IKEA Has Been Talking About Selling Beyond Its Stores for Two Years. Why Is It Still So Slow?

IKEA needs to expand its channels and go out to find more customers. It doesn't seem to know where to look, or how to sell to them. Many of its ideas are still stuck at "plan" and "preparation."

On August 17, more than 100 media outlets poured into the West Bund Art Center in Shanghai for IKEA's press conference marking its new fiscal year. Besides the press seating, a third of the venue's exhibition space was given over to 14 mock living rooms displaying more than 700 new products due to launch in August. The space would stay open to the public for the next five days.

"The Living Room" is the marketing theme IKEA China has set for the new fiscal year. To support it, the company brought in a new "retail growth manager" late last year — someone with 18 years of experience in the US and Australian markets — to oversee the living-room-themed makeover of showrooms in its stores nationwide.

Tim Prevada, new to the job, spent 10 minutes at the press conference explaining IKEA's insights into the living room, among them that "Chinese people spend an average of 2.5 hours a day in the living room" and that "the living room is where Chinese consumers spend the most money." In an interview with QDaily, he said he hoped the new theme would lift the living room's contribution to sales.

Setting a marketing theme and publishing an insights report to go with it is routine for IKEA. It signals where the company will focus for the coming year, and so far the approach has worked. By the numbers it released, IKEA is still posting double-digit growth in China. As of August 10, its sales in the Chinese market topped 13.2 billion yuan, up 14% year-on-year. Store visits nationwide passed 90 million, up 11%; visits to the official website passed 75 million, up 24%; and membership passed 18 million, up 12%.

But every one of those growth rates is slowing. The unprecedented number of new products, and the first-ever appointment of a "retail growth manager," both say something about the pressure IKEA is under.

Two and a half years ago IKEA said it wanted to "change from a company that only does store business into a multichannel retailer." Since then, "multichannel retail" has become a phrase IKEA executives and spokespeople bring up again and again in public. Expanding into channels beyond physical stores is in fact seen as the key to widening IKEA's business and keeping it growing.

It was also the question that drew the most attention at the press conference. In the Chinese market, IKEA first raised "multichannel retail" publicly at last year's earnings press conference, and set up a new department dedicated to it at the same time.

This time Zhu Changlai, retail president of IKEA China, said expanding multichannel retail and improving the logistics system would be the priorities for the next three years. But asked exactly how IKEA would expand in 2018, she again mentioned no concrete e-commerce plans, saying only that IKEA would open three new stores, in Guangzhou, Chengdu and Xuzhou.

The only things that actually had to do with "multichannel retail" were two changes to internal systems. IKEA plans to build three distribution centers, five customer distribution centers and five small-parcel distribution centers in China by 2020, spread across five regions — east, south, west, north and central — to speed up logistics.

IKEA also set up a new department this May called IKEA Business Solution (IBS), folding its existing internal IT systems into it to support the digital side of multichannel retail. In plain terms, the department's job is to help IKEA gather, process and act on information from all its channels faster: data analysis, website improvements, CRM maintenance, online-offline interaction.

But all of it is still at the stage of "plans" and "preparation."

More and More Rivals Online

In a market where shopping on a phone is already this common, IKEA talking about "multichannel retail" looks distinctly late. For a multinational that has always leaned on physical stores, though, it really is a hard thing to do.

IKEA is not publicly listed, but it watches its numbers closely. Slowing growth is the most direct and the most important reason it has started to change.

In the last fiscal year, IKEA's global growth slowed to 7.1%. Under the plan it announced earlier — €50 billion in sales by 2020 — it needs to average 10% sales growth a year.

IKEA leans heavily on the fast-growing Chinese market, but in fiscal 2017 its growth rates here for sales, store visits, website visits and membership fell by 4.9%, 9%, 10% and 9% respectively from the previous fiscal year.

Part of the reason is that IKEA has more and more online competitors. In a look at the Chinese furniture market published at the end of 2015, QDaily already noted that value-for-money "basic" furniture was selling well on Taobao and other e-commerce platforms, while brands chasing design and quality were all working out how to use the internet to do higher-margin business — on top of the consumer education IKEA had already done for them.

During last year's Double 11 shopping festival, more than 30 home-furnishing brands on Tmall each sold more than 100 million yuan worth of goods. Linshi Muye sold more than 600 million yuan worth, and pingo International more than 400 million. Numbers that large suggest there is no way to gauge how many consumers, and how much spending power, IKEA cannot reach for want of an online channel.

