IKEA: expanding through franchising Essay
IKEA: expanding through franchising
It is the beginning of 2011, and Ingvar kamprad, founder of the Swedish furniture retailing giant IkEA, is concerned ‘his’ firm may be growing too quickly. he used to be in favour of rapid expansion, but he has now started to worry that the firm may be forced to close stores in the event of a sustained economic downturn. on the other hand, IkEA is active in nearly all the world’s con- tinents, though to a lesser degree in South America. kamprad wonders if this continent, and in particular Brazil, could be a future growth market for IkEA.
Although IkEA is one of Sweden’s best-known exports, it has not, in a strict legal sense, been Swedish since the early 1980s.
the store made its name by supplying Scandinavian designs at Asian prices. It managed its international expansion without stumbling. Indeed, its brand – which stands for clean, green and attractive design and value for money – is as potent today as it has been at any time in more than 60 years in business.
the parent of all IkEA companies – the operator of 253 of the 287 worldwide IkEA stores – is Ingka holding, a private Dutch-registered company. Ingka (taken from the first few letters of kamprad’s name) belongs entirely to the Stichting Ingka foundation. this is a Dutch-registered, tax-exempt, non-profit-making legal entity, which was given kamprad’s shares in 1982. Stichtingen, or foundations, are the most common form of not-for-profit organization in the netherlands; tens of thousands of them are registered.
Most Dutch stichtingen are tiny, but if Stichting Ingka foundation were listed it would be one of the netherlands’ ten largest companies by market value. Its main asset is the Ingka holding group, which is con- servatively financed and highly profitable.
Valuing the Ingka holding group is awkward, because IkEA has no direct competitors that operate globally. Shares in target, a large, successful chain of stores in the uS that makes a fifth of its sales from home furnishings, are priced at 20 times the store’s latest full-year earnings. using that price/earnings ratio, the Ingka holding group is worth €35 billion.
now Ingvar kamprad has heard that the top man- agement of the IkEA group plans to make a further international expansion, into South America, because of the growth opportunities there. kamprad is very sceptical about these plans and his personal assistant has asked you, as an international marketing specialist, to get an expert opinion about the plans . . .
IKEA – the story
IkEA Svenska AB, founded in 1943, is the world’s largest furniture retailer and specializes in stylish but inexpensive Scandinavian designed furniture. In 1943 the founder of IkEA, Ingvar kamprad, from Agunnaryd, Sweden, registered the name IkEA, which was formed from the founder’s initials (Ik) plus the first letters of Elmtaryd and Agunnaryd, the farm and village where he grew up.
the first IkEA store opened in Älmhult, Sweden, in 1958. then the internationalization process started.
About corporate IKEA
IkEA has grown into the world’s largest furniture retailer, with 313 stores in 38 countries (2010) and a workforce of some 127,000 people since its first outlet opened in Älmhult in 1958. the firm is noted for its rapid international expansion and has recently set up stores in eastern Europe, Russia and Asia. the total revenues in 2010 was €23.5 billion.
IkEA’s success in the retail industry can be attri- buted to its vast experience in the retail market, product differentiation and cost leadership. the company, which remains in private ownership, is one of the world’s most successful multinational retailing firms, operating as a global organization, with its unique concept that its furniture is sold in kits that are assembled by the customer at home.
there are about 12,000 products in the total IkEA product range. Each store carries a selection of these 12,000 products depending on the store size, and the core range is the same worldwide.
IkEA accounts for just 5-10 per cent of the furniture market in each country in which it operates. More important is the fact that the awareness of the IkEA brand is much bigger than the size of the company, because IkEA is far more than a furniture merchant. It sells a Scandinavian lifestyle that customers around the world embrace.
the IkEA business idea is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford them. the company targets customers who are looking for value and are willing to do a little bit of the work themselves, trans- porting the items home and assembling the furniture. the typical IkEA customer is young and from a low- to middle-income family.
