IKEA INDIA: EXPANDING TO SUCCESS
Brief introduction/background of the case
IKEA Group was founded in 1943 by Ingvar Kamprad in Smaland in southern Sweden. It
originally sold pens, wallets, picture frames, table runners, watches, jewellery, and nylon
stockings, and it introduced furniture into the product range in 1948. As of 2017, IKEA had 415
stores across 49 countries. The company’s core business at present is providing home
furnitures, furnishings and accessories. The IKEA Group vision was “To create a better
everyday life for the many people.” through offering home furnishing products at affordable
prices for the masses.
In 1975, IKEA Group started its extended supply chain in India. They have been
sourcing for years from the country for their global stores . In 2012, it received foreign direct
investment approval from the government of India to set up retail operations in the country. It
began by opening an experience centre in Hyderabad in 2017. It planned to open several stores
across India by 2025. However, in May 2017, Maeztu, the chief executive officer of IKEA India,
was facing a dilemma about the future success of the business in the Indian market, as major
retailers are going bankrupt.
Central problem
● How will IKEA India reach its goals and fulfill the Indian expansion for the IKEA Group?
Secondary problem
● How can IKEA create the right policy framework and figure out a sourcing strategy for
determining the appropriate product mix, pricing and supply chain?
Objectives
1. To address the problems of product availability, timely delivery, display of all types of
furniture in its stores, and customer service
2. To find local furniture suppliers that would meet IKEA’s quality standards
3. To set its product retail price in India lower than that of its rivals
4. To offer products that cater to the preferences mindset and aesthetic of key customer
segments in India
SWOT Analysis
Strengths
1. Brand reputation and market presence
IKEA is the most valuable furniture retailer brand in the world listed in the 46th
position of the Forbes list in terms of brand value, valued at nearly $US 11.77 billion.
The business operates 415 stores in 49 countries and is present in the major world
markets. More than 600 million customers visit IKEA stores every year.
2. Democratic design concept
IKEA has developed the notion of democratic design which implies achieving an
attractive form, quality, function and sustainability at a low price. Based on these five
fundamental principles, IKEA Democratic Design guides the development of every
product, from the original idea to the factory floor and into the store, all the way to the
customer’s hands. Very early on in the design phase, IKEA product developers and
designers work with a diverse team of technicians, manufacturers and specialists. This
special partnership helps keep their prices low and find the latest techniques to create
new products according to their standards.
3. Strong supplier and manufacturer relationships
A key part of IKEA’s success is credited to its communications and relationship
management with materials suppliers and manufacturers to get good prices on what it
procures. IKEA’s average time working with suppliers on a global level in 2017 was 12
years. The IKEA Group maintained strong supplier and manufacturer relationships to
develop efficient, cost-effective and creative products, as well as smart product design,
packaging and distribution.
4. Cost leadership strategy
IKEA designs unique products that incur low manufacturing costs while meeting
strict requirements for function, efficient distribution, quality, and impact on the
environment. According to a case study produced by The Times of London, more than
50% of the products are made from sustainable or recycled products. IKEA seeks to use
as few materials as possible to make the furniture, without compromising on quality or
durability. By using fewer materials, the company cuts down on transportation costs
because it uses less fuel and manpower to receive materials and ship products.
Weaknesses
1. Cultural differences
IKEA is a Swedish brand, founded by a Swedish entrepreneur named Ingvar
Kamprad. Indian people were different from Swedes, Germans, and French in terms of
their behavior, food habits and recreation. India was a country with more than 1.21 billion
people with different cultural and ethnic backgrounds. Juvencio Maeztu the CEO of IKEA
India worried if his European roots would stand in the way of IKEA Group’s expansion
plans in India. Before entering the Indian market, Maeztu and his team conducted a
market research study in India by visiting more than 500 homes to understand people’s
needs and wants. The research team entered local households; interacted with families
in their kitchens, bedrooms, and washrooms.
2. Control for standards
Ikea’s main concern is to keep the cost minimal but at the same time provide
good quality service and high product performance. This is not always possible. Ikea is
known for producing affordable, furnitures, but not all of the store’s offerings are shown
to stand the test of time. Firm’s cost reductions lead to decreasing product quality, which
was followed by higher number of products returned and damaged brand.
