IKEA: A Review of Recent International

IKEA: A Review of Recent International Expansion and
Opportunities within Mexico’s Urban Cities
By: Molly Fallon, University Honors in Business Administration
Capstone Advisor: Professor Richard Linowes, Department of Management
American University, Kogod School of Business
Spring 2014
ABSTRACT
The following paper reviews IKEA’s recent international expansion strategy and advocates for
management to consider expansion into Mexico’s urban cities, such as Mexico City, Monterrey and
Guadalajara. Over the past ten years, IKEA has nearly doubled its store count and aggressively expanded
its presence within emerging markets to keep up with the growing global demand for low-priced, quality
furniture and meet its ambitious $68.5 billion sales goal by 2020. While IKEA’s management has ruled
out further expansion into Latin America in the past, the paper articulates why Mexico’s growing
economy, home furnishings industry, and middle class create both a timely and ideal business climate for
IKEA.
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I. COMPANY OVERVIEW
At a Glance
Founded by Ingvar Kamprad in 1943, IKEA began as a small, mail-order sales business selling
pencils, post cards, and other small merchandise in Agunnaryd, Sweden. Seventy years later, IKEA is
now the world’s largest designer and seller of ready-to-assemble furniture, appliances and home
accessories with annual sales of nearly $40 billion (Inter IKEA Systems B.V., 2014). The company is
universally recognized for its affordable modern architectural designs and eco-friendly simplicity. In
2013, IKEA’s brand value was estimated at $13 million, supported by its presence in over 26 countries
and 670 million annual visitors (Interbrand, 2013) (Inter IKEA Systems B.V., 2014).
IKEA is highly regarded within the industry for its acute attention to cost control and
sustainability. Over the past five years, the company has been able to reduce prices anywhere from one to
three percent each year as a result of supply chain improvements, strategic packaging, economies of scale,
and transportation modifications (Tuttle, 2011). For example, the company recently reduced the price of
its EKTORP line of sofas by 40 percent after it designed a more efficient way to fit the sofa within its
shipping containers, found new sources for wood and cotton, and eliminated glue (Chasan, 2014). Several
of the company’s cost savings are also the result of the company’s waste reduction and energy
conservation initiatives (see Table 1 in Appendix). From 2010 to 2013, the company reduced operational
carbon emissions by 19.3 percent nearly reached its 2015 goal to have 100 percent of home furnishing
products, including packaging, made from renewable, recyclable or recycled materials (IKEA Group
Sustainability Report, 2014). Beyond operational sustainability initiatives, IKEA also places an emphasis
on the sustainability and cost savings of its products. As of 2013, 32 percent of wood and 72 percent of
cotton used in IKEA’s products came from sustainable sources, and energy-consuming products were 32
percent more efficient than they were in 2008 (IKEA Group Sustainability Report, 2014).
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Corporate Structure
IKEA’s complex corporate structure is another notable element that is unique to the IKEA brand.
Protecting the Kamprad family from taxes, disclosure and takeover, IKEA is owned and operated by a
puzzle of for-profit and not-for-profit corporations (see Figure 1). The Stichting Ingka Foundation, the
owner of IKEA’s holdings company INGKA Holding, is estimated to have a net worth of approximately
$36 billion as of 2006, but it is unknown (and consequently scrutinized for) how much the foundation has
actually given to charity over its lifetime (The Economist, 2006). INGKA Holding, the parent company
that controls the IKEA Group, franchises the IKEA Concept from IKEA Systems B.V., a completely
separate entity that owns and franchises the brand (The Economist, 2006). While INGKA Holding
franchises most of the company’s retail stores, some stores in Australia and the Middle East are run by
other franchisees (The Economist, 2006).
II. IKEA’S INTERNATIONAL EXPANSION
Current International Presence
Over the past decade, IKEA has nearly doubled its store count to keep up with growing global
demand for low-priced, quality furniture and meet its ambitious $68.5 billion sales goal by 2020
(Hansegard & Rolander, 2014). Central to the company’s growth strategy has been to continue expansion
into emerging markets in order to compensate for slowed growth in developed markets (Sky News, 2014).
Currently, IKEA’s retail presence spans 26 countries, but 227 of its 298 existing stores are located
throughout Europe. As a result, a majority of the company’s sales come from Europe, followed by North
America, Asia and Australia, and Russia (see Figure 2).