As mentioned earlier, IkEA’s retailing is based on a franchise system. Inter IkEA Systems BV, located in Delft (the netherlands), is the owner and franchisor of the IkEA concept. the IkEA group is a private group of companies owned by a charitable foundation in the netherlands. It is active in developing, purchas- ing, distributing and selling IkEA products. the IkEA experience is about more than just products, however – it is a retail concept. for the concept to work, all aspects must be in place. IkEA products are there- fore sold only in IkEA stores franchised by Inter IkEA Systems BV. however, most of the global product policy (including product development) and the global marketing are centralized to the Swedish part of the company, IkEA of Sweden.
IkEA performs some of the value chain activities internally, while using its relationships with suppliers to combine its internal and their external resources for the sake of both efficiency and development. for instance, products are developed in close collaboration with sup- pliers while taking into consideration the impact of the raw materials, components and facilities involved, since all these resources entail costs and have an impact on quality, design and function. In fact, next to low costs,
reasonable quality, appealing designs and adequate product functionality are major goals for IkEA. these goals lead the company to promote a _constant_ product and technical development, which contributes to its image as an innovative and fashion-oriented firm, but which depends heavily on the contribution of its entire network of suppliers.
to cope with such tasks, IkEA needs advanced skills in marketing, retailing, logistics, purchasing, product development and technologies. this need for competence is reflected by IkEA’s complex organiza- tion. however, the complexity of IkEA’s organization is overshadowed by that of its industrial network – both internal and external (see figure 1). this network includes 1,380 direct suppliers and about 10,000 subsuppliers, spread over 60 countries: 287 IkEA stores (253 own stores plus 34 franchised stores) are located in 30 countries including Europe, Australia, the uS and China.
Between IkEA’s stores and suppliers stands a vital, but less visible, part of IkEA’s network: its wholesale and logistic operations, comprising 27 distribution centres and 11 customer distribution centres in 16 countries. Since IkEA does not own any transport facilities, this network is physically connected via another group of external actors, about 500 logistic partners.
A pivotal role in this network is played by ‘IkEA of Sweden’, (located in Âlmhult, Sweden) a leading business unit that not only manages IkEA’s product range, but also _supervises_ the entire IkEA universe and develops long-term marketing, logistics and purchas- ing strategies. IkEA of Sweden has both an overall responsibility and a coordinating role in the develop- ment, purchase, distribution and marketing of each single product.
PRODUCT DEVELOPMENT AND PRODUCTION
the team behind each product consists of designers, product developers and purchasers who get together to discuss design, materials and suitable suppliers. Everyone contributes with their specialist knowledge. Purchasers, for example, use their contacts with suppliers all over the world via IkEA trading Service offices. Who can make this product of the best quality for the right price at the right time? Products are often developed in close cooperation with suppliers and often only one supplier is appointed to supply all the stores around the world.
IkEA does have its own manufacturing facilities. In 1991 it acquired its own sawmills and production plants and established the industrial group Swedwood to pro- duce wood-based furniture and wooden components. the primary motive behind this acquisition was to
IkEA and its internal and external network (as it was in 2007 – but the basic principles in IkEA’s supply chain are the same today – 2013)
ensure production capacity for IkEA. however, most of the production is done by subcontractors all over the world.
In order to keep costs low, IkEA shoppers are ‘prosumers’ – half producers and half consumers. In other words, they have to assemble the products them- selves. to facilitate shopping, IkEA provides catalogues, tape measures, shopping lists and an internet website to help the consumer with fitting the furniture into the room. Car roof racks are available for purchase at cost and IkEA pick-up vans/mini-trucks are available for rent. IkEA’s success is based on the relatively simple idea of keeping the cost between manufacturers and customers down. Costs are kept under control starting at the design level of the value-added chain. IkEA also keeps costs down by packing items compactly in flat standardized packaging and stacking them as high as possible to reduce storage space during and after distribution.
Effective marketing through catalogues is what usually attracts customers at first; what keeps them coming back is good service. IkEA believes that a strong in-stock position, in which the most popular style and design trends are correctly anticipated, is crucial to keeping customers satisfied. for that, IkEA depends on leading-edge technology and the company has developed its own global distribution network. By utilizing control points in the distribution cycle, the firm is able to ensure timely delivery of products to retail stores all over the world.