Opportunities
1. FDI in single brand retail
The government of India recently allowed the 100% FDI (Foreign Direct
Investment) in single brand retail trade as it aims to attract investments in production and
marketing, and improve the availability of such goods for consumers. As IKEA is now in
favorable position, it would be a great opportunity for them to enter into the market since
the government is also open and willing to negotiate with multinationals that seeks to
invest into the country. However, there are certain conditions that need to be done like
sourcing of 30% of the value of goods purchased should be done in India, preferably
from MSMEs, villages and cottage industries, artisans and craftsmen, in all sectors.
2. Growth in internet usage
With over 460 million internet users, India is the second largest online market,
ranked only behind China. By 2021, there will be about 635.8 million internet users in
India, and an estimate of 43.8% digital buyer penetration in 2016 which results that
online shopping is also a popular online activity for Indian internet users. With such
large usage of the internet, the country would provide IKEA an additional cost-effective
procurement strategy; a greater opportunity in entering India.
3. Partnerships with social entrepreneurs across the world
Started in 2012, IKEA now has several ongoing partnerships with social
entrepreneurs, employing local artisans in vulnerable communities around the world.
The social enterprises that were partnered are mainly self-help groups and women-
owned cooperatives. Through IKEA, the social entrepreneurs can access a global
marketplace, giving them a strong foundation for self-sufficiency and independence. In
connection, IKEA would also gain a better reputation and morale for doing so.
4. A boom in the real estate sector of India
IKEA has now partnered with the city-based developer Rustomjee to offer
designer, furnished homes at upcoming township project Global City at Virar. The whole
idea behind the planned move was to increase the visibility of IKEA products and
showcase them one apartment. Usually, developers have fully furnished homes as a
sample to give buyers the idea of how space with all the furniture arranged. ‘Show-
homes’ is not new since real estate developers have been doing the same for local
furniture outlets, however, for IKEA’s case, it will be able to penetrate the market easily
in India since it is a very well-established brand.
Threats
1. Major retailers globally were going bankrupt
There are still a lot of ongoing issues in India like the Indian government the
requires retailers to source 30% from small suppliers that is needed to comply, and the
continuing US investigation of fraud in Mexico, Brazil, China and India. Taking Walmart
as an example of this case, their hope was not fulfilled; with an amazing international
expansion often has the unfortunate flavor of inexperience. Dealing with foreign
authorities requires finesse and charm, and even so sometimes still it does not pan out
as hoped.
2. Most Indian households could not afford the beautifully designed home furnishings
because of their higher prices
India is all about being modern and global but with an ethnic twist. Indian homes
typically are not very large, so sizing the furniture appropriate is important. IKEA has
done with their research and learned that home furnishings is not a priority for most
Indian people. However, IKEA sees an enormous potential change wherein they are
looking forward to showing the people of India that making their homes more functional,
beautiful and personal which need not be complicated nor expensive. With that being
said, IKEA is selling a product in India for less than it charges elsewhere. In other
instances, the company is tailoring it for local tastes.
3. Indians are not a fan of the do-it (DIY) culture
It has been an issue for IKEA to find a way around that would get Indians to
assemble its signature do-it-yourself (DIY) furniture. Indians are not only used to buying
a full range of pre-assembled furniture, they also typically outsource other household
services such as plumbing, electric connections, and cleaning to the abundant cheap
labor available in the country. All of this render their response to IKEA’s primary concept
uncertain. What IKEA did was to tie up with local startup UrbanClap to help shoppers put
together its furniture. And also, IKEA will offer assembly, delivery, and kitchen
installation services to create an easy buying experience for Indian consumers.
4. Competition against organized (70%) and unorganized (30%) retailers
The prime minister of India, Narendra Modi, pledged the inauguration of the
prominent ‘Make in India’ campaign. Make in India, is a propaganda initiated for the sole
purpose of inviting various commercial sectors from all around the world, to engineer
their products in India and sell them anywhere they wish. As this campaign welcomes
foreign countries to manufacture in India with open arms, this automatically increases
the competition against organized and unorganized retailers from international
commercial companies. As for IKEA’s case, they would either lose its profits or dominate
the small local entrepreneurs and force them out of business.
Alternative courses of action
ACA No. 1: Acquire the Godrej Interio
India-based furniture brand Godrej Interio claimed a 15-20% of the organized furniture
market, including both the home and institutional segments in India. Godrej Interio, the furniture
arm of the diversified Godrej Group is known for its quality products and quick services. Being
India’s leading furniture and interior solutions brand, acquiring Godrej Interio could create a
shareholder value over and above the sum of the two companies.
