Top 15: IKEA — In China, a Market Like No Other, Its Store Openings Are Already Planned Through 2025

For the first time, IKEA talks about its plans for new stores in China, its best-selling products in each region, and how it intends to sell you more new products.

Designers often have mixed feelings about what IKEA does. In a recent email, the Finnish furniture designer Yrjö Kukkapuro gave us his verdict on the Nordic mass-market home furnishings brand: "IKEA has brought democracy and equality to China." Then he added: "But it is also making furniture in Shanghai look the same as furniture in Tel Aviv."

In fiscal 2014, China was IKEA's fastest-growing market. The Asia-Pacific region as a whole, together with emerging markets including Russia, accounted for 15% of global sales and helped lift IKEA's overall results. In 2014, 714 million people walked into IKEA stores and another 1.5 billion visited IKEA.com, both more than in 2013; sales rose 5.9% to 28.7 billion euros.

The "equality" Kukkapuro speaks of includes the sameness that comes with mass industrial production. But IKEA is still far from that point in China. It does not have enough stores here, and for people in most of the country it remains a Swedish brand you buy through a "purchasing agent." Sixteen years after entering China, IKEA opened its 16th store here last September. In the United States it has 39 stores; in Europe, 222. North America and Europe are still IKEA's largest markets.

As a private company, IKEA has no investors to impress with store counts in emerging markets, but Chinese consumers are unhappy. Of all the news about IKEA, what potential customers care about most is "when is it coming to our city," not "IKEA has set up a product development center in Shanghai." Last year's plan was to expand in China by three stores a year from this year on. As things stand, it may not manage three. As of this May, only two new stores, in Hangzhou and Xi'an, are confirmed to open on schedule. After Wuhan, Xi'an is the second city in central or western China that IKEA has entered.

If IKEA wanted to move faster, it should not find it hard. Local governments in second- and third-tier cities welcome it, which makes getting land much easier; and if it wants to keep opening stores in big cities, there are ways to do that too. "In first-tier cities like Beijing, Shanghai and Guangzhou, it has become harder and harder for IKEA's home furnishings business to find suitable plots on its own strength and appeal. We can help it there," Ding Hui, China managing director of IKEA's shopping center group, told the media last year. The IKEA Group's shopping center business is thriving in China; because of its size and its full mix of retail formats, it is seen as a way to boost commerce in the surrounding area.

IKEA's stores in China were once known for their sheer size: 8 of IKEA's 10 largest stores worldwide are in China. But starting with the Chongqing store, and including the Wuhan store opened last September and the Xi'an store that followed, IKEA has settled on the standard 30,000 square meters. IKEA says that in some cities it will now prefer to open two or three medium-sized stores to reach a wider area. Chengdu's second IKEA store will open next spring. That sounds like the right way to change how people live.

The more stores it opens, the more it sells, the lower its costs, and the more affordable its prices. You may not realize that in the 11 years up to 2009, IKEA's average product price in China fell by about 50%. Over the past five years, prices have dropped another 15%. IKEA attributes the cuts to lower raw-material and logistics costs and to higher sales volume. As a result, according to IKEA's annual report, profit held flat in fiscal 2014 despite the price cuts.

Beyond opening more stores and cutting prices, IKEA does not look likely to change much in China in the short term. Over the past year, IKEA's new CEO Peter Agnefjäll and its new head of product design Marcus Engman have put forward plenty of new ideas, such as putting more weight on design and embracing smart technology. IKEA has increased the number of new products accordingly: over the course of this year it will launch 20 all-new collections in China. In August, IKEA's wireless charging products will also go on sale in China.

At heart, though, IKEA China is still trying to become a more influential mass-market retailer, not an industry innovator. On design, for instance, you have to tell "new products" apart from "personalized design." In 2014 Engman had IKEA work with more outside designers on limited-edition collections, but IKEA's retail division in China is not convinced that personalized design does much to meet mass-market demand; it would rather stress the growing number of new products. Unlike product development, which depends on decisions made at headquarters, the retail division has the final say on how the business develops in the Chinese market.