IkEA thinks that consumer tastes are merging globally. to take one example, while they have been exporting the ‘streamlined and contemporary Scandinavian style’
to the uS since 1985, they have realised there are opportunities to export uS style to Europe, too, as Europeans have picked up on certain uS furnishing concepts. to respond to this new demand, IkEA now markets ‘American-style’ furnishings in Europe.
Bureaucracy is fought at all levels within the organization. kamprad believes that simplicity and common sense should characterize planning and strategic direction. In addition, the culture emphasizes efficiency and low cost, which is not to be achieved at the expense of quality or service. Symbolic policies, such as only flying economy class and staying at economical hotels, employing young executives and sponsoring university programmes, have been integrated into the corporate culture and have further inspired the spirit of entre- preneurship in the organization. for instance, all design teams enjoy complete autonomy in their work, but are expected to design new and appealing products regularly.
IkEA has improved its value chain through a co- operative focus on suppliers and customers. the firm emphasizes centralized control and standardization of the product mix.
In order to maintain cost leadership in the market, internal production efficiencies must be greater than those of competitors. under IkEA’s global strategy, suppliers are usually located in low-cost nations, with close proximity to raw materials and reliable access to distribution channels. these suppliers produce highly standardized products intended for the global market, the size of which allows the firm to take advantage of economies of scale. IkEA’s role is not only to integrate operations globally and design products centrally, but also to find an effective combination of low cost, standardization, technology and quality.
In the case of IkEA, a standardized product strategy does not mean complete cultural insensitivity. Rather, the company responds to globally emerging consumer tastes and preferences. Retail outlets all over the world carry the basic product range, which is universally accepted, but also place great emphasis on those product lines that appeal to local customer preferences.
IkEA has modified the value chain approach by integrating the customer into the process and intro- ducing a two-way value system between customers, suppliers and IkEA’s headquarters. In this global sourc- ing strategy, the customer is a supplier of time, labour, information, knowledge and transport. on the other hand, the suppliers are customers, receiving technical assistance from IkEA’s corporate technical headquarters through various business services. the company wants customers to understand that their role is not to con- sume value, but rather to create it.
IkEA’s role in the value chain is to mobilize suppliers and customers to help them further add value to the system. Customers are clearly informed in the catalogues about what the firm’s business systems provide and what they are expected to add to the final process.
In order to furnish the customer with good-quality products at a low cost, the firm must be able to find suppliers that can deliver high-quality items at low unit cost. the company’s headquarters provides carefully selected suppliers with technical assistance, leased equipment and the necessary skills needed to produce high-quality items. this long-term supplier relationship not only produces superior products, but also adds internal value to the suppliers. In addition, this value chain modification differentiates IkEA from its competitors.
Directly linked to its mission statement, IkEA has built its cost leadership position on these processes. It furnishes the customer with a quality product with components derived from all over the world utilizing multilevel competitive advantages, low cost logistics and large simple retail outlets in suburban areas. furthermore, cost leadership has been effectively incorporated into the organization’s culture through symbols and efficient processes.
In return for high sales volumes, IkEA accepts low profit margins. In addition, IkEA’s marketing emphasis on budget prices and good value clearly communicates cost leadership to customers. IkEA’s strategy demonstrates that the perception that cost leadership equals poor quality in products and services is incorrect. high quality is associated with input and process variables. Cost reduction, on the other hand, does not mean reducing the quality of these variables, but rather doing things better, and more efficiently. Cost leadership is a part of the management process and culture. From this discussion it is possible to conclude that IkEA effectively aligns its cost leadership platform, focusing on the needs of its target market segment. Differentiation, as indicated in the modification of the value chain, also focuses on this particular segment.
THE INTERNATIONALIZATION OF IKEA
IkEA has applied a conservative policy to inter- nationalization. As a general rule, the firm does not enter a new potential market by opening a retail outlet. Instead, a supplier link with the host nation is estab- lished. this is a strategic, risk-reducing approach in which local suppliers can provide valuable input on political and legal, cultural, financial and other issues
that provide opportunities and/or threats to the IkEA concept. In the 1970s and 1980s, IkEA concentrated its international expansion in Europe and north America, mainly through company-owned subsidiaries and stores. In the 1990s and 2000s the international- ization process has concentrated on Russia and the far East. until now IkEA has not shown much of a presence in the developing countries. the first IkEA store in latin America opened on 17 february 2010 in the Dominican Republic.
