The Impact of IKEA on Emerging Markets: Ken Research

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Introduction: On March 12 2018, IKEA appointed Peter Betzel as the new CEO for IKEA India. This change simply signifies the growing commitment by IKEA towards the Indian Furniture Market.  Before India, Betzel was managing IKEA’s largest market- Germany. The Swedish retailer has bet big on India with a plan to open 25 stores across India by 2020 with each store having an investment of approximately USD 80-110 Million being made for each store. The company plans to have stores in almost all of India’s tier one cities with plans for Bangalore, Mumbai and the National Capital Region. The company, as of 2016 had already invested over USD 350 Million and was one of the first companies to gain approval for 100% FDI. The market for Indian furniture is estimated to be worth USD 20 Billion as of 2018 with online furniture sales contributing only USD 250 Million. The majority of furniture sales happening in India are brick and mortal outlet sales.  Although IKEA is marking their entry into India with their Hyderabad store set to open in 2018, there is an emerging market they have managed to gain a solid foothold on, China. IKEA China is seeing strong growth with the company managing revenue of USD 2 Billion for the year 2017 alone. Customers visiting the retail stores increased by 11% to 90 Million while the visits to websites increased by 24% to 75 Million. This growth has shown potential for IKEA in China which has led to their decision of opening 3 new stores by the end of 2019.

Impact:  The entry of a company such as IKEA is a major improvement into the market for furniture in emerging economies such as India and China. India and China are rapidly developing nations with an increasing number of people entering the middle and upper middle classes owing to better employment and developing pay structures that are satisfactory to employees. The increasing pay leading to a growth in disposable income allows for consumption into a sector like furniture where products are highly differentiated and are usually used medium to long term based on the quality of the furniture. The entry of a company such as IKEA that sells economical furniture and simultaneously implements a DIY model of consumption not only allows access to quality furniture to a larger number of income groups, but also allows furniture which is based on functionality to be appealing for a variety of consumers. This implies an expected increase in satisfaction from utility based furniture which has a pleasant design, all for a lower price than traditional retailers which is one of the key factors for IKEA expected to dominate the Indian Furniture market, more so the furniture raw material is expected to be locally sourced which would allow for greater margins. Finally IKEA standards for customer service is exemplary, as seen in the case of China. For the sake of the Chinese market, IKEA lowered their prices for furniture by almost half in order to appeal economically to the Chinese population. This signifies a strong commitment towards expanding the customer space and brand equity of the company in emerging markets.

Outlook: IKEA expects that India and China will become part of their biggest markets and are set to go toe to toe with their European customer base. Although this may take some time for implementation, there is strong possibility of IKEA becoming the market leader in the furniture market with growing disinterest by popular furniture players in the Indian market such as Future group being almost ready to abandon their furniture segment as it has consistently been a loss maker, second reliance already having exited the market, and landmark having falling sales over recent sales periods, aside from the lack of well structured competition, the level of fragmentation in the market presents a need for a company like IKEA capable of building a sustainable customer base and growing the interest of the Indian furniture market while managing to scale the business of the Chinese markets simultaneously.

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https://www.kenresearch.com/tag/consumer-products-and-retail/furniture/25.html

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Ken Research

Ankur Gupta, Head Marketing & Communications

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0124-4230204

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