IKEA: The Worlds Largest Furniture Retailer

IKEA The Worlds Largest article of article of article of furniture RetailerIntroduction jibe to KeyNote, 2008, IKEA is the worlds handsomest article of furniture seller. IKEA sells a lifestyle to its middle-class globular consumers done cheap contemporary flat-packed designs. The Swedish based comp either has 237 stores around the world and it is the world leader in home furnishings (Mintel, 2006). IKEA is responsible for a world- pan pick outic system that concent charge per units on greet management, efficiency and quality.However, at that interpose is much more than to IKEA than just its cheap voguish furniture. As Eberhard-Harribey (2006) states, regardless(prenominal) of its openly aggressive focus on press clipping costs, IKEA is a leading company when it comes to incorporated amicable Responsibility (CSR) matters (see more on appurtenance 1). IKEA has managed to combine a cost focus strategy with CSR issues as opposed to companies such(prenominal)(prenominal) as Starbucks and The Body Shop, which is considered to be proud CSR-oriented further that charge a premium-price for its sustainable products. IKEA has observeable policies on pip-squeak compass and has strong partnerships with UNICEF, and the WWF.More over, IKEA has a trans study strategy. The business maximise its planetary strategy of product regularisation whilst responding to, consumer local inevitably. Globalisation, factors like economical ripening, deregulation, more disposable income and rising housing merchandise have created some a(prenominal) another(prenominal) an(prenominal) opportunities for growth in which IKEA have continuously tell apartn advantage of in many countries. In spite of its global presence, it is worthy to point pop out both facts. First fact is that europium accounts for 82% of IKEAs fundamental revenues and spousal relationship the States accounts for 15% (Datamonitor, 2009). Second fact is that in both Europe and North America r egions, as a result of the economic down device the furniture retail industry is nether a lot of competition.In disposition to reduce the semipolitical-economical and social-demographical risks inherent with such regions, IKEA needs to concentrate on diversifying its operations into former(a) grocery stores promptly and efficiently. Moreover, by expanding into other markets, IKEA target besides take advantages of opportunities that these refreshing markets offer that current markets no longer do. For example, in the past when China opened-up its policy to FDI, it eventu onlyy led to the Chinese economic improvement, the bone in the housing market and subsequently the request for home furnishings in China. These events have unmistakable whollyowed IKEA to successfully commemorate this market. The current strategy manner that IKEA undertakes when ingress a natural market is International Franchising whereby products, particular rights, operational systems and the habi tuate of IKEAs label name ar sold to the foreign franchisee for a sum fee and sh be in the profits.It seems sensible thence that IKEA advance on expanding into refreshful markets. Nevertheless, before IKEA chooses a nonher market to enter, IKEA needs to go with some steps (1) Assess potential markets, (20 Evaluate the respective risks and benefits, (3) recognize the near appropriate market that not only match the piece of furniture Industry but ultimately complement IKEAs vision and Corporate Social Responsibility.In this work IKEAs plan will be to further its global expansion into the south Ameri buttocks trade, having brazil-nut tree as a target. brazil-nut tree is the largest country in due south America and agree to Datamonitor (2009), it is characterises the most enchanting country for the Furnishing Industry.The followers analyses have as an aim to critic aloney sic whether or not IKEA basin successfully enter the brazil-nut treeian Market and how it shoul d best endeavour such moveIndustry Overview Global home Furnishing RetailThe home furnishings retail sector includes furniture, infrastructure coverings and theater textiles. furniture sales dominate the global home furnishing retail sector, with 63.9% of the sectors value. IKEA has the largest sh atomic number 18 in the global home furnishing market. Its share accounts for 2.3% (MarketLine, 2009).Europe accounts for 43.1% of the retail sectors value and the confused annual growth rate of the sector in the period 2004-2008 was 2.6%. Moreover, according to Datamonitor, 2009, sectors value reached a value of $663.4 billion in 2008 and it is forecasted to grow by 24.9% in 2013 (MarketLine, 2009).Moreover, according to Mintel (2008) the UK is IKEAs most successful market. However is being held derriere by the thornyy of getting new stores, low consumer confidence callable(p) to the economic slowdown.The UK housing market has slowed dramatically and with house prices and the subroutine of minutes forecast to fall this year, this must be with child(p) news for furniture retailers. Already in 2008 there have been a number of casualties, including kip Depot and New Heights, and most recently Ilva and ScS.At the same clip furniture retailers are facing unprecedented levels of competition from outside of the specializer market from the likes of Tesco, Asda, Woolworths, Argos, Homebase, BQ, and even Next and MS. Is it all doom and gloom for the furniture specialist?more The UK housing market has slowed dramatically and with house prices and the number of transactions forecast to fall, furniture retailers are facing exceptional bill of competition from outside of the specialist market from the likes of Asda, Argos, not to mention MS and Next.Five Forces abridgmentRetailers of furniture, floor coverings and household textiles are the players of the home furnishing retail sector and the main buyers are taken as end-users, and manufacturers of furniture, f loor coverings and household textiles as the key suppliers.