Future Expansion Plans and Considerations
IKEA’s business model requires the company to carefully consider where it expands in order to
maintain its economies of scale, demand and profitability. Often, cities that have an IKEA retail outlet
boast a large population, high per capita GDP, strong middle class, and predisposition towards
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international retail chains. As of April 2014, the company had publically announced plans to open stores
in major cities in Indonesia, South Korea, Serbia, Croatia, India, and Morocco (see Figure 3). Notably,
IKEA had full intentions to enter into Ukraine in 2015, but government corruption and the recent Russian
conflict have thwarted progress (Lovasz, 2014). While the company expanded into the Dominican
Republic and Puerto Rico in 2010 and 2013 respectively, IKEA’s CEO Mikael Ohlsson has stated that
further expansion into Latin America is not a current priority (Perri, 2011).
While IKEA’s product and store experience remain recognizable across each of its 26 markets, the
company invests considerable research into home visits, surveys, and focus groups each year to ensure
that products, showrooms, and services align with local economic, cultural, and living conditions (Miller,
2004). In China, for example, IKEA’s retail store includes several adaptions, such as:

Smaller show rooms to match the size of the average Chinese apartment

Inclusion of balcony exhibits

Smaller beds and firmer mattresses

Greater emphasis on living room furnishings

Fee-based assembly services since the Chinese do not value the DIY concept as much as their
Western counterparts.
IKEA also takes into consideration regional preferences when configuring their retail stores. For example,
balcony exhibits in northern China display food storage furnishings whereas exhibits in the south display
laundry furnishings in order to be consistent with regional norms (Ringstrom, 2013). Retail store
adaptions in Asian markets have proven to be the most dramatic, and the company expects the transition
into the South Korean and Indian markets to require similar considerations.
As IKEA has expanded into emerging markets, the company has also altered its positioning. In
developed markets, IKEA is positioned as a low priced, mass-market brand, but in emerging markets, the
brand positioned towards the growing middle class who aspire to own international lifestyle products
(Ringstrom, 2013). For these reasons, customers within emerging markets are most sensitive to price and
IKEA’s marketing is slightly more exclusive (Ringstrom, 2013).
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III. MEXICO’S COMPETITIVE LANDSCAPE
Current Economic Trends
One of the strongest economies in Latin America, Mexico’s $1.17 trillion GDP ranks fourteenth
in the world just behind Canada, Australia and Spain. Mexico’s real GDP is expected to grow faster than
any other Latin American country at an average rate of 4 per year percent over the next ten years as
government reform spurs manufacturing activity (particularly within the automobile sector) and foreign
investment (see Figure 4)(Euromonitor, 2014). If reforms are successfully implemented, it is possible,
though contested, that Mexico could even surpass Brazil as Latin America’s largest economy in less than
a decade (Euromonitor, 2014). As the economy begins to expand, disposable income is expected to
increase at an average annual rate of 3.7 percent (Euromonitor, 2014).
In general, Latin America’s middle class is expected to increase substantially by 60 to 70 percent
over the next 20 years with Brazil and Mexico seeing the largest movements (Zammit-Maempal, 2009).
Brazil and Mexico currently account for the largest middle class populations, followed by Argentina and
Columbia (see Figure 5)(Zammit-Maempal, 2009). Within Mexico specifically, 17 percent of the
population joined the middle class since 2000 (Euromonitor, 2014). Currently, the middle class accounts
for nearly 40 percent of the population with a majority living in urban areas such as Mexico City,
Monterrey, and Guadalajara (Euromonitor, 2014).
Home Furnishing Trends and Competition
As Mexico’s economy improves, households have begun to make greater investments in home
furnishings. In 2012, the Mexican home furnishings sector grew by 8 percent as consumer confidence
improved and homeowners increased their investment particularly in outdoor furniture (9 percent
growth), beds (10 percent growth), wardrobes (11 percent growth), household textiles, and lighting (6.3
percent growth)(Euromonitor, 2013). From 2012 to 2017, home furnishings are expected to experience
14.2 percent growth with indoor furniture continuing to account for the majority of sales (see Table 1 and
Table 2).
