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March 3, 2006

A. Beijing


Q. Where, as of next month, is the second–largest IKEA store in the world?

You wouldn't think a winning strategy for a Western company would be to try to compete in China on price.

But that's precisely what IKEA is doing.

Mei Fong, in a story on the front page of today's Washington Post Business section, noted that the Chinese, who boast the world's fastest–growing economy, "... are notoriously reluctant to spend money. People on average save 30 per cent of their incomes...."

Thus, Ian Duffy, who for the past four years has been in charge of IKEA's Chinese stores, took an approach opposite to that of other foreign brands in China and slashed his company's prices.

He said, "I had to make a break, change perceptions that Western–branded goods are normally more expensive."

Thus, he's pushed IKEA's prices in China as much as 70 per cent below those for the identical product in IKEA stores in other countries.

Looks like his strategy is working: "Weekend throngs at IKEA's three stores in China — in Beijing, Shanghai and Guangzhou — are so big, with more than 20,000 visitors each on any weekend day, that employees use bullhorns for crowd control."

IKEA plans to open a store in the city of Chengdu this year and then add two stores annually until 2010.

Duffy said, "Chinese consumers are the most demanding in the world."

If that's the case, look for the rise of world–class Chinese brands in the next several years, driven by that country's own ethos.

Here's the Post article.

    Ikea Goes Even More Cut-Rate to Draw Chinese Shoppers

    When Ian Duffy was first put in charge of Ikea's China stores four years ago, he spent hours at the checkout line observing customers.

    He didn't see many.

    Instead, he saw plenty of people crowding the Beijing store for freebies -- such as access to air-conditioning and clean toilets.

    Adding insult to the injury: Shops right outside were offering copies of Ikea designs at a fraction of the cost.

    So, to lure shoppers, the blue-eyed 48-year-old Brit launched perhaps the least expensive Ikea non-sale item anywhere in the world: the 12-cent vanilla ice cream.

    Thus began Ikea's strategy to beguile the finicky Chinese consumer by slashing prices in China to the lowest in the world -- the opposite approach of many Western retailers.

    Although China boasts the world's fastest-growing economy as millions join the ranks of the middle class, the frugal Chinese are notoriously reluctant to spend money.

    People on average save 30 percent of their incomes, one of the highest savings rates in the world.

    China's trading partners, such as the United States and Europe, hope to narrow their huge trade deficits by getting the Chinese to buy more of their products.

    Yet, typically, Western brands in China price their products 20 percent to 30 percent higher than in other markets.

    That's partly to make up for China's high import taxes on foreign goods and partly to lend their products an added cachet in Chinese eyes, an important branding strategy in developing markets.

    Foreign retailers in China "don't feel that they have to compete on price," because they are offering a wider selection of goods and a more pleasant shopping experience than domestic competitors, said Ann Chen, a retail analyst at Boston-based consultancy Bain & Co.

    Not Duffy.

    "I had to make a break, change [Chinese] perceptions that Western-branded goods are normally more expensive," he said.

    By stocking Ikea's Chinese shops increasingly with China-made products, Duffy pushed prices on some items as low as 70 percent below prices in Ikea outlets elsewhere.

    An armchair from Ikea's popular Ektorp range retails for $112 in China, 67 percent less than one sold in the United States.

    The gamble seems to have worked.

    Ikea -- whose name in Chinese, "Yi Jia," means "comfortable home," -- is anything but comfortable on weekends, as thousands of Chinese crowd in to look and to outfit their homes and apartments.

    Weekend throngs at Ikea's three stores in China -- in Beijing, Shanghai and Guangzhou -- are so big, with more than 20,000 visitors each on any weekend day, that employees use bullhorns for crowd control.


    Next month, Ikea will open a 452,100-square-foot store in Beijing, second in size only to its flagship store in Stockholm.

    At the store, which Ikea furnished with extra-wide aisles to handle the expected crowds, the Swedish company expects to sell enough furniture every year to fill about 5,000 40-foot containers -- double what it sells in other stores.

    It's a fast-growing market.

    During the past eight years China has seen a huge surge in homeownership as authorities did away with state-allocated housing and subsidized rentals.

    Because many apartments are typically empty shells sold without paint, lighting or even flooring, the market for home furnishings has taken off.

    Bain & Co. estimates that the do-it-yourself market in China -- stretching beyond furniture to include items such as bathroom tubs and sinks as well as gardening tools -- is growing 10 percent a year and generates $15 billion in sales.

    Ikea's price strategy is encouraging repeat customers.

    In a thrifty nation accustomed to durable Chinese wooden furniture, habits are changing.

    "My parents' furniture used to last more than 10 years, but now they change every three or four years," said Chen Wei, 40, who recently brought his wife and mother to the existing Ikea store in Beijing.

    His mother, though, laments Ikea's falling prices: A sofa she had bought in 2004 for roughly $360 was now $224, she said.

    "I really regret not waiting," she said, sighing.

    Ikea holds a 43 percent market share in China's housewares segment, Bain estimates.

    But it is about to get a lot of company. Until last year, Chinese regulations required all foreign retailers to have a local partner.

    With the change in regulations, B&Q PLC, a home-improvement retailer owned by Kingfisher PLC of Britain, has announced plans to more than double its current number of stores in China to 100 in the next five years.

    Ikea, too, is expanding under the new rules.

    Its first two stores in China were joint ventures.

    But last October, Ikea opened its first wholly owned store in Guangzhou, a structure it plans to use for future stores, Duffy said.

    Ikea plans to open a store in the city of Chengdu this year and add about two stores annually until about 2010.

    Some analysts question whether Ikea can maintain its cut-price strategy as it enters China's smaller cities, where incomes are lower and demand for bargains even higher.

    "It's a big test for us," Duffy acknowledged.

    But he insists the company still will be able to reduce prices each year by improving productivity in stores, making more products in China (it is currently building a factory in the northeastern city of Dalian) and sticking to wholly owned stores.

    Half of the products in Ikea's Chinese stores are made in China, compared with about 23 percent in Ikea stores overall, with the rest made in countries such as Poland and Sweden.

    That has enabled the company to halve prices in China over the past four years, even as Chinese consumer incomes have increased.

    So far, few foreign retailers in China are making a profit from sales in the country, analysts estimate.

    Ikea is not publicly listed and does not disclose profitability, but analysts estimate its China operations bring in about $120 million in annual revenue.

    Duffy, a law graduate who long ago eschewed pinstripes for the jeans-wearing, everyman ethos at Ikea, said he has seen plenty of shoppers in his 19 years with the company.

    "Chinese consumers are the most demanding in the world," he said.

    But he appears undaunted.

    Standing by the plastic-shrouded products in his cavernous new store, he said, "People like what we've got. We've had seven years to build a following in the city, and in that time, we've learned enormously."


March 3, 2006 at 12:01 PM | Permalink


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