IKEA Invades America
IKEA Invades America
February 7, 2012
IKEA Invades America • ISSUES IKEA is currently the world’s top furniture retailer, yet they remain far from being the leading furniture retailer in the United States. IKEA’s current niche position and targeting strategies are unable to sustain the growth that they are looking for. In order to expand aggressively and open 50 stores by 2013, IKEA needs to target to a larger market and find ways to appeal to a broader consumer base that may still be unfamiliar with Scandinavian design and IKEA’s self-service culture. This must be accomplished while allowing IKEA to retain their quintessential Scandinavian roots. As Anders Dahlvig, the Global Production Head, puts it, “We have to find a balance.”
• DECISION ALTERNATIVES The following three decision alternatives target consumers segmented by existing shopping habits (See Appendix A for Segmentation Analysis) 1. Target consumers who shop at high-end retailes. Drastically change the marketing mix to position IKEA as a provider of traditionally designed furniture. 2. Target the entire USA market without changing IKEA’s core products. Aggresively advertise and promote IKEA and Scandinavian design to change existing consumer preferences. 3. Target all consumers who shop at low-end retailers while retaining IKEA’s current positioning. Tweak the product lineup to appeal to this new expanded target market.
Our decision criteria include: Fit with company goals: IKEA’s number one concern is to be able to expand and appeal to a broader consumer base while retainining its Scandinavian roots and differentiating factors. Potential profitability: The potential for IKEA to increase market share, grow, and increase sales. Brand image: Ability to retain and strengthen its brand of self service, low price and good design. Customer satisfaction/customer lifetime value: Long-term customer satisfaction and brand loyalty Feasibility: The costs associated with implementing the solution.
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IKEA Invades America • Industry Analysis The US furniture retail industry is a potentially very profitable market for IKEA, with over $67 billion in sales in 2002. With a highly fragmented market, the industry is competitive and consumers have high purchasing power: they can pick and choose from a large pool of retailers. As of result, companies need to strongly differentiate and advertise themselves in order to attract consumers, especially given the fact that furniture purchases tends to be infrequent due to their costs. However, this also presents an opportunity: with the right positioning and differentiation, a company can easily lure a customer away from established brands. The large difference between low-end and high-end retailers, where consumers have to trade off between price and quality, also provides an opportunity. IKEA is ideally positioned in the middle of the low-end and high-end retailers (See Appendix B for Perceptual Map). With only 14 stores in USA, IKEA also has many opportunities to expand into large cities such as New York City, Seattle, Detroit and more.
• Company Analysis IKEA is currently the world’s top furniture retailer with an extremely well-known and strong brand. Their do-it-yourself culture that requires buyers to transport and assemble their own furniture is both a strength and a weakness. IKEA can cut costs and pass the savings on to the customer, yet most US consumers are used to a more traditional service experience, with sales consultants, free delivery and set up service. Further weaknesses include the furniture’s short life span, as many high-end retailers highlight the longevity of their products. However, IKEA fills the gap between low-end and high-end retailers by operating based on their strategy of “low price with meaning”. They compete very effectively by utilizing their global supply chain network to cheaply produce well-designed products that are marked 30% to 50 % below competitors’ prices. They also provide value through an unique shopping experience: large bright and well-designed “theme park-like” stores, play areas for children and in-store restaurants. IKEA has managed to create a niche market for themselves in the USA, and they can capitalize on this to expand further.
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IKEA Invades America • Evaluation of Alternatives Alternative 1 This alternative requires IKEA to target consumers who currently shop at high-end retailers. Thus the product line will be adjusted and tailored to consumers who prefer traditionally designed furniture. IKEA will continue to provide their unique one-stop shopping experience while adding to their sales force to accommodate the expectations of the market. IKEA may also consider providing free shipping and installation of their furniture. Their pricing scheme will change and increase to reflect their new target market and costs. IKEA’s distribution strategy will remain the same with large, freestanding retail stores. IKEA needs to advertise their redesigned products and promote through social media, personal selling, ads in more high-end publications. PROS: - As the target is no longer a niche, this alternative will significantly increase the target market size - Manageable and well-known market, with high potential margins and profits CONS: - High costs associated with R&D and completely new marketing strategy - High marketing costs; it is difficult to change the perception of IKEA as a low-price retailer - Deviates from IKEA’s original Scandinavian design and brand, may alienate existing customers - Ignores many of IKEA’s critical success factors (See Appendix E for Critical Success Factors)
Alternative 2 With this alternative, IKEA will target the entire market of low- and high-income consumers by promoting IKEA’s unique approach towards customers. Customers are expected to be more than just mere purchasers; transportation and assembly become their responsibility. However, this effort is rewarded through extra value derived from significantly lower prices, and an inimitable positive shopping experience. Promotion of this particular extra value is crucial for mass success – IKEA is not just the shop, it is a partner for life. Therefore, there is a need to design a more massive
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IKEA Invades America and long-term marketing campaign that addresses the broad public and explain IKEA’s reasons for unconventionality and change their views towards Scandinavian design. The message should underline the benefit of customer involvement and persuade them to accept the difference. PROS: - Preserves brand image and is not in conflict with any of IKEA’s original brand values - Maintains competitive advantage of differentiation and its critical success factors - Potentially significant profitability if entire market can be reached CONS: - High marketing campaign costs in order to cover the entire market - Difficult to find proper message to promote with a risk of message rejection - Highly difficult to change US consumer preferences for traditional design and service