(Table bellow adapted from Datamonitor, 2009)IKEA Swot AnalysisIKEAs Corporate Social ResponsibilityAccording to Maon, Swaen and Lindgreen (2007) IKEA receives instancy from various external stakeholders. This pressure mainly exists because IKEAs business is modeled on cost leadership the majority of its raw materials are originated from developing countries. Since the end of the 1980s, IKEAs policies have been under invariant scrutiny, particularly from NGOs. For example, IKEA was under the public eye over child labour in Asia, working conditions in Eastern Europe and Asia, and wood from equivocal forests in Indonesia and Russia. Some critics argue that IKEAs sustainable practices took too long to be implemented and others question why the company do not shop social and environmental labels on its products, even though the products meet criteria for products do of tropical wood materials.However, for IKEA, the brand itself should be a guarantee of environmental consideration and social responsibility Moreover, as a result of such pressures, the company is more actively involved in its CSR than ever. See succeeding(a) for examples of IKEAs current practices(Source IKEA Group, Panda.org, UNICEF and SaveTheChildren.com, 2009).Identification of a New MarketWhereas the North Ameri cease furniture and floor coverings market is currently going through concentrated times, South American has kept strong growth in value, a trend that according to Marketline, 2009 is meant to carry on rising.As for 2010 IKEA will enter the South American market. The first IKEA store will be allocated in Santo Domingo, Dominican Republic (Reference?). However, as it is lay downn bellow there are other countries within South America in which IKEA could be successful.article of furniture take aback Coverings in South AmericaIndustry ProfileThe South American furniture floor coverings market generated total revenues of $19,801.3 million in 2008, representing a compound annual growth rate (Datamonitor, 2009) of 7.5% for the period 2004-2008.Market segmentationLiving room furniture sales has proved the most lucrative for the South American furniture floor coverings market in 2008, generating total revenues of $7,420.1 million, equivalent to 37.5% of the markets overall value. brazil (Marketline, 2009) however, Brazil leads the South American furniture and floor coverings market, accounting for 63.3% of the markets value.Factors Influencing the Likelihood of New Entrants and New Entrants in the Furniture Market in South AmericaAs shown above, there is a lack of brand strength in the Latin American furnishing market. This is raise shows that somewhat easy for new businesses to enter the market. Examples of such business however, are those well established diversified retailers, such as supermarkets and department stores ledger origination the market.Advantages for retailers occur within the ma rket on a small photographic plate with either one or several outlets, for which fixed costs and entree barriers are fairly low.However, the impact of the current global economic nook on the retail environment can discourage the entrance of new furniture businesses into the extravagantly-street in the medium term. there is however little establishment activity regulation which only concentrates on health and safety of the products. Overall, Datamonitor (2009) sees that the threat of new entrants to the furniture market in South America is considered to be strong. It is therefore important that establishes its presence in the region before other transnational companies decide to enter the South American. By being a entering such region, IKEA can be as successful as Telefonica has been since 1990 (Griffin and Pustay, 2009). It can generate more sources of revenue as well as establishing new customer base before competitors.There are a large number of different retailers of diff erent sizes from small independent retailers to large chain-stores operating(a) within the furniture and floor coverings retail market. Many players within the market are diversified retailers, such as department stores, supermarkets and DIY stores, which are not critically reliant upon furniture sales, which in turn ease rivalry. However, there are many small specialist stores, where the sale of furniture and floor coverings products is critical to success.These companies need to compete intensely with the supermarkets, which is becoming incr embossmently difficult in terms of price without compromising product quality as the supermarkets can afford to make smaller margins over a wide range of products. The current economic downturn is adversely affecting retail sales, reducing growth potential and increasing exit barriers, which enhances rivalry. Overall, rivalry with respect to the furniture and floor coverings retail market is moderate. (Please refer to Appendix 2 for further an alyses).BrazilThe Brazilian economy was not affected by the global financial crisis as the countrys economy is tightly regulated with Jewish-Orthodox macroeconomic policies. The countrys growth rate increased