In China, IKEA's best sellers are mostly low-priced classics. In last fiscal year's annual report, Fiona Li, IKEA China's sales manager, said: "We have indeed invested more in low-priced products, especially those that meet basic everyday needs."

The old complaints about IKEA are still the same: designs that all look alike, and poor quality. In Kukkapuro's view, IKEA's "furniture that does not last" has long since taught people to "buy often and throw away often," which falls some way short of a good life. IKEA sees it the other way round. It believes its real challenge in China is that people are unwilling to spend enough on their homes, and in particular that they are not in the habit of investing in them more than once.

Buying, replacing and throwing away again and again is essentially "fast fashion" applied to home furnishings. Chinese consumers are still far from used to it.

IKEA's answer is to offer more home solutions, such as showing you how to fit a space-saving coat hook on a door. The other part is service. After launching design services for businesses in China, IKEA's Beijing Xihongmen store is now trying out home renovation design plans. From its existing services, such as delivery and installation, IKEA has learned that Chinese consumers expect more service, a finding that may help it develop the whole East Asian market.

In the past, this multinational seldom talked about how it adapts its operations to different markets. It preferred to stress the uniform character of a global brand that "creates a better everyday life for the many people." This time, however, Zhu Changlai, IKEA China's retail manager (referred to below as "Z"), talked to us about IKEA's business in China.

Q: China's market is growing fast. Does that mean any store you open is bound to make money?

Z: No, not at all. "Adapt to local conditions" sums up IKEA's approach. What we don't need to change in China is the brand image. We have been here for more than a decade, and consumers have built up an idea of the brand: that we have always been for the many people, part of their everyday lives, and that a better life starts at home. The more stores we have, the further we reach and the more influence we have. That doesn't change. But market relevance takes thought.

Q: What do you mean by market relevance?

Z: Things like the size of the store, its layout, how the showrooms are set up. For example, when we open a store in Shenyang, we have to understand the people of Shenyang: what their apartments look like, what their home life is like, what problems they have, whether their kitchens are L-shaped, U-shaped or I-shaped. We go down to that level of detail and adjust our strategy accordingly. In Tianjin, many balconies are used as kitchens, and some people even cook on the balcony, so you will see that kind of kitchen in the Tianjin store.

Q: So by walking into an IKEA store, you can learn about the home life of people in that city or region?

Z: Yes, through the store's size, its structure and its displays. IKEA has four regions in China: East China, Central and Western China, South China, and North China. In all of them we are thinking about how to be more down-to-earth and closer to ordinary local people.

Q: We often hear that IKEA's headquarters in Älmhult acts like a central authority, constantly issuing orders that local teams simply carry out, and that this is what keeps such a huge multinational moving fast.

Z: Prices in the Chinese market are set by China's sales managers and marketing managers together, based on the market. We also give store managers a lot of freedom over how products are displayed. I'm sure many other companies would also say "as global as possible, as local as necessary."

Q: "Local" might mean a country, or something finer, where each region or city is different. Here, how much autonomy does localization mean?

Z: From 2011 to 2013 I was deputy retail manager in Germany. Germany has 46 stores. How does one national headquarters serve 46 stores and manage them well? No other market is like Germany. I think Germany's structure is a good one: you put some experienced leaders at the German headquarters and draw up strategies that can be rolled out to all 46 stores. In terms of discipline, it is very orderly, very rule-bound and very dedicated. But what I keep thinking about is this: do you want one big ship moving slowly forward, or many speedboats heading in the same general direction, where we allow some speedboats to stray off course and then come back? In other words, where do you need central control and where should you delegate; where do you need discipline and where can there be more freedom?

Q: Is the management of local stores in China now more decentralized and freer than in Germany?

Z: Compared with Germany, yes, it is more decentralized. In the Chinese market, the next strategy depends on how well the store manager and his team understand local shopping habits. But it also depends on whether the results are good, and whether it is good for consumers.

