What IKEA brings to the table


July 13, 2012

Raghavendra Kamath, Business Standard

Mumbai, 13 July 2012

Just one sentence in the IKEA website sums it all up: “We design the price tag first and then develop the product to suit that price”. The $30 billion (over Rs 165,000 crore) furniture powerhouse with 330 stores worldwide obviously doesn’t like to mince words: it’s an out and out price warrior in all the 41 countries (India will be the 42nd) it operates in.

That obviously would be a cause for concern for the four to five organised players, which account for 6 per cent of the total furniture market in India, while the rest is in the unorganised segment.

“Product developers and designers work directly with suppliers to ensure that creating the low prices starts on the factory floor,” says IKEA Group spokesperson Josefin Thorell. Others agree. “People flock to IKEA stores because of price”, says Debashish Mukherjee, partner and vice president at AT Kearney, a global management consulting firm. Consider this: in China, the retailer has cut prices by 60 per cent since 1998 when it entered the market.

The low pricing has its roots in sourcing. Globally, a third of IKEA’s sourcing comes from China, and two-thirds from European countries like Poland. While IKEA develops the entire range of furnitures in Älmhult, Sweden, product developers and designers work directly with suppliers. IKEA has about 31 distribution centres in 16 countries, supplying goods to its stores. Since it owns product rights of almost every product, it can switch suppliers whenever it feels.

At the heart of the strategy is the concept of do-it-yourself (DIY) furniture which means buyers have to assemble different pieces of the product themselves. The ‘flat packs’ design helps the retailer to sell them at lower prices, consultants say. A customer has to take the delivery of the product and assemble it himself.

Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy explains: “When they sell flat packs, there are no assembling costs, lower shipment costs and mostly products are sold on catalogues, which helps them reduce operational costs and lower prices. Those flat packs work well with young consumers whose budgets are normally tight,” says Dutta.

The IKEA catalogue, many say, is the company’s greatest weapon. A 300-page missionary text, it goes out to over 180 million people in 27 different languages. The catalogues also help the retailer to save on advertising costs, says Sanjay Badhe, a Mumbai-based independent retail consultant.

Original styles and designs make it different from others, say consultants. The other key element is flexibility. For example, the beginnings of IKEA in America were inauspicious, with European compact efficiency conflicting with America’s “bigger is better” creed. IKEA’s designers changed their mindset on how they approached American design after the head of US operations made a stunt of it: He handed out T-shirts to Swedish designers that declared “size matters.” They apparently got the message.

There will also be a certain recall value even before IKEA makes an entry into India. For example, its products are already popular among urban shoppers.

IKEA’s Thorell says the Swedish retailer’s presence in India will, in a major way, help improve availability of high quality, low-price products, increase sourcing of goods from India and increase the competitiveness of Indian enterprise through access to global designs, technologies, skill development and global best practices. IKEA sourced goods worth $ 450 million (Rs 2,475 crore) from India in 2011 and says it plans to exceed over $ 1 billion (Rs 5500 crore) over the next few years.

India’s total furniture market is estimated to be around Rs 100,000 crore and organized market constitutes six per cent of that at Rs 6,000 crore. Home Town run by Future Group, Home Centre owned by Dubai’s Landmark Group and Homestop of Shoppers Stop are the main organised players in the market.

“Their entry will bring a sea change in the Indian furniture market,” says Mahesh Shah, who heads Home Centre, the home products retailer at Landmark group. Shah says IKEA could pose a challenge for value retailers such as Furniture Bazaar.

Some consultants such as AT Kearney’s Mukherjee says that IKEA will have to figure out the last mile supply chain issues in India. The reason: most western countries have large houses and cars and even large parking lots where IKEA’s furnitures, which are folded and sold, can be stored. But In India, both cars and houses are smaller, making it difficult for consumers to stock them.

“In India, the cost of real estate is high, retail space availability is an issue and overall store efficiency is a big challenge. They can’t cut and paste their global model here. They have to develop India-specific strategy,” says Dutta of Third Eyesight.

“Globally, do-it-yourself concept is quite popular, But in India, people are more comfortable with readymade furniture or getting it made from carpenters. It needs to be seen as to how IKEA develops here,” says the chief executive of a retail chain who did not want to be quoted.

(This article appeared in Business Standard on 13 July 2012.)