Ikea Group

Company Profile
Publication Date: 2 Apr 2010

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Ikea Group

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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Ikea Group
Company Overview

COMPANY OVERVIEW
Ikea Group (Ikea or "the group") is an international home products retailer that sells furniture, accessories, and bathroom and kitchen items. Ikea operates about 301 stores overall in 36 countries/ territories most of them in Europe, North America, Asia and Australia. Ingka Holding BV, which is wholly owned by Stichting Ingka Foundation, is the parent company for the Ikea group of companies. The foundation is owned by the Kamprad family. Inter Ikea Systems BV is the franchisor of the Ikea Concept-selling Scandinavian designed furniture at competitive prices. Ikea is headquartered in Delft, the Netherlands. Ikea recorded revenues of E21.5 million ($29.1 million) during the financial year ended August 2009 (FY2009), an increase of 1.4% over 2008.

KEY FACTS
Head Office Ikea Group Olof Palmestraat 1 Delft 2616 NLD

Phone Fax Web Address 31 15 215 38 38 http://www.ikea.com

Revenue / turnover 21,500.0 (EUR Mn) Financial Year End August

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Ikea Group
SWOT Analysis

SWOT ANALYSIS
Ikea is one of the largest furniture retailers in the world. It sells more than 9,500 home furnishing products in about 301 stores in more than 36 countries. In FY2009, Ikea stores welcomed a total of 590 million visitors and Ikea websites attracted 561 million visits. Ikeas strong presence enables the group to strengthen its brand equity and also enhance its profitability. However, reduced disposable incomes have impacted the demand for Ikeas core product, furniture adversely. Strengths Significant market presence Strong in customer satisfaction Focus on sustainability Opportunities Diversifying sourcing base Increasing online sales Weaknesses Location disadvantage Declining sale densities in the UK

Threats Impact of economic slowdown in major markets Barriers to enter lucrative growth market Unfavorable market trends

Strengths

Significant market presence Ikea is one of the largest furniture retailers in the world. It sells more than 9,500 home furnishing products in about 301 stores in more than 36 countries/ territories. Of the 301 stores, the Ikea group itself owns 267 stores in 25 countries. The other 34 stores are owned and run by franchisees outside the Ikea group in 16 countries. Apart from this, the Ikea group has 41 trading service offices in 30 countries, and 28 distribution centers and 11 customer distribution centers in 16 countries. In FY2009, Ikea stores had a total of 590 million visitors and Ikea websites attracted 561 million visits. A strong presence gives the group considerable bargaining power and an advantage in terms of customer recall. The Ikea concept is based on offering home furnishing products at low prices. The group's products are designed, manufactured, transported, sold and assembled in line with this concept. To help keep prices low, the group ensures maximizing production equipment, using raw materials efficiently, applying technical innovations and effectively managing waste. Furthermore, customer involvement contributes to low prices. The Ikea concept relies on customers to choose, collect, transport and assemble Ikea products themselvesand offers home delivery services at an additional cost. Ikeas low cost proposition is central to product offering and keeps the flow of customers.

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SWOT Analysis

Strong in customer satisfaction Ikea was ranked 9th in Verdicts (Datamonitors retail brand) Consumer Satisfaction Index (CSI) which measures how satisfied customers are with the retailers they use. CSI looks at satisfaction across different aspects of the retail proposition (range, convenience, price, service, facilities, ambience, quality, and layout) and provides an overall satisfaction score for each of these. The CSI is derived from an annual survey of 6,000 consumers. Ikea has managed to stay in the top ten despite its CSI score falling by one point. Ikea continues to score well in product its range, finishing ninth out of all retailers, with a wide selection of furniture and homewares for each room of the house. In terms of product range, the groups competitors such as Debenhams were ranked 14th while Next was ranked 16th. Ikeas large stores also allow them to display these items effectively through roomsets and interesting merchandising, the main reason why the retailer is sixth overall for layout. Ikeas strong performance in customer satisfaction enhances its brand value and vindicates the niche it has created for itself. Focus on sustainability In response to pressures on global retailers to co-exist with the environment, Ikea has been working towards sustainability since 1999. Previously, Ikea was accused of being a landfill-waste generator because it made large volumes of products that did not last. To reduce the associated poor publicity, Ikea has been pursuing sustainability in a big way since then. In 2009, Ikea invested $77 million in clean technology startups like solar. Today, 71% of all Ikea products are recyclable, made from recycled materials, or both. The group recycles 84% of the waste generated in its stores. When a country introduces stricter emission rules, like when Japan decided to restrict formaldehyde emissions to levels close to zero, Ikea imposes the new restrictions on its global operations. Ikeas sustainability initiatives focus on four areasproducts and materials, suppliers, climate change, and community involvement. Ikea imposes codes of conducts on its sourcing partners (nations and suppliers); the group made consequences harsher for sourcing partners such as those in China for their uncooperativeness in providing correct information (towards assessing adherence to the groups code of conduct). This issue has been a driver in Ikeas intention of reducing its sourcing arrangement with its Chinese associates. Ikeas strong focus on sustainability enables it to adhere to global manufacturing standards, create goodwill, and strengthen its brand value.