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Mexico’s high-end furniture retailers have also witnessed considerable growth. While still a niche market,
high-end home furnishings gained sales share as more Mexicans sought out quality, luxury brands
(Euromonitor, 2013). However, mass-market retailers continue to account for the most growth within the
sector. Interestingly, there has been no clear shift in retail channel preference despite the industry’s
changing competitive landscape. Consumers continue to shop at hypermarkets, department stores, and
furniture and homeware stores. Internet sales have only experienced modest growth due to the slow
adoption of credit cards and overall consumer desire to touch and feel home products (Euromonitor,
2013).
Competition within Mexico’s home furnishings category is extremely fragmented, with most
competitors competing on the basis of price and holding less than two percent market share. El Puerto de
Liverpool, a retailer of clothing, appliances, consumer electronics, and home furnishings, holds the largest
market share with 8.8 percent (Hoovers, 2014). The company manages over 65 department stores in
Mexico’s largest cities as well as several shopping malls targeting an upper-income customer base
(Hoovers, 2014). The company’s strength within the home furnishings sector, like many competitors
within the industry, is largely attributed to their strong private label brand, Haus. Competitors such as
Muebles Dico, Grupo Gigante, Sears, and Wal-Mart also carry their own private labels (Euromonitor,
2013). El Puerto de Liverpool has seen sales increase by over 20 percent in the past year, as customers
increasingly prefer larger value-added stores to informal markets (Euromonitor, 2013).
A growing consumer preference towards chained outlets has allowed international retailing
chains such as Home Depot, Zara Home, H&M Home, and Crate and Barrel to successfully enter the
market and take market share from independent operators (Euromonitor, 2013). Home Depot entered
Mexico in 2001 and now operates over 100 stores in 60 urban and rural cities. Zara Home entered the
market in 2011 and since has opened over 15 stores in Mexico’s major urban centers. As of 2012, Zara
Home had a market share of .4 percent (Euromonitor, 2013). H&M Home and Crate and Barrel only
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recently entered the market and have yet to expand beyond Mexico City. Whereas Crate and Barrel
attempts to target high-end furniture and homeware buyers, Zara Home and H&M Home attempt to target
the middle class and offer trendy home furnishings and homeware at affordable prices.
Business Environment
In light of major government regulatory reforms, Mexico’s business environment has improved
substantially over the past few years. In 2013, the World Bank Group ranked Mexico in the top third of
countries in terms of ease of business, placing the country well above Italy, the Czech Republic, China,
Russia, Brazil, and India (World Bank Group, 2014). The World Bank noted improvements in trade and
enforcement of contracts but still ranked Mexico fairly low in terms of paying taxes (World Bank Group,
2014). Similarly, Mexico ranked 61 out of 138 surveyed countries on the World Economic Forum’s
annual Enabling Trade Index Report, which aims to “assess the quality of policies, infrastructure, and
services facilitating the free flow of goods over boarders and to their destinations” (Doherty, Geiger &
Hanouk). The report mentioned Mexico’s competitive advantages such as foreign and domestic access as
well as openness to foreign business participation; however, the report also noted the need for continued
infrastructure and transportation improvements as well as challenges working with Mexico’s public
institutions (see Table 3 for Latin America performance rankings)(Doherty, Geiger & Hanouk).
IV. RECOMMENDATIONS AND CONSIDERATIONS FOR MANAGEMENT
Recommendation
As INGKA Holdings looks to expand IKEA’s retail presence and exploit opportunities within
emerging markets, management should look to Mexico’s urban cities, such as Mexico City, Monterrey
and Guadalajara, as potential retail location contenders. Mexico’s growing economy, middle class, and
home furnishings industry create both a timely and ideal business climate for IKEA. Furthermore, Mexico
could position the company to possibly expand into other Latin American countries in the future.
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It is clear upon a review of Mexico’s growing economy and middle-class that cities such as
Mexico City, Monterrey, and Guadalajara could support IKEA’s business model. Beyond the country’s
strong forecasted GDP and disposable income growth previously mentioned, Mexico’s economy is
similar in terms of GDP per capita to Turkey and Russia where IKEA currently has a retail presence. At a
micro level, Mexico City in particular stands out as an incredibly viable market given its similarity in
population and population density to cities such as Shenzen, London, Moscow, and Istanbul where IKEA
also currently has a strong retail presence (CIA World Factbook, 2014). Mexico City is also comparable
to Shenzen and Istanbul in terms of GDP per capita.
