Three Questions IKEA China Needs to Take Seriously | Top 15 Annual Reports

A belated e-commerce push, a restaurant that may be stealing the show, and the struggle to stay young

IKEA's home-furnishings business keeps getting better.

In fiscal 2015 (September 2014 to August 2015), IKEA's 328 stores worldwide generated €31.9 billion in sales, up 11.2% from fiscal 2014.

2004–2015 fiscal years, IKEA total revenue (including shopping centers). Source: IKEA

Existing stores grew, and the world's largest home-furnishings retailer also opened 13 new ones — three in China (Wuhan, Hangzhou, and Xi'an) and its first in South Korea, in Seoul. The new stores were packed from day one, with people queuing outside; the Seoul store had to close for several days because the crowds were too large. In Hangzhou, five months after opening, weekend lines still formed at the five or six self-service kiosks for membership cards.

Expansion has also made the shopping-center business more important to IKEA. In December 2014, IKEA Group bought its sister company, Inter IKEA Centre Group, and renamed it IKEA Centres. The rental income from these malls lifted IKEA's revenue last fiscal year, and — just as important — each houses an IKEA store, the two feeding each other foot traffic. Of IKEA's 18 stores in China, the three set inside shopping centers in Wuxi, Beijing, and Wuhan drew more than a third of all visitors in fiscal 2015: 27.6 million visits.

As in recent years, China remained IKEA's fastest-growing market in the world — a star. Last fiscal year, Chinese consumers spent 10.5 billion yuan at IKEA, up more than 18%, nearly double the rate of Russia, the next fastest-growing market.

IKEA president and CEO Peter Agnefjäll told Reuters last September: "In China, we are still very, very small." As a share of group sales, this market — which IKEA entered 18 years ago — accounts for just 4.7%, while Germany (historically IKEA's largest market) and the United States (which had an outstanding year) each account for around 14%.

Source: IKEA fiscal 2015 yearly summary

IKEA's hopes for China showed up in an internal move as well: last fiscal year, a young executive named Volker Voit transferred from IKEA Germany to China as deputy sales manager. When QDaily interviewed him last October, Voit compared the two markets: "Germany is a far more mature market — IKEA has been there for over 40 years, and people still like to add a few new touches or swap out small items now and then. China is a fast-growing market where people are hungry for new things, new technology. How to serve local consumers is a fresh question here."

Voit

He was right. To grow bigger, IKEA China — and IKEA as a whole — has to solve these new problems.

The question people care about most: e-commerce

Over the past few years, IKEA rolled out online shopping in 13 markets — but in fiscal 2015, that number did not budge. The good news: IKEA's attitude toward e-commerce has changed enormously.

In 2008, IKEA founder Ingvar Kamprad rejected a proposal to "open an online home-furnishings channel," arguing that "you can do business on a web page, but it would cut store visits, and you'd lose some extra sales — things customers pick up on impulse, items they don't really need."

But early last year, current president and CEO Peter Agnefjäll changed his tune in an interview with The New York Times. "We are not the earliest adopters," he said, "but we've thought it through. We understand this is not a trend — it is a transformation."

Within that transformation, IKEA's website drew 1.9 billion visits, online sales rose 35% and topped €1 billion for the first time in fiscal 2015 — yet still made up only 3% of total sales. When CNBC interviewed him last October, Agnefjäll admitted: "IKEA's online business has indeed fallen behind, and over the next five years we'll focus heavily on e-commerce." Sales would reach €50 billion in five years, he added, with online accounting for 10% of that.

Peter Agnefjäll. Source: IKEA fiscal 2015 yearly summary

What headquarters thinks matters a great deal, because this multinational's major decisions lean heavily on a single directive from the top.

Zhu Changlai is the general manager of IKEA China. She often wonders whether IKEA should move like a large ship — steady and slow — or like a fleet that lets a few fast vessels race ahead. When QDaily interviewed her last November, she said IKEA China's "online-service planning is in step with IKEA globally." Before a wide rollout, IKEA is testing a new web system in Ireland, hoping to start online sales in more markets in 2016 and 2017.

One thing to watch for: China's first multifunction distribution center opens in Tianjin this February. Besides supporting more store openings in the north, it will handle online-sales operations.

But the store remains IKEA's most important place. After IKEA reported its strong fiscal 2015 numbers, Zhu said, she fielded many questions like this one: how did IKEA grow 18% without online shopping?

"People question whether you can succeed without e-commerce," Zhu said. She favors an approach where "consumers first experience IKEA in a physical store, then shop online" — especially in an emerging market like China, where IKEA has only 18 stores and adds about three a year.

Stores and online alike reflect headquarters' caution in decision-making. If only they brought half the nerve they show on clean energy and climate. Last fiscal year, IKEA Group and the IKEA Foundation together put €1 billion into renewable energy — yet even counting the large sum spent acquiring IKEA Centres, total investment across all their other businesses came to just €2.6 billion.

This caution about opening new channels has made it a reflex for regional managers to tell reporters "the sooner the better." That was Zhu Changlai's answer when asked when online shopping would launch in China, and it echoed South Korea general manager Andre Schmidtgall: "Personally, I wish IKEA had come to Korea sooner." Yet in the end IKEA spent seven years preparing before it entered South Korea.

The restaurant business is booming — but is that a good thing?

Let's go back to the question IKEA China rather enjoys: how did IKEA grow 18% without online shopping? It's no great mystery — the IKEA restaurant is a big part of the answer.