Could Brazil be a future opportunity? (See later sections about the Brazilian furniture market.)
Expansion by franchising
IkEA mostly approaches unknown, relatively small and high-risk markets by franchising. Serious applicants are carefully researched and evaluated and franchises are granted only to companies and/or individuals with strong financial backing and a proven record in retail. franchisees have to carry basic items, but are given the freedom to design the rest of the product mix to fit local market needs. the basic core items number approximately 12,000 simple and functional products. the centralized head office is actively involved in the selection processes and provides advice. In addition, all products have to be purchased from IkEA’s product lines.
In order to maintain service, quality and logistic standards, individual franchisees are periodically audited and compared with overall corporate perform- ance. Extensive training and operational support are provided by the headquarters. All franchisees pay franchise fees to IkEA holdings. All catalogues and promotional advertising are the responsibility of head- quarters. franchising has been used as a vehicle for the company’s generic focus strategy.
Balance of autonomy and strategic direction
As IkEA continues to expand overseas, the signific- ance of centralized strategic direction will increase. naturally rapid internationalization will trigger a range of challenges imposed on the headquarters, such as the following:
● the complexity of the logistics system will increase.
● It will be more difficult to respond to national needs and cultural sensitivity issues.
● Emerging demographic trends will force the organ- ization to broaden its focus strategy to respond to varying nation-level consumer groups. With all these challenges emerging it might be very difficult to maintain a central organizational structure. the best way to meet these challenges is to find the proper balance between country-level autonomy and
centralized intervention. With reference to IkEA’s long-term relationship and control over its suppliers in exchange for quality assurance, technology transfers and economies of scale factors may trigger potential suppliers to integrate forward and produce competitive products for IkEA’s local competitors. With logistics complications and long lead times IkEA is forced to maintain high control levels over its suppliers. for instance, if the supplier responsible for the screws com- ponent to a table cannot deliver on time, the supplier of the table-top has to adapt its production to the new scenario. Without IkEA’s centralized logistics system this example could lead to severe store shortages, leading to losses in sales.
THE BRAZILIAN MARKET FOR FURNITURE
from 2006 to 2010 Brazil had an average yearly growth in gDP of 5.5 per cent (see also Section 6.5 on the BRIC countries).
According to the Brazilian Association of furniture Manufacturers (ABIMoVEl), the Brazilian furniture mar- ket was estimated at approximately uS$4.5 billion in 2008, of which about uS$150 million were imports. the market can be broken down into three main cat- egories: residential (60 per cent), office (25 per cent) and institutional organizations, such as schools, hospitals and hotels (15 per cent).
Brazil has 4.6 million hectares of planted forests, almost all of which are located in the south of the country. Wood from such forests is mainly used in the production of furniture, pulp and paper. the main furniture production centres, as well as the most import- ant markets, are also located in southern Brazil.
As the Brazilian furniture market continues to reap more and more of its profits from exports, production is increasingly tailored to satisfy market niches that demand differentiated products. to meet this need, the Brazilian industry is investing more in design and development, although investments are smaller in comparison to investments made in the uS, Italy and germany. Brazil is also importing state-of-the-art equip- ment to address quality issues mandated by foreign markets, e.g. the uS, Italy and germany. today the segment requires import of equipment such as wood- drying machinery, finishing machinery and tools.
According to the Brazilian furniture Association there are approximately 14,500 Brazilian furniture manufacturers, most of which are small. these firms are typically family-owned companies whose capital is exclusively Brazilian. historically, the greater proportion of Brazilian manufacturers have been concentrated in areas of large population density in southern Brazil.
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the process of trade liberalization initiated in 1990 introduced significant changes in Brazil’s trade regime, resulting in a more open and competitive economy.
uS exports of furniture to Brazil reached $50 million in 2008 (35 per cent of total Brazilian furniture imports). uS exports to Brazil were particularly strong in the area of seats, new-design office furniture and high-end, high-value-added residential furniture. Market analysts estimate that in the next three to four years imports of institutional furniture, such as that used in hospitals and hotels, will increase considerably, mainly imports from the uS.
