STRATEGIC RETAILING

© Roshan Jacob

“If retailers are to succeed in an overseas market, they must not only master the traditional skills of market segment cultural and economic traditions of the host country.” (Ingvar Kamprad, founder, IKEA 1993)

IKEA is the largest furniture retailer in the world and offers a

wide range of well-designed and functional products at a low

price with the idea of serving low-middle income groups. The

company was established in 1943 by Ingvar Kamprad, an

entrepreneur from the Småland province in southern Sweden.

The IKEA Group is owned by Stichting INGKA Foundation

which owns INGKA B.V. - the parent company of the IKEA

group. IKEA has about 127,800 co-workers and 253 stores in

24 countries with 1,220 suppliers in 54 countries (IKEA 2009).

IKEA entered the Singapore market in 1978 with its first store

at Sixth Avenue.

The IKEA Concept began with Ingvar's innovative

idea - to offer home furnishing products of good

function and design at prices much lower than

competitors by using simple cost-cutting solutions that

did not affect the quality of products. Ingvar used

every opportunity to reduce costs and scraped and

saved in every way possible; except on ideas and

quality.

The IKEA Vision

To create a better everyday

life for the masses.

The Business Idea

To offer a wide range of well

designed, functional home

furnishing products at prices

so low that as many people

as possible will be able to

afford them.

The Approach

“Your partner in better living.

We do our part, you do

yours. Together we save

money.

IKEA has its façade clad in the main colors of

Sweden‘s flag, yellow and blue. Life size banners are

displayed at strategic points to immediately grab an

individual‘s attention. IKEA uses ambience and

psychological factors (contrasting hues, magnitude,

and zonality) to attract shoppers with a single purpose

– clear and concise visual communication with its

customers.

For the interior, its main aisle is unpainted concrete

flooring, which conveys a low-cost, no frills

environment that is in sync with IKEA‘s low price

concept (franchisor.ikea.com 2009). On the other

hand, light-colored laminated flooring for showrooms

create a professional yet relaxing ambiance.

IKEA uses bright lighting to suggest a value store

image, for it targets the mass market and works within

their budget. But for most of its showrooms and

exhibits, incandescent lighting is used for a relaxed

and welcoming feel, implying how ideal homes should

look like, leading to classical conditioning. To appeal

to the shoppers’ senses, soft soothing music is played

in the background to create a more relaxing

environment which causes shoppers to stay longer.

The mega store comprises of four levels in total – the first two

levels are car park lots and the top two stories are showrooms.

IKEA is designed around a "one-way" layout. This format is

designed to encourage the customer to see the store in its entirety,

although, there are often shortcuts to other parts of the store.

Showrooms are set up to its very last details along every aisle, and

almost seem like beckoning shoppers to explore each display area.

For each section, a huge variety of furniture is offered to suit the

customer‘s individual preference and budget.

IKEA has artfully placed selections of supplementary goods on the

staircase landing to utilize space and leads to impulse purchases.

A lift is also provided for shoppers with trolleys or the handicapped

to get to the lower level with ease

IKEA uses spine layout for its circulation, with a single main aisle

running through the store. The furniture is displayed in a variation

of free-flow, grid and loop layouts, allowing shoppers to touch and

try the items out, engaging them in total sensory with the

merchandize.

Utilizing its space with unconventional layouts to efficiently house their huge array of merchandize, customers feel that IKEA is like a labyrinth, with more and more to explore and uncover with each corner and section they turn to.

The vast majority of IKEA stores are located outside of city

centers, primarily because of land cost and traffic access. IKEA

buys the land where it opens new stores, and builds all new

stores from the ground up, thereby eliminating leasing or rent

fees. This approach is financially savvy in the long run. Several

smaller store formats have been unsuccessfully tested in the past.

Timings

An important feature of many IKEA stores is their long opening

hours. Many IKEA stores are in operation 24 hours a day with

restocking and maintenance being carried out throughout the

night. However, public opening hours tend to be much longer

than most other retailers, with stores open well into the evening.

In the Tampines outlet for example, the store is open till 11 pm,

while opening times is often around 9am.

Restaurants

IKEA stores also feature restaurants serving traditional

Swedish food such as potatoes with Swedish meatballs,

cream sauce and lingonberry jam, along with a few varieties of

the local cuisine like Nasi Pandang, and beverages such

as lingonberry juice, although there are variations. Besides the

Swedish staples, hot dogs and drinks are also sold at the

bistro, Also items such as Prinsesstårta - Princess cake are

sold as desserts. Refills of coffee, tea, and soft drinks are free.

