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When
Ian Duffy was first put in charge of Ikea's China stores four years ago, he
spent hours at the checkout line observing customers. He didn't see many.
Instead, he saw plenty of people crowding the Beijing store for freebies --
air conditioning, clean toilets and even decorating ideas. Adding insult to the
injury: Shops right outside were offering copies of Ikea's designs at a fraction
of the cost.
So, to lure shoppers, the Englishman launched what could be the cheapest Ikea
nonsale item in the world: a scoop of vanilla ice cream in a cone for 12 cents.
Thus began Ikea's strategy to beguile the finicky Chinese consumer by
slashing prices in China to the lowest in the world -- the opposite approach of
many Western retailers.
Although China boasts the world's fastest-growing economy as millions join
the ranks of the middle class, the Chinese are famous for their reluctance to
spend their money, saving on average 30% of their income, one of the highest
savings rates in the world.
By increasingly stocking Ikea's Chinese shops with China-made products, Mr.
Duffy pushed prices on some items as low as 70% below prices in Ikea outlets
outside China. For example, an Ikea's single-seat Ektorp armchair retails for
$112 in China, 67% cheaper than one sold in the U.S.
The gamble seems to have worked. Next month, Ikea will up the ante in its
low-price strategy by opening a store in Beijing that will be its largest store
in the world outside of its flagship store in Stockholm. The big boxy building
in Ikea's traditional blue and yellow colors will be roughly 42,000 square
meters, or close to the size of eight football fields, only about 20% smaller
than Ikea's Stockholm store.
The Beijing behemoth is meant to cater to large volumes. Ikea expects to sell
enough furniture to fill about 5,000 40-foot containers in the store each year,
double what it sells in other stores. Weekend crowds at Ikea's three other
Chinese stores are already so big -- more than 20,000 customers a day -- that
employees need to use megaphones to keep them in control.
Though no stranger to large crowds, Ikea is expecting even more people will
flock to its new Beijing store. To accommodate them, its building aisles are
half a meter wider than normal. The store is expected to draw six million
visitors annually, compared to two million for Ikea outlets elsewhere.
Ikea -- whose name in Chinese, "Yi Jia," means "comfortable home" -- is
anything but comfortable on weekends, as thousands of Chinese crowd in to find
goods to outfit their new homes and apartments. Over the past eight years China
has seen a huge surge in homeownership as Chinese authorities have done away
with state-allocated housing and subsidized rentals. Since many apartments are
typically empty shells sold without paint, lighting or even flooring -- a
practice called "mao pi," or semi-furnished -- the market for home furnishings
has taken off.
In cutting prices so deeply, Ikea is bucking the trend. Typically, Western
brands in China price products such as makeup and running shoes 20% to 30%
higher than in their other markets. That's partly to make up for China's high
import taxes on foreign goods and partly to lend their products an added cachet
in Chinese eyes, an important branding strategy in developing markets.
Ann Chen, retail analyst at Bain & Co., a Boston-based consultancy group,
says foreign retailers in China "don't feel that they have to compete on price,"
because they are offering a wider selection of goods and a more pleasant
shopping experience than domestic competitors.
Mr. Duffy has a different take. "I had to make a break, change [Chinese]
perceptions that Western-branded goods are normally more expensive."
That approach may be giving Ikea a boost. Bain & Co. estimates that the
do-it-yourself market in China -- stretching beyond furniture to include things
like bathroom fixtures as well as gardening tools -- is growing 10% a year and
is worth $15 billion in sales. In China's home-wares segment alone, Ikea holds
43% market share, Bain estimates.
But Ikea is about to get a lot more company. Until last year, Chinese
regulations required all foreign retailers to have a local partner. Ikea's first
two stores in China were joint ventures. But last October, Ikea opened its first
wholly owned store in Guangzhou, setting the trend for all future stores, Mr.
Duffy said.
With the change in regulations, United Kingdom-based home-improvement shop
B&Q has announced plans to more than double its current number of stores to
100 over the next five years. Home Depot Inc. is also said to be considering
entry, and, according to some media reports, the company is considering buying a
stake in local player Orient Home, which has 22 stores around China. Other
foreign entrants are expected to follow.
Some analysts question whether Ikea can maintain its cut-price strategy as it
plunges into China's secondary cities, where incomes are lower and demand for
bargains is even higher. Ikea plans to open a store in the city of Chengdu later
this year, and add about two stores yearly until about 2010. The pace is swift
compared with Ikea's first seven years in China, where it kept to just two
stores, one in Shanghai and the other in Beijing.
"It's a big test for us," says Mr. Duffy, who nonetheless says that Ikea will
reduce prices each year by improving productivity in stores, increasing its
China manufacturing facilities (it is currently building a factory in the
Northeastern city of Dahlian) and sticking to wholly owned stores.
Half of the products in Ikea's Chinese stores are made in China, compared
with about 23% in Ikea stores overall, with the rest made in places such as
Poland and Sweden. That has enabled the company to halve prices in China over
the past four years, even as Chinese consumer incomes have increased.
The success of Ikea and other Western retailers in China has wider
implications: China's trading partners in Europe and the U.S. hope to reduce
their huge trade deficits by getting the Chinese to buy more of their products.
But that's not easy when plenty of foreign retailers in China have yet to see
profits from country sales, say analysts.
The Swedish company isn't publicly listed and doesn't disclose profitability,
but analysts estimate Ikea's China operations bring in about $120 million in
turnover yearly. Mr. Duffy, 48 years old, a law-school graduate who long ago
eschewed pinstripes for the jeans-wearing, everyman ethos at Ikea, said China
operations are on track to achieve profitability, but declined to say when.
Judging by the crowds, Ikea's attempt to appeal to Chinese tastes while
sticking to its signature Swedish style is working. Ikea cafeteria menus in
China, in addition to the company's trademark meatballs and lingonberry juice,
feature rice and braised spiced pig trotters. It offers a few products -- not
many -- made just for Chinese stores, such as a 12-cent red placemat with doggy
figures, a nod to this Lunar Year of the Dog.
Ikea's throwaway chic is helping convert the habits of a thrifty nation used
to durable Chinese wooden furniture. Example: Chen Wei, 40, who recently brought
his wife and mother to the existing Ikea store in Beijing's Madian district. "My
parents' furniture used to last more than 10 years, but now they change every
three or four years," Mr. Chen says.
Mr. Duffy has seen plenty of shoppers in his 19 years at Ikea. "Chinese
consumers are the most demanding in the world," he says. He appears undaunted.
Standing by the plastic-shrouded products in his cavernous new store, he says,
"People like what we've got. We've had seven years to build a following in the
city and in that time, we've learned enormously."