The same holds globally. In 2012, IKEA became the second-largest home furnishings company in the US, behind Ashley Furniture. But by IBISWorld's figures, the US furniture market, now worth $70 billion, already takes 15% of its sales online. That has pulled Amazon and Target into selling furniture online in this market, making them new rivals for IKEA.

To solve the problem of finding customers, IKEA said more than two months ago that it would work with third-party platforms to reach consumers faster. It still has no concrete plan — which third party, or how the partnership would work.

Of the e-commerce operation that began trial running in Shanghai last August, Zhu Changlai told QDaily: "The main purpose of e-commerce isn't to drive up sales figures, it's to learn how a new channel works. Whether it's driving traffic or understanding customers' search habits, our biggest change is to go and find consumers, rather than waiting for consumers to find you."

IKEA does need to go looking for consumers now, which is nothing like the past, when all it had to do was announce a store opening. But the company still looks like it is feeling its way. It plans to improve its clunky keyword search, for instance (in future, searching "blackboard" on the website will no longer fail to turn up the "Marla" drawing board), and to add more readable editorial content, along the lines of the long articles in the IKEA Home Furnishing Guide (《宜家家居指南》). Adding social and readable content to an e-commerce platform, it's worth noting, is already standard practice in the Chinese market.

To Chinese consumers already used to shopping online, these changes are still not fast enough. A user going by "Xiaohengyuanyang" left a comment on the download page for IKEA's iOS app: "Products I can find on the website can't be found in the app, and the ones the app does find won't open or display. Same membership number, same account, and the shopping list on the website still isn't linked to the one in the app... Way behind the times."

Expanding Offline Is Getting Harder

In its 20 years in China, IKEA has always put the biggest share of its resources into physical stores. At the 2014 earnings press conference, Zhu Changlai told QDaily that from 2015 IKEA would add two to three stores a year, with the plan already mapped out to 2025.

Back in 2010, when IKEA was only beginning to speed up its expansion, leaning on stores probably wasn't that hard. Local governments in second- and third-tier cities welcomed it, and to open in big cities it could count on help from shopping malls. Ding Hui, managing director for China at IKEA Centres Group, told reporters in 2014: "In first-tier cities like Beijing, Shanghai and Guangzhou, it is getting harder and harder for IKEA to find a suitable plot on the strength and appeal of its own name alone. That's where we can help."

But with the format saturated and land prices soaring, even shopping malls now find land harder and more expensive to get.

In a 2011 interview, Ding Hui estimated that a project in the Chinese market takes one to two years to lock down and four years to develop. In practice it has taken longer: a shopping mall in Changsha originally due to open in 2019 has been pushed to 2020, and another in Shanghai originally slated for 2017 changed its story at the end of last year, saying that "2016-2017 was only ever the timeframe for acquiring the land."

The room for growth in existing stores doesn't look promising either. IKEA did not release same-store sales figures at this press conference, but even as global growth slows, half of its earnings come from new stores. In the Chinese market, sales and foot traffic keep rising, yet IKEA is not making more money out of each Chinese consumer: the average transaction still sits around 140 yuan, the same as the past two years.

PUP Can't Carry the Load in China, and the Logistics to Support E-Commerce Aren't Ready

PUP was once seen as IKEA's halfway house between the store and e-commerce. Over the past year IKEA opened 19 pick-up and order points (PUPs) worldwide, six more than the regular stores it added. A PUP is smaller, carries fewer categories, can get a rent discount by moving into a shopping mall, and doesn't require buying land and building from scratch the way a store does. It costs less and goes up faster.

When the Beijing Wukesong outlet opened this March, Zeng Lan, manager of IKEA's Xihongmen store, explained the "multichannel strategy" this way: "IKEA stores are the core, and IKEA pick-up and order points and IKEA e-commerce are supplements to the stores."

The awkward thing about PUPs in the Chinese market is that when buying furniture and household goods, Chinese consumers are still more used to one-stop shopping in a store, or to fast, convenient online shopping. Ordering offline and then collecting the goods yourself or waiting for delivery cuts against the most common shopping habits, and feels needlessly fiddly.

The people shopping at PUPs now are also mostly those who already know how IKEA works. In the second- and third-tier markets where IKEA wants to expand quickly, consumers know neither IKEA's thousands of products nor the PUP buying process well enough.