Grocery Store

IKEA also has a mini shop selling Swedish-made, Swedish-style

groceries, such as Swedish meatballs, packages of gravy and

various Scandinavian cookies and crackers, as well as salmon

and salmon roe.

Child Care

Most IKEA stores have a play area, named Småland, for children

aged 3 to 10 years. The service is offered completely free of

charge. Parents drop off their children at a gate to the

playground, and pick them up after they arrive at another

entrance. The area mostly features things such as slides,

seesaws, cartoons, a ball pit, etc.

The IKEA experience

IKEA customers are actively involved in the shopping experience.

The IKEA Concept relies on customers to choose, collect, transport

and assemble IKEA products themselves. All products in the store

are supported by price and product information that is clearly

marked on large, easy-to-read tags, enabling visitors to

serve themselves. There are of course, knowledgeable co-workers

available to customers when needed.

The shopping sequence first involves going through furniture showrooms and making note of selected

items. The customer collects a trolley and proceeds to an open-shelf warehouse for smaller items

(Market Hall). Then the customer visits the furniture warehouse (Self-Serve) where previously noted

showroom products in flat pack form is picked. Finally, the selected products are taken to the cashier's

station to make payment. The IKEA store is laid out so they will not only find what they came for, but also

be inspired by unexpected ideas and low-priced products as well.

Most IKEA stores offer an "as-is" area at the end of the

warehouse before the check-out counters. Returned, damaged

and formerly showcased products which are not in new condition

or taken out of the IKEA product range are displayed here, and

sold with a significant discount, but also with a "no-returns" policy.

The store provides everything that is needed for convenient

shopping: pencils, notepads, tape measures, store guides, IKEA

catalogues, shopping bags, strollers and trolleys. Customers

may need to bring a car to take purchases home, or they can

use the low-priced IKEA home delivery service if that is easier.

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 embalagens and stacking

as much as possible to reduce storage space during and after

distribution in the logistics process.

IKEA manufactures quality products with components

derived from all over the world utilizing multi-level

competitive advantages, low-cost logistics, and large retail

outlets in suburban areas. Furthermore, cost-leadership

has been effectively incorporated into the organization’s

culture.

In return for high sales volume, IKEA accepts low profit

margins. Also, IKEA's marketing emphasis on budget prices

and good value clearly communicates cost leadership to

customers. 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 do things

better, and more efficiently. Cost leadership is a part of the

management culture.

Product

From the drawing board onwards, cost-consciousness is an ever-

present part of the production chain. In many cases the final cost of

the product is determined at the very outset of the design process.

Through access to good, inexpensive raw materials, IKEA works

together with its suppliers to make full use of the materials.

Transport

Large volumes in combination with flat packaging are vital for IKEA

to transport products economically from the supplier via the stores to

the customers. At present, 20 percent of all IKEA goods are

transported by rail.

The main goal for the distribution at IKEA is to manage and transport

the goods flow from thousands of suppliers, which is to be connected

to the operational needs of each individual IKEA Store. The

challenge is to connect the geographically widespread IKEA Stores

in Beijing, China, San Francisco, USA and Moscow, Russia to the

thousands of globally outspread suppliers, which can only be

achieved by coordination.

Pricing

Customers play their part in keeping prices low. Using the information

on the product price-tags, customers collect what they want to buy from

the racks in the store‘s Self-Serve Area, take the products home

themselves and put them together with the help of the enclosed

assembly instructions.

Perhaps the most instrumental factor in enabling customers to

comprehend and relate to IKEA’s values is its international pricing

mechanism, wherein all product prices are guaranteed to be sustained,

at the annual catalogue rate. This not only ensures customer

confidence but has been proven favorable in informing customers to

make the most of the seasonal reduction in prices on selected

products.

IKEA’s pricing strategy is not plain - low price, but value for money.

They also cut down on the costs in sales personal, as IKEA customers

need to pick up their own merchandize and clear their own trays at the

food court.

Merchandize

At the IKEA store, there are hundreds of inspirational displays -

from realistic room settings to real-life homes, all with product

combinations that provide fresh ideas and know-how on

contemporary interior design. There are about 10,000 products

in the total IKEA product range; complete with information on

prices, color, constituent materials, finishing‘s variants and

maintenance tips. The core range is the same worldwide. The

profile of its well-designed and high quality range is distinctively

Swedish/Scandinavian. All of IKEA’s products are labeled

"Design and Quality, IKEA of Sweden."