Beyond Mexico’s promising economic landscape, the country’s budding middle class has created
considerable opportunity for IKEA. Within Mexico’s urban areas, the middle-class accounts for half of
the population and has driven growth within the home furnishings industry (Euromonitor, 2014). IKEA’s
value proposition appears to align perfectly with the middle class’ shifting preferences within the home
furnishings industry: affordable, quality furniture found in larger, value-added stores. Moreover, like
H&M Home and Zara Home, IKEA’s international retail brand carries significant weight among trendy,
fashion-conscious consumers.
Finally, expansion into Mexico positions IKEA to consider further expansion opportunities
within Latin America in the future. Not far from retail locations in the Dominican Republic, Texas, and
Arizona, expansion into Mexico is a logical, logistical first step into Latin America but should certainly
not be the last considered. As Latin America’s middle class continues to develop, IKEA should keep in
mind populous cities such as Lima, Sao Paulo, and Rio de Janeiro that also share strong economic, social
and regulatory prospects.
Considerations for Management
While Mexico presents several opportunities for IKEA, management should bear in mind
challenges the country continues to face that could hinder IKEA’s success such as corruption, lack of or
unenforced regulation, and sluggish justice system. As of 2013, Mexico ranked 106 out of 177 countries
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on Transparency International’s Corruption Perceptions Index. Mexico’s high ranking is largely attributed
to the lack of transparency within local government that allows for public officials to embezzle millions
from the state, engage in bribery with drug cartels, and accept bribes from businesses. Similarly, the
World Economic Forum ranked Mexico 128 out of 138 in terms of efficiency and accountability of public
institutions and cited corruption, crime and theft as major challenges when importing (Doherty, Geiger &
Hanouk). In the past, foreign businesses have found themselves partaking in bribery and illegal activities
in order to speed up decisions or obtain privileges. In 2012, for example, Wal-Mart was accused of paying
$24 million in bribes to Mexican officials in order to circumvent local zoning regulations (Baurmann,
2013). As of April 2014, Wal-Mart had spent $439 million investigating into the allegations and both the
U.S. Department of Justice and Mexican authorities had yet to file charges (Vereacos & Dudley, 2014).
Beyond Wal-Mart, there have been very few incidents of multinational companies engaging in bribery
within Mexican officials. Companies such as Home Depot have proven that it is possible to operate and
thrive within Mexican cities without succumbing to the country’s corrupt tendencies.
Management also might consider adding new textile patterns and colors to its product range if it
expands into Mexico. Latin American home décor is known for its ornate patterns and vibrant colors,
vastly different than the simple designs and colder colors that IKEA is known for. Management might
consider sourcing these textiles locally and extending the offering to retail locations in Texas, Puerto
Rico, and Dominican Republic.
Finally, one of management’s greatest challenges might prove to be finding a suitable retail
location within Mexico’s populous cities. Given the sheer size of IKEA’s retail store and the fact that
IKEA must account for the transportation constraints of its customers, IKEA has in some cases taken
years to scout out ideal locations within major cities. For example, IKEA spent nearly a decade scouting
out its St. Louis, Missouri location and arranging a complicated series of transactions with the 21-acre
site’s nine different uncooperative landowners (Kumar, 2013). In the case of India, the company is still in
talks with the Ministry for Commerce and Industry to identify locations situated near strong road
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networks and public transport at the right price within the states of Haryana, Andhra Pradesh,
Maharashtra and Karnataka where it intends to open stores within the next few years (The Hindu, 2013).
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Appendix
Table 1: FY2013 Sustainability Report Highlights
Source: IKEA Group Sustainability Report
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Figure 1: IKEA Corporate Structure
Source: Inter IKEA Group
Figure 2: Sales and Purchasing by Region and Country
Source: Inter IKEA Group Annual Report 2012
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Figure 3: IKEA’s International Retail Presence
Figure 4: Latin America GDP Growth
Source: The World Bank
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Figure 5: Largest Middle Class Populations in Latin America
Source: UK Foreign and Commonwealth Office
Table 2: Home Furnishings Growth
Source: Euromonitor
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Table 3: Latin America and Caribbean Economies Enabling Trade Index Summary
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