in 2008 to reach 5.9%. Moreover, Brazil is the founder member of Mercosul regional integration which for instance, are responsible for 75% of South Americas GDP and it is the worlds fourth-biggest integrated market. The economic reforms, liberalized foreign investment to most sectors have been considered to be responsible for the current economic.The market of furniture in Brazil has three main segments home (60%), office (25%) and institutional organisations (15%). Analyses show that (reference) this last segment is on the growth and imports should increase. This change in demand for foreign designs can sure benefit IKEA in Brazil.The market is similarly restrained by high interest rates (18.3% per year in 2001) which prevent people from demanding bank loans, and thus maint ain their get big businessman at lower levels than if they could borrow notes easier. It then has a bad impact on house purchasing and in series, lowers the buying of house furnishings too.However, despite its high profile, Brazil still suffers from corruption. According to Transparency Internationals subversive activity Perceptions Index for 2008, Brazil is ranked in the 80th place out of 179 countries. Because corruption is perceived to be very(prenominal) strong in Brazil, the majority of businesses are expected to encounter corruption when proposing contracts to governments. Moreover, deforestation caused by multi-nationals is make serious harms to the Brazilian rainforests. As the demand for environmentally friendly companies in Brazil and around the world continues to rise, companies such as IKEA can sure enough expect to have its CSR scrutinised before receiving any license for operation.PESTLE Analysis of IKEA in BrazilBrazil has come out to be of the best market to i nvest (Griffin and Pustay, 2009) the economic reforms implemented after 2003 led to increases in real per capita income, and an improved income distribution. Real per capita income increased 14% from 2004 to 2007 and the inequality in the distribution of income, measured by the Gini coefficient (which ranges from 0, which reflects equality, to 1, which indicates inequality), diminished from 0.6 in 2000 to 0.5 in 2007.Although the political stability in Brazil does not have the same standard of security as other OECDs, the political stability in Brazil is improving steadily. Brazils president is considered to be more sensible than other South American leftist leaders. And Although Lula obviously seeks to protect national companies, He is also aware that many Brazilian businesses are not very efficient. after being re-elected, Lula has welcomed FDI in Brazil with open arms (Reference)Additionally, as the poverty situation in Brazil is still high, the Brazilian government and its pop ulation are in turn very active when it comes to social programs. There are major government programs that aim to tackle the problems of income inequality and recover to credit. Programmes such as Zero Hunger (Projeto Fome Zero) provides low-income families conditional cash give bases reach nearly one quarter of Brazils population (MDS).Such programs can be seen as an opportunity for IKEA. Since IKEA has such renounced CSR programs in place, it can certainly work with partnership with the Brazilian government. Also, as more people are acquiring houses, the demand for furniture will eventually increase.With emerging markets capturing investors attention, many are turning their focus towards South American markets. Strong exports, high commodity prices and increased investments have been contributing factors to growth within many of the Latin American markets (Fleming, 2007).Amongst its neighbours, Brazil is the country that provides its population the highest honest purchasing pow er (IMF, 2006) Thus, Brazil seem a very entrancing market for IKEA, especially since the its furniture imports have experienced a growth of 16.27% during the terce quarter of 2006. The imports of furniture in Brazil are misrepresentled by the get together States with 39% of the share, followed by Germany with 36% and Italy with 10% (ABIMOVEL, 2008).Because Brazils income gap between the naughty people and the poor people is very high, The 10% richest people agnize 50% of the totally income and the 10% poorest people only get less than 1% (source?) social status are very meaningful, especial for the middle-classes. As IKEA has been very proficient in selling lifestyles to its customers (KeyNote, 2008) the status importance amongst Brazilians could turn out to be advantageous for IKEA. Nevertheless, credit option is extremely limited among most consumers who are expected to pay for their goods in instalments. Very ofte, consumers opt for a certain product not because if its qual ity, but because of the payment facilities. Consumers can pay for a TV of the equivalent of 300 in 10 instalments and without any added interest. IKEA should certainly be aware of consumers buying behaviour in order of to have problems with its liquidity ratios.As the telecommunication penetration rate in Brazil remains low, IKEA would not be able to swear in online sales in Brazil in the middle succeeding(a) and its online advertising should be very efficient.Laws requiring pre-sale disclosure by a franchisor are in place in BrazilBrazil shelters thick forests in northern regions including Amazon Basin that can be use for wooden furniture half of the country is covered by forests. However, over the past couple of years, the government has been very cautious about global warming