IKEA is one of those iconic global brands that people either love or hate. Customers in Europe, where it has been operating for the longest time, love the cheap prices and the clean Scandinavian design sensibility. On the other hand, those who hate IKEA deride its cheap furniture and impossible to understand instructions for assembling the products.
IKEA’s success was based on low cost far flung locations, frugal management approach that embraces cost reduction as a driving principle, great Scandinavian design, overwhelming assortment in large stores, flat pack efficient logistics system, and asking customers to assemble the products for themselves. In Europe the high social costs for companies to hire labour meant significant reduction in prices if customers adopted IKEA’s DIY (do-it-yourself) culture.
The India Challenge
For IKEA, because of the country’s large population and fragmented furniture market, India has been for decades on the radar as an attractive market. Yet the throttling regulations placed by the Indian government on foreign retailers did not allow IKEA to open stores profitably. Many of these regulations are initiated at the behest of the domestic retail entrepreneurs who use the protected time to set up their own operations. When they are ready to sell, these same businesspersons lobby the government to ease the rules against foreign firms. Multinational corporations (MNCs) understand this as it is the model of wealth creation for the elites in many emerging markets.
There are however two concerns that I would like to highlight with the above approach. First, who pays for this? Basically, since this model reduces competition it is the Indian consumers who pay via higher prices and reduced choice. By protecting local competitors, instead of competition, the poorer consumers are contributing to enriching the elites of the country. It is an instrument for increasing inequality in the country and transferring wealth from the masses to the few.
Second, even after being allowed entry, the bureaucratic requirements make doing business in India astonishingly difficult. A small personal anecdote will help illustrate this. Last month, I needed to transfer money from my Indian HSBC account to Singapore HSBC account as well as transfer money from the Singapore HSBC account to the UK HSBC account. HSBC allows all accounts to be linked so that you can see the complete picture of your accounts across countries on their website.
The HSBC phone app allowed me to transfer from Singapore to UK with one click within 10 seconds. I immediately saw the money in my UK account. For the transfer to Singapore, HSBC Mumbai initially demanded a form to be filled out by my tax accountant. Then a second four-page form had to be completed by me. Finally, the compliance officer at HSBC demanded an additional letter from a chartered accountant on top of these two forms that reiterated the source of funds (which interestingly was a direct transfer from my provident fund proceeds into HSBC). The whole process took a week, cost five thousand rupees in fees to the tax accountant, a personal visit to the Mumbai branch, as well as a day at least in between when the money was deducted from the Indian account and deposited in the Singapore account! Any new entrant will face the many frustrations of doing business in India and learn how to navigate through these obstacles.
Why IKEA will succeed in India
An interview on the subject of IKEA’s entry into India that I did unfortunately touted that it would be difficult for IKEA to win customers in India. Others also commented that IKEA would face difficulties because of its inability to provide the cheapest prices against the traditional unorganised sector and the unattractiveness of DIY for Indian consumers. Furthermore, analysts had the usual knee jerk reaction that the success of IKEA would depend on having an effective online sales strategy. My own analysis leads me to disagree with these conclusions, although predicting the future is fraught with danger for an academic.
Valued Customer: In their home country, Sweden, and more generally in Scandinavia, individual incomes are relatively equal. I recall a ride in Oslo with a charming immigrant Pakistani taxi driver, who proudly recounted that his son was an engineer. On my remark that the son must be making a lot of money, the taxi driver gently informed me that everyone in Norway earns more or less the same, but his son meets a better class of people.
Given the high taxes and relatively equal incomes in these countries, IKEA’s cheap prices are attractive and almost everyone is a target customer. In India, the natural segment will be on young (25-40 years) upper middle class, especially couples and young families who live in urban areas. Perhaps this population is only 4-5% of India. Yet, it numbers 50-60 million consumers, which is large by global standards.
Value Proposition: In the developed markets, IKEA’s proposition is cheap prices, good design, instant availability, and large selection. To obtain this, consumers had to forgo the selection assistance, convenient high street location, and assembled furniture that the traditional furniture retailers offered. Since Europeans are enthusiastic about DIY when incentivised through lower prices, IKEA has been one of the pioneering examples of a successful global retailer.
In India the proposition will have to change to some degree. First, IKEA will not be the cheapest in the market as the unorganized sector which avoid overheads and taxes can be relatively cheaper. However, they cannot deliver the selection or design of IKEA. Furthermore, IKEA is more than furniture as housewares is a large component on which they will be unmatched on assortment and design.
Second, DIY has to change to “Do it for you”. Fortunately, this is a problem that IKEA has already solved in other emerging markets like China, Singapore and Hong Kong. In Singapore, an independent network of contractors arranged via IKEA delivers and assembles the products. In India, though they will need training and active management, a similar network will have to be set up.
The fundamental value proposition of IKEA of great design and large assortment of furniture and furnishings combined with its Scandinavian image has no competition in India. It is very attractive for the target customer described above who is faced with a paucity of choice in these categories. And, the prices will need to be keen, but do not need to be the cheapest in the market as the proposition is unique enough. Like many mass market western brands (e.g., Marks & Spencer, Starbucks, Zara), their positioning in Asia will be more up market.
Finally, IKEA has always been a destination store. Its large assortment and the need to visit it at most once or twice a year makes it feasible for a customer to make the trip. Often it is part of a day out for the family, which is why IKEA offers a cheap restaurant and fifty cents soft serve ice cream cones for the children. For IKEA, the visit to the store allows them to sell several impulse items that the customer was not intending to buy.
Online is really not a large segment in those categories where look, touch and feel are important considerations because the products are not standardized, it is a few times in a lifetime shopping need, and the outlay for the customers is a relatively large. In any case, shopping for a car or furniture is fun for a large segment of the population. The challenge will be to find appropriate locations which provide both the necessary size and the transportation linkages. Given the poverty of public transportation in India and state of the roads, accessing a location on the outskirts of the city becomes the obstacle for many consumers.
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 entry as a small portion of the assortment will have to be customized specifically for India, local sources developed to reduce costs, independent assembly contractors trained, and the service more perfectly aligned with customer expectations. But there is a large market that is seeking the better solution that IKEA offers. It may take a few years to get the proposition perfect and break even, but success is assured in the long run. Now I would not say the same thing about Walmart’s entry into India via Flipkart.