IKEA’s on-shelf merchandize presentation and visual merchandizing is creative and truly inspiring. It

never fails to excite shoppers with the endless possibilities and instills in them a sense of awe with

the abundance of merchandize displaying variety, assortment and depth. Merchandize are displayed

in an organized manner and arranged according to an allocated amount of floor space; showing what

can be done with IKEA’s products regardless of space. Props are used as much as possible in order

to enhance the sensory stimulus factors for the consumers.

In other areas, merchandize is neatly laid out with supplementary

products used as props to enhance the impression it gives to

consumers. Consumers are encouraged to test the products, such

as beds and sofas. This stimulates the sensory appeal to the

consumers during their post-transaction stage, tranquilizing the

knowledge and impression that has previously already been

conceptualized by the brand‘s image.

The children’s section offers a wide assortment of merchandize

with a plethora of colors. This section is especially vibrant, with

attractive merchandize ranging from products with complimentary

colors to that of contrasting and eye-catching ones.

Hardlines and softlines are seen throughout the store. Wall fixtures

are used to display art pieces, and in the lighting section, to display

lamps. Light bulbs are placed nearby using dumping for an impulse

purchase decision. Gondolas are used to stack products on

shelves, such as in the utensils and tableware section; while pots

are arranged on make-shift shelves in the ‘Featured’ fixture, with

promotional price signage hanging above. Rugs of assorted colors

are stacked or pegged to the wall, with carefully measured gaps

between each rug and the next. By doing so, it has an orderly

appearance from the consumer‘s perspective.

The furniture warehouse area is the final section of the store, with

all merchandize dismantled and packed in boxes. Here, shoppers

perform an important retail task of self service, and collect their

goods just before payment. Merchandize in this area is rather heavy

and bulky, and hence placed right before the cashiers for the

convenience of customers and safety of other shoppers.

While developing new products and gauging the turnover of existing

ones, IKEA’s product managers use a price matrix to identify gaps in

the company's product lineup - and how much to charge for the new

product. To identify market opportunities, they take a product council

directive, plot the existing product lineup on a grid, and look for

empty spaces.

Manufacturing

Although IKEA household products and furniture are designed in

Sweden, they are largely manufactured in developing countries

to keep down costs. With suppliers in 55 countries, roughly 2/3

of purchasing is from Europe with about 1/3 from Asia. A small

amount of products are produced in North America.

Comparatively little production actually takes place in Sweden,

though it still remains the fourth-largest supplier country (behind

China, Poland and Italy). China accounts for about 2.5 times as

much supply as Sweden. For most of its products, the final

assembly is performed by the consumer.

Top 5 purchase countries

• China 18% • Italy 7% • Poland 12% • Germany 6%

• Sweden 9%

IKEA: Supply Chain Management

Distribution

IKEA uses excellent supply chain concepts to offer good value to its customers by reducing and

eliminating wastes at every stage. Close relationships with their suppliers enables IKEA to make a

real difference, with economical bulk production to keep the prices low while ensuring good quality.

Also, flat packing reduces transportation, assembly and retail costs.

For IKEA, distribution is an important

part of the equation of creating home

furnishing articles at prices which are as

low as possible. Today approximately

10,000 IKEA products are manufactured

by 1,220 suppliers and transported to

186 IKEA stores around the world, often

via one of the company‘s 28 central

warehouses and distribution centers. At

IKEA, distribution is all about making the

route from the manufacturer to the

customer as efficient and short as

possible.

IKEA WAY

The IKEA Way on Purchasing Home Furnishing Products (IWAY)

has been introduced in all IKEA units and a compliance audit

group has been formed to perform and calibrate the audits. IWAY

includes not only environmental concerns but also labor, social,

and forestry issues. IWAY explains the minimum requirements on

social and working conditions and environmental demands at

IKEA suppliers range. It includes 19 different areas divided into

more than 90 specific issues and defines what suppliers can

expect from IKEA and what IKEA requires form suppliers

concerning environment, labor and working conditions, and

forestry management.

IKEA’s Value Proposition

IKEA is committed to designing great products in

terms of convenience, functionality, price and

quality and hence delivers clever solutions and

great value to the customers. They achieve this by

using the best of supply chain practices, lean

management, minimizing retail, production and

distribution costs and using inexpensive materials in

innovative ways.

Great Functional Design

Easy to use, practical and yet attractive are the

mantras for IKEA design. It follows a no frill

approach and allows the customer to customize to a

large extent. Innovation is the key to the great

designs that IKEA produces which simplifies

everyday home furnishing needs.