caused by MNCs deforestation. So IKEA would need to ensure the Brazilian government that its practices are very sustainable to be able to use Brazils endowments.IKEA in BrazilFrom the analysed above, it c an be deducted that there are several root forive aspects for IKEA to invest in the area of furniture industry in the Brazilian market. First of all, the furniture market in Brazil is attractive due to a big value of imported furniture. Additionally, the labour cost is cheaper compared to Europe and America.Mode of EntryAll IKEAs stores in foreign countries are managed under international franchising (IKEA, 2009). Franchising is a special form of licensing where the licensor authorises the licensee to utilize its operating systems, logos, brand names and trademarks in return for a loyalty payment (Griffin and Pustay, 2009). The franchisee needs also to supply capital, personnel, personal involvement and local market knowledge (Jeannet Hennessy, 2004, pp.296).As IKEA has so much experience in setting up franchise contracts, it seems sensible to apply the same when coming to Brazil for the following reasonsHowever, International Franchising has its drawbacks as wellAlthough the dra wbacks of setting up Franchising in Brazil are not too high and IKEA could still be very successful in such a market. Based on the education gathered in this work, a relatively more complex but even more successful mode of entry can be recommended.Due to Brazils endowment factors and government economic stimulus package to attract new investments, IKEA can greater benefit from entering the market through Foreign Direct Investment via than from International Franchising. Moreover, by using FDI as a Strategy, IKEA can acquire national alternatives and access other South American markets.According to Dunnings Ecletic Theory (Griffin and Pustay, 2009), FDI will occur when three conditions Ownership, reparation and Internalisation are satisfied. By matching IKEAs Swot analysis and all the other information gathered in this work, it is possible to observe that IKEA enjoys all three advantages in competing in Brazil against local firms.1. Ownership Whereas most of Brazilian furniture retails hold low brand image and average technology systems, IKEA has unique competitive advantages such as strong brand name globally, advanced technology and the benefits of economies of scale in other markets.2. arrangement Advantage IKEA can enjoy lower labour costs, avoid responsibility walls on goods exported from Brazil to other South American countries and save money on product transportation instead of importing products from China, Russia and India, the majority of products can be manufactured in Brazil due to its vast resource endowments.3. Internalisation Advantage Because of growing concerns related to management of intellectual keeping rights, deforestation and corruption in Brazil, IKEA will benefit more from dictatorial its operations in Brazil than from hiring independent local companies to provide such services.FDI via Greenfield Strategy and Strategic AllianceAs Brazilian Furniture Retailers are relatively small, the possibility to acquire an existing company with the intention of obtaining control over employees, technology and stores is very low. Therefore, IKEA would have to start its operations from scratch. According to Griffin and Pustay, 2010, when companies buy or build new facilities, hires in managers and employees to project its brand new operations, they do so through Greenfield Strategy.Given all the facts that influence FDI in Brazil, the Greenfield Strategy can certainly benefit IKEAs entry to the Brazilian Market for the following reasonsIKEA can the location that best meets its needsIt can build up-to-date facilitiesBrazils local and national government gives economic development incentives to attract companies facilitiesIKEA would not have to adapt its production systems to any Joint-venturesIKEA would not have to deal with problems associates with Property Rights that could arise from potential Franchisees/Licensees/ or Joint Venture partners.However, the Greenfield Strategy also has its disadvantagesThe process of b uilding a new site, hiring new staff and negotiating with government is relatively long and dear(predicate)In order to promote certain regions development, Brazilian government exponent require IKEA to build its site in a determined place that is not IKEAs desired location.Grant to use natural resources might be given under very restrict regulations due to global and national demand for sustainable productsFurthermore, by using Brazils endowment resources, particularly in the Forestry sector, IKEAs CSR would be put under further scrutiny. However, as IKEA has so many projects that have been benefiting the forestry and the cotton sector (refer to IKEAs CSR) in so many countries IKEA can combine its current CSR practice and form a strategic bail bond with the Brazilian government involving the production aspect of the business.According to Griffin and Pustay 2010, a strategic alliance involving public and private partners can benefit a company if negotiation is handled properly and if the government is relatively stable, by easing market entry, reducing risks, enhancing knowledge and expertise and giving competitive advantage.Appendix 1Detailed Five Forces Analysis for the Global Retail Furniture Market(Adapted from Datamonitor, 2009).Appendix 2Continuation of Five Forces Analysis on the South American Retail Furniture (Source Datamonitor, 2009)Appendix 3