For now, PUPs may also be performing below expectations. The only public figures on the Wenzhou PUP are that it received more than 200,000 visitors in three months, and that 40% of the customers who placed orders chose to collect them in person. According to the latest figures from IKEA, the PUP that opened in Beijing's Wukesong at the start of this year has averaged monthly sales of 3.5 million to 4.5 million yuan over its first six months. Visitors number 2,500 on weekdays and 5,000 to 6,000 at weekends.

Measured against the sales and store-visit numbers in the 2017 earnings report, the Beijing PUP's average monthly sales are about a tenth of the average IKEA store's, and its weekday and weekend visitor numbers are a quarter and a half of a store's. Cheng Weiming, warehouse manager at the Shanghai Fengxian distribution center, told QDaily that IKEA will probably not open any more PUPs, because "for what you put in and what you get back, there's no need."

In the multichannel retail strategy IKEA has set out, e-commerce is the most important piece after physical stores, but it is spreading very slowly worldwide. Of the 28 markets where IKEA operates, only half have online shopping. In fiscal 2016, online sales grew 30%, a rate 6.5% lower than the previous fiscal year; the total reached €1.4 billion, still only 4% of all sales.

Zhu Changlai told QDaily that after a year of operation, IKEA's Shanghai e-commerce business handles 500 orders a day per store ("per store" here means the IKEA Baoshan store in Shanghai, which runs e-commerce for the region). The average order value has been "rather unexpected" — 1.5 times the offline figure. That counts as "a sales result that meets headquarters' expectations."

Zhu Changlai laid out no clear e-commerce plan at the press conference, but the buildout of the logistics system hints at what IKEA may be worried about.

The most expensive part of selling furniture online is logistics. Jaimee Minney, vice president of marketing at Slice Intelligence, said in an interview with Retail Dive last year: "The biggest challenge for a furniture e-commerce business is how to maximize logistics efficiency and keep the customer comfortable. That's not something you have to think about much when you have a huge physical store."

Cheng Weiming, the warehouse manager at the Shanghai Fengxian distribution center, told QDaily that customer distribution centers and small-parcel distribution centers already exist in some markets worldwide, but are still a new experiment in China. Think of them as the stores' "outer warehouses": they take stock from the distribution centers and then deliver large furniture and small household goods straight to consumers.

"This will help IKEA meet the needs of different groups of customers better, and it also gives online shopping the logistics support it will need in future," Cheng Weiming said.

Unlike the distribution centers, IKEA will probably expand the customer distribution centers and small-parcel distribution centers only by leasing, and will hire third parties to run these "outer warehouses" at first.

China Is Still Far From Where Headquarters Decides, and Its Size Makes It Slow to React

In IKEA's own account, China has always been its fastest-growing and most important market. One of the examples it cites most often is that "apart from headquarters in Sweden, Shanghai is the place with IKEA's most complete set of supply-chain operations." That includes a product research and design center, a testing center, and a low-turnover logistics distribution center (which stores, sorts and ships slower-selling, low-demand products such as curtain fabric and cabinet doors). All of them serve the whole Asia-Pacific market.

In practice, though, China still plays a fairly small part in IKEA's global product development and brand planning. Asked whether IBS, the internal technology-integration department set up this May, was in step with headquarters, Zhu Changlai paused before saying: "Headquarters actually set theirs up several years ago."

You may also have noticed that the marketing moments that rode the news — the "Balenciaga blue shopping bag," the "A Song of Ice and Fire blanket-cape DIY guide" — came out of headquarters, and were then passed along in the Chinese market by media outlets and social-media accounts.

Adam, a product manager at IKEA's product research and design center, told QDaily that headquarters is pushing a new project: every department is being asked to help design the shipping packaging that customers see. This is not the container-style shipping IKEA has used for decades — the new packaging goes straight into the hands of online shoppers, so it has to account for shipping efficiency as well as design, safety, protection and cost.

In China, the project has not yet begun.

Judging by the logistics expansion plans and the new IBS department Zhu Changlai described, IKEA is still building the groundwork for selling through more channels. As we noted in earlier reporting, once e-commerce is rolled out in full, the strain on logistics will multiply, and could even undo years of positive revenue and profit growth.

IKEA has seen this coming. "We have close to 10,000 SKUs, and more than 500 internal systems covering production, distribution, allocation and customer management. Digitizing our retail channels means integrating those 500-plus systems, and that takes a lot of adjustment and a lot of talking," Zhu Changlai said.

Graphics: Feng Xiuxia

Cover image courtesy of IKEA