Q: What differences in shopping habits has IKEA seen among consumers in different Chinese cities?

Z: In cities like Shenyang and Dalian, household income is half of what it is in Beijing and Shanghai, which certainly means low-priced products are more popular.

Q: But hasn't low price always been your strategy, across the whole Chinese market and even overseas?

Z: It's not just low price; it's value for money. Selling things for 3 or 5 yuan is not the strategy now.

Q: Do stores in different markets put different products in their busiest areas?

Z: In a new market, we can't expect consumers to know much about home furnishing right away. I pushed cushions across the entire textiles department. Cushions are the easiest thing to accept: they don't need cutting to size, and they are much easier to buy than curtains. You already have a sofa, so you can buy another cushion. You have to work out, according to local conditions, which products are most likely to get customers interested in furnishing their homes and be accepted. So for the small items by the escalators, we don't require every store to be the same.

Q: Which products sit in the same spot in all 16 stores?

Z: Market entry products, meaning practical, low-priced entry-level items. If you visit all 16 IKEA stores now, you will find we are promoting storage series and wardrobes everywhere; that is uniform. In one particular place in the showroom, and I can tell you exactly where, you can see the two newest collections, and that is the same in all 16 stores. So is the kitchen series launched in June.

Q: With displays differing, what is the final effect on sales? Is the top 10 list of best sellers different in every store too?

Z: They are about the same, which surprised us a lot. If you look at 20 products or 50 products, about 10% differ; most products are still the same. The 80/20 rule still applies. I think the reason is value for money, which spreads by word of mouth from one person to ten and from ten to a hundred.

Q: Small items make up most of the top 10 by units sold, like the blue "Ingvar shopping bag." If small items are what sell well, does that hurt profit? The stores look busy and lively, but does IKEA actually make little money?

Z: Those are rumors. Don't pay attention to them.

Q: You have kept cutting prices: by 2009, IKEA's retail prices in China had fallen by 50%, and over the past five years they have fallen another 15%. Has that really not hurt profit?

Z: One factor is volume. We have opened more stores, and that rule never changes. We have also benefited from the WTO: China has lowered taxes on imports, our purchasing in China has grown, and supply chain costs have fallen.

Q: When IKEA China wants to launch products designed specifically for the Chinese market, does it still have to go through headquarters? Especially since IKEA set up a product development center in China last June.

Z: This week, all of our commercial teams are in Sweden, and each region is presenting its product development proposals to headquarters. This is centralized: once or twice a year, for a week, going through the proposals one by one. Usually we discuss them with the headquarters team and draw up a plan. For example, in China people use chopsticks and woks; they don't need so many shallow dishes, they need deeper bowls, so we add bowls to the collection. Some of these products were already made in China, so we add them in China, and they are not sold in Germany. But others, such as the wok or the five-piece bedroom set for under 3,000 yuan, were added to the global range because of the Chinese market, and they are sold in Germany too. Products from IKEA's global range are all sold in our Chinese stores. And we find more and more that features China has proposed, such as coffee tables and beds with built-in storage, are being taken up by other markets around the world.

Q: Are there services launched specifically for the Chinese market?

Z: Yes, and that matters a lot. Chinese consumers expect more service, and they don't like to do things themselves. There are also outside factors: abroad, for example, you can strap flat-pack furniture to the roof of your car, but in China there are restrictions on that. Our prices for delivery and installation also tend toward the low end; we want to offer customers a paid service, but one they can afford.

Q: Is China the country where IKEA's delivery and installation services are used most? What are the numbers?

Z: In volume, it is the highest in the world. In proportion, it is about the same as Japan; China and Japan have the highest rates in the world. For large furniture, the three categories of sofas, mattresses and PAX wardrobes, it is above 85%. We know this from our detailed data.

Q: Of IKEA's 10 largest stores in the world, 8 are in China. What does opening big stores in China mean?