Alternative 3 With this alternative, IKEA should target low- to middle-income consumers who currently shop at low-end retailers. They are more likely to accept IKEA’s current products, price, promotion, and distribution strategy. IKEA would slightly tweak its product line and add to their style matrix, (ie. an American style in addition to Scandinavian, Modern, Country and Young Swede). This will appeal to the broader American market yet still retain IKEA’s core Scandinavian design style. IKEA should continue to promote aggressively to get Americans to take a more “commitment-free approach to furniture” and expand to large cities with their traditional large store format. PROS: - IKEA’s brand image will evolve and adapt slightly to the US market, yet still remain Scandinavian - A commitment-free approach to furniture would encourage consumers to purchase more from IKEA, generating high customer lifetime value - Potential profitability is high as the target market, the low-income consumer, is extremely large - Good fit with the company’s goals to expand and open more stores, appeal to a braoder
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IKEA Invades America consumer base but still retain it’s critical success factors - Feasible to invest in R&D, tweak product line, expand and increase advertising CONS: - Will not appeal to Americans who prefer the traditional furniture shopping experience - Targetting low- to middle-income consumers provides lower margins than high-income consumers - Adding a product line will incur large costs: increased inventory and design costs
• Recommendation It is recommended that IKEA choose Alternative 3. This addresses all of IKEA’s issues, and is the best method to lead the company to be the leading furniture retailer in the United States. The low- to middle-income consumer is a large segment and by targeting them, IKEA would be able to support their expansion goals. According to our Segmentation Analysis, these consumers are most likely to want to try new things and are looking for low-price, functional furniture with decent design. IKEA already has all the ingredients in place: well-designed furniture, low prices, and a superior large store experience. Influencing consumer preferences for Scandinavian design is difficult, but IKEA has the budget to advertise to its consumers, and this will benefit in the long-run. Adding a new American-style product line will also help ease new consumers into shopping at IKEA while allowing IKEA to slowly adapt to the US market and retain its core brand image and differentiating factors. We believe that the benefits of this decision vastly outweigh the disadvantages of IKEA not appealing to those who prefer a more service-oriented furniture shopping experience. To implement this strategy, IKEA should focus on market research to see which major cities they should expand to that will best serve the target market of low- to middle-income consumers. As they consist of the working class and students, ideal locations would be near schools, suburban areas and business districts. IKEA should also focus on researching and developing a new product line that would appeal to Americans, yet still retain their distinctive Scandinavian style.
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IKEA Invades America
• Appendices Appendix A - Segmentation Analysis Consumers who shop at:
Low-end Retailers
Geographic
Urban - live in Urban and Urban - live in Suburban cities, close to suburban - live cities. areas. schools. in cities.
Urban - live in cities. Downtown core
Demographic
Low-income, single.
Low to middle- Low-income, Middle to income. living by them- high-income self. earners, dual earner households.
High-income professionals, age 25-35, career-focused professional.
Psychographic Willing to change and try new things.
Fairly traditional.
Willing to change and try new things.
Fairly traditional.
Willing to change and try new things.
Product Related
Looking for low-priced, durable and functional furniture.
Looking for low prices and convenience.
Looking for style, design, and durable furniture.
Looking for style, design, and convenience.
Students
Looking for convenience and low prices.
High-end Retailers
Families
Singles
Families
Professionals
Appendix B - Perceptual Map High Quality
Low Price
Low-end retailers
High-end retailers
High Price
Low Quality
Appendix C - Porter’s 5 Forces Analysis Substitutes: Low Threat. There is little threat outside that of resellers (craigslist, antique stores) New entrants: Low/Medium Threat. There are high costs of setting up production facilities. Independent furniture makers can differentiate but may be too small to create a large impact.
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IKEA Invades America Supplier: Low Threat. Globalization means that large retailers can obtain supplies almost anywhere, especially in developing countries where prices and labour is significantly cheaper Competition: Medium/High threat. The market is highly fragmented, with many companies all vying for market share. There is a wide dichotomy between low-end retailers who compete on price and thus have low quality stores, and high-end retailers who compete with selection and high quality service. Buyer: Medium/High threat. Buyers have almost unlimited options, they can easily change their minds and switch to better companies, especially since furniture is a big purchase. Thus consumers will seek out nformation and shop for the best quality products for the cheapest prices.
Appendix D - CDSTEP Analysis Culture: Interior design is a very personal and unique to the customer. IKEA creates pieces that are simple and covers nearly all forms of furniture. IKEA’s corporate culture is considered waste a deadly sin at IKEA, and employees are on a first name basis, despite seniority or position. Demographic: The typical IKEA shopper is a person who travels abroad, likes taking risks, likes fine food and wine, has a frequent-flier plan, and is an early adopter of consumer technologies. Social: US consumers are unwilling to change and replace their furniture. Yet many have constantly changing tastes to keep up with changing design trends. Technology: IKEA uses its flat packaging technology as a competitive advantage to cut costs. Economic: During economic downturns, cheaper retailers tend to flourish more. Political/Legal: IKEA is based in Sweden.
Appendix E - IKEA’s Critical Success Factors - Superior shopping environment: large stores with many ammenities to provide a onestop shop experience. Stores include restaurants, children play rooms, and supplies to help with furniture shopping (rulers, pencils, catalogs). Large and open spaces with many model furniture encourages customers to spend time comfortably browsing. - Uncomplicated design: Customers can easily mix and match simple furniture pieces. - Strong purchasing power: IKEA globally sources their supplies and suppliers compete to provide the lowest costs possible. - Low prices: Their distribution superiority with flat packaging significantly lowers shipping costs and their strong purchasing power allows IKEA to price lower than competition.
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