The Secret to Business in China

Absolute Internship arranged on Tuesday, June 23 for the interns to tour IKEA’s Shanghai store and corporate office. We had the opportunity to learn more about conducting business in China through the challenges and opportunities that IKEA faces. IKEA operates 16 stores in China in 13 cities. Globally, IKEA has 1.5 billion visitors to the stores per year.

Since its founding in Älmhult, Sweden in 1943, IKEA has been focused on keeping prices low by assembling the product yourself. Carrying out IKEA’s vision in China has been difficult as the Chinese do not understand the concept of taking the furniture home to assemble. However, the Chinese keep coming to IKEA because it is trendy. Western products appeal to the Chinese; they prefer products made in America or Europe (while Americans prefer products made in China).

The secret to success in conducting business in China is to adapt to the local market. The presentation by the Director of Marketing for IKEA Shanghai stressed to us the importance of understanding people’s life at home. The products have to be relevant and affordable to any culture. In China in particular, products must be affordable. Competition in China is the share of the wallet. Chinese spend the majority of their money on electronics, English education, entertainment, traveling, and stock market investments. For any large corporation to survive in China, they must be able to compete against the Chinese wallet. In the United States and Europe, customers value the usefulness and style of the product more than the low cost. The Director of Marketing has visited many homes across China and the reoccurring obstacle in one’s ease of life is home organization. The challenge is marketing the products to the Chinese. In some cities in China, cooking and eating occurs on the patio. In other cities, the bedroom is only used to sleep. IKEA has 9500 products in inventory and 95% of all products are the same in IKEA’s stores across the world. Because of the differences in cultures within China and globally, each IKEA store may differ in layout depending on how a particular product should be marketed. For example, a dining room table may be marketed in the kitchen section of the store in Shanghai but placed in the patio area of IKEA in the Nanjing store.

Each store is designed to be a maze. I finally learned why I spend hours in the IKEA store “lost” in shopping: at each turn/corner in the store, over 1.5 BILLION people see the product per season. It is impossible to not pass by the product. I was also fascinated by the logistics of product placement. IKEA uses the “3 Aces + 1 King” model. 20% of IKEA’s products make up 80% of IKEA’s income. Top selling products are thus placed strategically throughout the store. The 3 aces resemble the top seller, top margin, and lowest price. The King is the new product. Each area/department of IKEA has “3 aces + 1 King.” In China, low price is very important. The lowest priced product in the section of the store is marked in yellow with a red background. When customers make a turn in the store, their eyes are instantly drawn to the low price of the product. Anchoring the lowest priced product is the top seller, top margin, and new product. IKEA uses a tier system where there are different models of the class of product (similar to car models – each adding more features).

IKEA’s biggest opportunity is to expand to ecommerce. Did you know that China has the world’s largest online population of 650 million people? The goal is to expand to ecommerce in China by July 1, 2016. Currently 66% of IKEA’s production occurs in Europe. This results in the majority of the inventory going through customs before being placed on the shelves or delivered to homes. IKEA and the Chinese government are working on agreements to build production facilities in China. Each province has different standards; China does not have national standards of construction. China does however require an emergency exit to be within 37.5 meters from wherever a customer is located in the store. Adapting this requirement into IKEA’s store plans is difficult as the store is strategically designed to be a maze. In order to be successful in the Chinese market, it is believed that IKEA will need a big delivery system in a reasonable time of delivery. In order for IKEA, and any corporation, to be successful in China, they must be adaptable and affordable.

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