Z: This was not headquarters' decision. We can decide for ourselves how big a store is and where to open it. But when we made that decision, we didn't deliberately set out to build the world's largest stores in China. In fact, the store recently opened in South Korea is also very large. One reason is the large population: we have 10 cities with populations of 10 million, and we have entered all of them. With that many people, we need to give everyone a better shopping environment, and the size also allows for growth over the next 10 or 20 years.

Q: Where does the extra space in the big stores go?

Z: The parking lots and the restaurants. Our restaurants are the largest in the world, much bigger than IKEA restaurants in Europe or Sweden. Our founder, Mr. Ingvar, wanted restaurants so that customers could rest for a moment and then carry on shopping; if they get hungry, they will leave the store.

Q: But he didn't expect IKEA's food business to make so much money. Last year, IKEA's global food division brought in 5% of total revenue.

Z: Right. In China, IKEA will add more local dishes in all four regions, but the jam, chocolate and Swedish salmon will stay the same.

Q: How does IKEA decide to enter a new city?

Z: IKEA has a very sophisticated local team, and it is decided by their market analysis and calculations: first, which cities; second, when to enter; third, how many stores to open. Our plan is already set through 2025.

Q: What are the main measures used in that analysis?

Z: Population, the reach into the surrounding area, the city's GDP and its purchasing power are all things we look at. Those are the most important. Then there is how quickly a suitable plot becomes available, which means working with the government. When it comes to finding land, I'm lucky: in second- and third-tier cities, governments strongly support IKEA coming in.

Q: What does that support tell you?

Z: Brand recognition. Since I came back from Germany in 2013, IKEA has opened six or seven stores in China. I went to every opening ceremony. When I chatted with government officials, I found they really love this brand.

Q: How do you expect the Chinese market to receive smart home products?

Z: I believe very well. Although the top 10 best sellers are still classic items, that doesn't mean people aren't after new things. A good share of Chinese consumers want novelty and change: the iPhone 6 is better than the iPhone 5, so they want it, whatever the price. It is not just about being new; behind it is being better. As long as we can show that our solutions are better, consumers will accept them quickly.

Q: What worries IKEA most in the Chinese market?

Z: I wouldn't say worries, but we do have challenges. For example, many people think of us as a brand for young people. They buy from us when they get their first home or have their first child. Once they have a bit more money, they think, everyone else has IKEA too, and they look for a more exclusive brand. Some people may also think IKEA's quality is not very good. We are fairly well known among young people, but we also need these people to stay with us when they have a second child or a second home. Another challenge is that many Chinese people think of furnishing a home as a one-time investment: once they have bought the apartment, had the child or gotten married and bought everything, they hardly touch it again. IKEA has to compete with travel and the iPhone to get people to spend their money on home life.

Q: How do you compete? Have you found an answer?

Z: That is why we say home life can become something "fashionable." Take sofa covers: you can buy a purple series for autumn and winter and a lemon-and-lime series for spring and summer. That is a small investment for a big change. Or take storage: as you collect more and more things and run out of cupboard space, that is also an investment, an investment in a solution.

Q: IKEA is in fact a style in its own right. How do you deal with competitors whose style looks just like yours?

Z: Good question. More and more people are indeed copying the IKEA style, and that is a challenge. I think we need to make the IKEA style even stronger. And this year we have 20 new collections. With that many products, they can't copy them all.

Q: Does that also mean IKEA will offer more and more personalized design products in the future?

Z: Do you think many people want personalized design now? I think what sets IKEA apart is that it comes from real life and gives you practical solutions. That is what we have always done and will do more of, from a small storage solution to a plan for a whole 15-square-meter home. That, I think, is IKEA's biggest strength against its imitators and competitors.

About Top 15

In every era, a few companies attract the most capital and the best talent and shape how society as a whole develops. QDaily believes that the companies shaping how we live are at the core of today's business world.

So we have picked the 15 most important lifestyle companies in the world and in China: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. The list will change as the companies' businesses, the market and trends change. We will follow these companies, and their competitors and partners too.

Over the next month, we will publish a series of reports on how these companies are doing.