Advantages:
a. Gain a better position in the Indian market
b. Stronger competitive advantage in India
c. Increase in bargaining power
Disadvantages:
a. With a market value of $US 2.4 million, the acquisition would cost a lot.
b. Godrej Interio is already a major player of all organized retailers.
c. Already gained strong brand patronage from Indian customers
d. Increase in debt load
e. Culture and values that the other company established may clash
f. Running the risk of being redundant
ACA No. 2: Adopt a B2B business model by tapping with local real estate developers.
Advantages:
a. Help in raising brand awareness
b. Less costly
c. Beneficial for both the company and the real estate developers
Disadvantages:
a. A shift or diversion from their target market
b. This may cause a delay in their strategic plan of opening 2 stores in India by
2025
ACA No. 3: Partner with unorganized retailers in India and develop e-commerce
technologies
Seventy percent of the Indian home and office furniture market consists of unorganized
retailers—small family-run shops and roadside carpenters who build to order (Chaudhuri &
Abrams, 2018). They usually lack best practices, inventory systems, and modern technology
and machinery. IKEA can capitalize on this opportunity by setting up partnerships with some of
these unorganized retailers and providing them with skills training and technological support,
effectively inserting them into Ikea’s supply chain. Moreover, Ikea can develop e-commerce
technologies in order to streamline the flow of products from suppliers to customers.
Advantages:
a. IWAY can be maintained by providing technical trainings and support to the
unorganized retailers.
b. This takes advantage of India’s online market—the second biggest in the world, next
to China.
c. IKEA could get some important input from these unorganized retailers in terms of
customer tastes and preferences in their respective areas.
d. Product prices can be kept low, because the products of unorganized retailers are
very cheap.
e. Tapping local carpenters and retailers lends a sense of authenticity to IKEA’s furniture
offerings.
Disadvantages:
a. Requires more quality controls
b. Process of gathering unorganized retailers could be a challenge, with many of them
scattered across India
c. IKEA would need to be thorough with its screening and selection process, making
sure that they partner up with retailers who not only use quality raw materials and labor, but who
are willing to meet IKEA’s standards.
Recommendation
The group recommends the second and third courses of action. IKEA India opened its
first store in 2018. The group’s recommendation follows the 2019-2025 period and aims to open
25 stores by the end of it.
To meet the 30% requirement of Indian sourcing by 2023, IKEA India will have to create
partnerships with unorganized retailers starting 2019. IKEA should select those retailers who
produce their own products, who use good quality raw materials, and who operate in safe
working environments. The development of an app, including for these retailers and the
provision of technical trainings and support would be in parallel to this process. However, the
app would have to be fully implemented in 2021.
To increase brand awareness, B2B marketing efforts would also commence by 2019.
Considering the broad coverage of India, pop-up stores would also be opened in 2019 and 2020
to increase brand and product awareness.
The group anticipates that starting 2021, IKEA would be actively opening stores to reach
its 25-store target in 2025.
Conclusion
IKEA is one of those iconic brands that people either love or hate. Customers in Europe,
where it first started its operations love the cheap prices and the clean Scandinavian design
sensibility.
IKEA’s success in other countries was based on low cost far flung locations, frugal
management approach that embraces cost reduction as a driving principle, great Scandinavian
design, flat pack efficient logistics system, and asking customers to assemble the products for
themselves.
IKEA is not new in India. They have been sourcing for years from India for their global
stores. As such, they do have some familiarity with the country. Though there will be the
inevitable missteps on the entry as a small portion of the assortment will have to be customized
specifically for India, local sources developed to reduce costs, unorganized retailers, and the
service more perfectly aligned with the Indian consumers expectations.
Aligned with the challenges that IKEA is facing in the Indian market, the group
formulated three alternative courses of action. Among the three alternative courses of action the
group decided to implement two, ACA number 2 and ACA number 3. The group decided not to
implement ACA number 1 which is to acquire Godrej Interio because of the difficulties that are
involved in the transaction. Conflicts due to cultural differences can arise if the acquisition of
Godrej Interio will be implemented. Cultural differences that has caused multinational
companies like McDonald's and Uber to stop its operations in India because of the lack of
understanding of the local culture.
After thoroughly analyzing the case the group firmly believe that alternative courses of
action number two and three which is implementing a B2B business model by tapping with local
real estate developers and partnering with unorganized retailers in India and develop e-
commerce technologies will help IKEA India reach its goals and fulfill the Indian expansion for
the IKEA Group.