Brazilian furniture imports totalled uS$150 million in 2008. this represented 3 per cent of the total furniture market in Brazil. the uS holds 35 per cent of the imported furniture market, followed by germany with 30 per cent, Italy with 20 per cent, and other countries with 15 per cent.
the different industry segments – residential, commer- cial and institutional – make up the Brazilian market. Each of those areas has its own purchasing approach. for example, the public institutions may import directly from its headquarters and, in the case of the furniture industry, the end user might be an importer or a store chain.
It is important to mention that there are no major distribution chains in Brazil. Most furniture imports are made through direct importers and, to a lesser degree, local manufacturers wishing to complement their product line.
high-end furniture and mattresses are commonly imported into Brazil by direct importers or furniture stores. Interior decorators and architects are also considered decision-makers, since they are the ones who recommend brands and styles to their final clients.
Brazil has a tariff-based import system and has simplified the process for obtaining import licences. Import tariffs are levied _ad valorem_ on the cost, insurance and freight (CIf) value of the imports. Import tax (IPI – see below) for furniture varies from 5 to 10 per cent.
the industrial products tax (IPI) is a federal tax levied on most domestic and imported manufactured products. It is assessed at the point of sale by the manufacturer or processor in the case of domestically produced goods, and at the point of customs clearance in the case of imports. the tax rate varies by product and is based on the product’s CIf value plus duties.
Interest rates in Brazil have decreased from 2008 to 2010 (estimated at 8.0 per cent per year in June 2010), but are still at a relatively high level and this discour- ages demand for bank loans. the few sources of funds available for long-term financing are provided by the national Bank for Economic and Social Development (BnDES), through leasing operations and by foreign government export agencies.
Distribution and business practices
Major end users of furniture will only purchase from well-known and reliable suppliers. Although large end users may import directly from foreign suppliers, they are always concerned with after-sales service. technical assistance and availability of replacement parts are considered important factors in the purchas- ing decision. In some segments, such as commercial and institutional, this factor may determine from whom the end user will purchase. A physical presence in the market, through either an agent or a manufacturing plant, increases the end user’s trust in the supplier’s commitment to this market and facilitates the sale.
the retail scene in Brazil
for many years the popular wisdom in Brazil was that shopping malls were only for rich people. the 1984 opening of the Center norte mall in São Paulo changed all that. It is strategically placed next to a subway and a bus terminal: proximity to mass transit is essential, since many low-income consumers do not own cars. Center norte was followed by other shopping malls in other cities, such as Rio de Janeiro and Belo horizonte.
Economic instability, difficulties in obtaining financing at reasonable interest rates and customs barriers for certain imports have slowed down the entry of foreign retailers to Brazil. Among the international chains that have been attracted by Brazil’s 80 million consumers are JC Penney, Zara and the Dutch chain C&A, which leads the fashion sector in Brazil. International fran- chisors such as Benetton, lacoste, hugo Boss, Polo Ralph lauren and McDonald’s operate in Brazilian shopping centres, some on a large scale.
those who have set up shops in Brazil have had varied results directly related to their ability to adapt to local conditions. Sears, for example, have had extremely negative results, due to the centralization of decision- making in Chicago. Similarly, Zara tried to bring its European management policy and market approach to Brazil and had poor financial results at the beginning. this is contrasted by the excellent performance of C&A, whose policies and procedures were defined in Brazil for the local market. JC Penney acquired a local chain (Renner) and accelerated its expansion with good results.
1. until now IkEA’s international marketing strategy has been tightly and centrally controlled by corpor- ate headquarters. however, high local pressures emerging due to demographic and cultural differ- ences might force the local IkEA shops to take strategic initiatives to respond to local market needs. In this connection, discuss the regional head- quarters and transnational organization (presented in Chapter 12) as hierarchical entry mode alterna- tives to the very centralized strategy emanating from IkEA’s headquarters.
IkEA has not yet explored joint-venture and strategic- alliance strategies. Evaluate the pros and cons regard- ing these two entry strategies versus the traditional IkEA entry mode – own stores and franchising.
Should IkEA penetrate the South American market by establishing a shop in Brazil?
In the light of the political and economic situation in South America, outline the sourcing concept that should be implemented in the South American market.