Worldwide, restaurant sales make up about 5% of total store revenue; in China, the share reaches around 10%. Strip out the restaurant, and IKEA's total store revenue growth in China would fall a little below 18%.

In fiscal 2015, IKEA's China restaurants sold 6 million classic Swedish meatballs and 12 million ice cream cones, and served 31 million people. That means nearly half of everyone who walked into an IKEA store in China that year also ate at the restaurant.

When QDaily spoke with Zhu Changlai in the middle of last year, she noted that IKEA's restaurant floor space in China is far larger than in Europe or North America — which is why 8 of the 10 largest IKEA stores in the world are in China.

IKEA China clearly felt that still wasn't enough. Last November (the third month of fiscal 2016), IKEA remodeled the restaurants in all its stores, adding high-capacity self-service tray-return belts for the crowds, reserving at least 100 to 200 more restaurant seats in newly opened stores, and — in Hangzhou, a special case — accepting Alipay in the restaurant.

IKEA has even begun treating its menu the way it treats home furnishings: localizing it. In China, IKEA restaurants are starting to serve regional specialties alongside Swedish food, split across East China, the central and western regions, South China, and the north. In South Korea, IKEA serves kimchi salmon rice.

The question is: for a home-furnishings company, is leaning this hard on the restaurant a good thing?

IKEA's store in Shanghai's Xuhui district, the first it opened after entering China, lets the restaurant open before the furniture floor, before 10 a.m. A large group of elderly people sits there, finishes a simple breakfast, and clears out once the furniture shoppers pour in.

At the new Hangzhou store, if you plan to eat there on a weekend at midday, your best bet is to arrive after 2 p.m. — or be ready to wait in a long line. Some people in line have come purely for the restaurant; at the store entrance, they shout at the top of their lungs: "Where's the restaurant?"

Weekend lunchtime at the restaurant in IKEA's Hangzhou store

But Zhu says the restaurant is a major source of visitors, and IKEA has an internal saying: "Restaurant staff are the best sofa salespeople."

That was Ingvar Kamprad's original reason for the restaurant — give customers a rest before the next leg of shopping, because a hungry customer leaves the store. Meanwhile, lifestyle brands of every sort have copied this proven revenue trick in recent years. But as food and drink claim a bigger share each year, IKEA's identity as a home-furnishings brand may suffer.

IKEA China says that won't happen. "Maybe the first time they don't buy anything," Zhu said of restaurant customers, "but we believe — and we have the data to back it up — that the second and third time, they'll go into the store." She added that the restaurant's low-price image matches IKEA's home furnishings, so the two don't clash.

By customer count and revenue, the average diner spends about 34 yuan per visit to the IKEA restaurant.

Is IKEA really not worried about staying young?

A month ago, we mapped out the youth problem facing the furniture industry. Our conclusion ran roughly like this:

Young people — especially in first-tier cities — have, after a long education in furniture (much of it thanks to IKEA's global reach), begun looking beyond IKEA for choices with a stronger sense of design and better quality, usually at a higher price. The rise of internet-native home brands has made that more possible.

The spending power of China's younger consumers should not be underestimated, and IKEA really does need to worry. The line that was popular in 1980s and 1990s America and once circulated among middle-aged Chinese — "if you only need it for three years, IKEA is fine" — is now second nature to the young people and young families who have just bought their first home. Among them, a craze for solid-wood furniture has sprung up out of nowhere.

"If solid wood is your only standard," Zhu said, raising her eyes a little, "you know, Chinese consumers have that demand, that traditional notion… but what we have to do is show where our quality is good. For instance, where flat-pack furniture is good."

Where is flat-pack furniture good? Beyond saving money, it isn't easy to explain. But what's good about the IKEA brand and the IKEA store is exactly the question IKEA answers best.

IKEA plans to use that answer to hold on to one slice of young shoppers: "families with young children." IKEA hired DreamWorks to make 25 animated shorts for the LATTJO toy line that launched last November.

Last September, IKEA introduced a supplementary card — like an add-on to the IKEA membership card — across all 18 of its China stores: the IKEA Family Kids card. With it, young families' small children get priority signup for IKEA's weekend children's activities.

In China, young families in emerging second- and third-tier markets are the most likely to be drawn to IKEA; their first impression of the brand still rests vaguely on "a trendy international name," which leaves them full of enthusiasm. In the new Hangzhou market, the children's activities sit in the most visible spot at the store entrance.

Weekend children's activities at the Hangzhou store

When QDaily interviewed Zhu Changlai in the middle of last year, she said IKEA faced two challenges. The first: once younger consumers' finances improve a little, they "may go after more distinctive brands, and some may feel IKEA's quality isn't good enough," so IKEA has to find ways to "keep them."

Personalized design was once the great hope, but IKEA China's stance on it now looks as ambivalent as the group's. Last May, IKEA held its "Democratic Design Day" in Älmhult, and afterward worked with fashion designer Katie Eary and artists on prints and posters for textile products — but the product lines involved are necessarily limited. Zhu says one of IKEA's solutions is limited editions. In the new fiscal year, IKEA will release 15 limited-edition series, priced at the mid-to-high end of its range.

The second challenge sounds more like an opportunity: bringing more people into home decoration at all. Ross Urwin, creative director of last year's Design Shanghai, said in an interview with Dezeen that "Chinese consumers are starting to tire of the entire fashion industry and turning to spend their money on home design instead."

Only one thing is certain: facing that opportunity, IKEA had better have its own house in order first.