anything else. We need to focus on other aspects of IKEA.”

IKEA’s China sales seem certain to boom, but for die-hard IKEA fans, there is bad news and good news about the multinational corporation’s current China operations. The bad news is that shoppers will not find IKEA’s famous Swedish cinnamon rolls in any of the China stores. The good news: The rolls are scheduled to arrive shortly.

Paula M. Miller is assistant editor of the CBR.