Extensive Range and Variety

IKEA has positioned itself to be the one stop destination shop for all home furnishing needs. It covers

all home solutions, ranging from kitchen, bedroom, bathroom, living rooms to office solutions, small

home decor products, lighting, carpets, small kitchen knick knacks, storage boxes, kids toys, etc. It

houses such a wide range of product categories and great depth in each category. These products

are very practical, appealing and modern; for everyday use.

IKEA: Customer Values

Convenience

All home needs under one roof. The simple return policy, simple

display of product information, the touch and feel of the products, helps

customers make most of their decisions by themselves. Customer

Service representatives, though few in number are always ready to

help the customers. The children‘s play area, the family great value

restaurant, special events, catalogue, seasonal themes, etc definitely

provide convenience to the customers.

Right Quality

Keeping the customer in mind, IKEA doesn‘t invest in unnecessary

expenses and focuses on appropriate quality for the right use. All their

products undergo rigorous tests to ensure they meet the required

quality and safety standards.

Catalogue

IKEA publishes the annual IKEA catalogue. Currently it is

printed in 27 languages for 36 countries, and is considered

to be the main marketing tool of the retail giant, consuming

70% of the company's annual marketing budget. The

catalogue is distributed both in stores and by mail. The

catalogue itself is printed on chlorine-free paper of 10-15%

post-consumer waste.

Loyalty Program

IKEA has launched a loyalty card program called ‘IKEA Friends’. The

distinctive yellow card is free of charge with a minimum purchase of

$300 and comes with a validity of two years. Benefits of becoming an

IKEA Friends member include exclusive perks such as discounts on a

special range of products in the IKEA store in addition to free drinks,

bonus points and invitations to IKEA’s sales previews, activities or

events. The card also gives discounts on food purchased in the

restaurant and the Swedish Food Market

Social Initiatives

IKEA Social Initiative was formed in 2005 to address

the company‘s commitment to investments in social

programs on a global level. What once started as

IKEA’s fight against child labor in the supply chain has

developed into a broad commitment - to create a

better everyday life for many children.

IKEA Social Initiative has chosen to concentrate its

long-term commitments on South Asia, and especially

India, where the needs of children and women are

great, and where IKEA has long business experience.

Save the Children is the world‘s largest independent

organization for children, working to secure children's

rights and improve children's lives in over 125

countries worldwide. Save the Children and IKEA have

worked together since the mid 90’s on an international

and local level. IKEA Social Initiative supports a range

of their programs

UNICEF is on the ground in over 150 countries and

territories to help children survive and thrive, from early

childhood through adolescence. The IKEA Social

Initiative has supported UNICEF programs for more than

a decade and has a corporate partnership with IKEA,

working at an international and local level.

The WWF and IKEA co-operation first began in 2002 to

jointly promote responsible forestry. The first years of co-

operation showed that by working together, more can be

achieved.

The IKEA Group and WWF co-operate in climate-change

projects aimed at reducing emissions of greenhouse

gases (CO2) generated by IKEA operations, in order to

reduce its impact on climate change.

Consumers were noted to be more careful with their spending and would only purchase products if

they provided adequate value for their money spent. With IKEA’s value propositions and customer

centric culture, it has definitely scored with its customers, while its popularity continues to grow with

the masses.

As climate change issues and global warming problems are continually highlighted, awareness of

environmental issues has increased amongst consumers. This increases consumer demand for

green products and places pressure on manufacturers to develop or import new environmentally-

friendly products. IKEA’s commitment to environmental sustainability and responsibility has resulted

in initiatives to reduce carbon footprint from all IKEA related operations. Currently, IKEA uses 71%

renewable materials in its products. IKEA’s proactive measures also ensure that its suppliers strictly

comply with the IWAY code of conduct.

IKEA’s success in the retail industry can be attributed to key aspects such as its vast experience in

the retail market, product differentiation, and cost leadership. Owing to its success and aggressive

growth strategy, IKEA is accelerating store rollouts in both large outlet and new high-street formats.

New large outlets are set to open worldwide, at an average cost of $66 million per store. The firm

plans to boost their profile in three of its fastest-growing markets: In Russia, where it is already a

huge success in Moscow, in China, where is has a strong footprint, and in the US, where the goal is

to have 50 outlets. IKEA demonstrates that, when underpinned by strategic partnerships with

manufacturers and suppliers, providing access to affordable contemporary design, in an exciting, yet

simple format can be a winning formula to become the world's most successful multinational retailing

company.

© Roshan Jacob