Weaknesses

Location disadvantage The vast majority of Ikea stores are located outside the city, primarily because of land cost and traffic access. Although this strategy reduces the cost of operations, Ikea continues to struggle with convenience. Its out-of-town location has disadvantaged Ikea because long travel considerations

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SWOT Analysis

do not suit recession-hit customers who prefer to shop locally. People are unwilling to spend money to travel large distances to the retailer, hence more are switching to grocers and other non-specialists. This trend has lowered penetration levels among two categories of Ikeas customer base. For instance, in the UK, penetration of the previous core 25-34 age group has dropped (on an annual basis) by 6.5% to 15.6% in 2009, while penetration of 35-44 year olds has also declined to 15.1% in 2009 from 18.6% in 2008. Lowered penetration levels place Ikea at a competitive disadvantage as customers find it difficult to access Ikea stores when compared to other retailers which are easily accessible. Declining sale densities in the UK In the UK, the average sale density recorded at Ikea stores have been declining since 2005. The group opened just one more store in the UK in 2009a deviation from a 2006 plan to open as many as 32 stores in the UK the longer run. In 2009, the group operated only 18 stores in the country. Ikeas past profitability was founded partly on comparatively high sales densities (measured as sales per square foot (sq ft) for its retail locations. During 200204, sales densities increased by 6.3% to reach 339 ($620.4) per sq ft in 2004. After 2004, sales densities declined. During 200409, the sales density declined by 22.7% to reach 260 ($405.6) per sq ft in 2009. By opening more stores Ikea distributed its customers over a larger number of stores which reduced the average footfall. Opening of new stores did not amount to incremental sales or customers. Declining sales densities indicate that Ikea may have to revisit its growth strategy away from opening more stores in the UK.

Opportunities

Diversifying sourcing base To support its value proposition, Ikea sources a substantial portion of its products from low cost manufacturing centers in Asia such as China. In 2009, Ikea sourced 30% of its products from Asia with China (21%) being Ikeas number one sourcing location. To reduce its overdependence on China (for the first time in several years), the group intends to strengthen its sourcing relationship with India. Ikea closed three sourcing offices (in Chengdu, Wuhan, and Xiamen) in China in 2009. India, which currently accounts for 3% of Ikeas worldwide purchases, is expected to become a stronger supplying partner. By 2014, Ikea expects India to supply E500 million ($676.7 million) worth of products for it, double the existing levels of E250 million ($338.4 million). Ikea has been sourcing textiles and carpets from India for over three decades. Now the group intends to also source plastics, steel, lighting and natural fiber categories from India. A diversified supplier base will reduce Ikea's dependence on China and increase its bargaining power. Increasing online sales

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SWOT Analysis

Online retail spending is on an increase. Retail e-commerce revenue (excluding travel) in the US was recorded at $142.4 billion in 2009, an increase of 4.1% over 2008. The pace of growth is estimated to be slow due to the weak economic situation and reduced consumer spending. However, retail e-commerce revenue is expected to grow at an annual rate of 8%, 9.5% and 9.2% in 2010, 2011 and 2012, respectively. By 2012, online retail spending is expected to generate revenues of $183.9 billion. To benefit from this trend, Ikea has also started transacting on its website, www.Ikea.com. A focus on online retail will open up another channel to reach customersthose who prefer to research for options and shop online. A stronger push to online retail would also solve a part of the problems faced by customers who are forced to go out-of-town for shopping at Ikea. Ikea can enhance and leverage its presence over the internet to drive topline growth.

Threats

Impact of economic slowdown in major markets Despite recovery signs towards the end of 2009, most advanced economies including the US and the UK were in the grip of recession throughout 2008 and most of 2009. The UK economy contracted 2.4% in the first quarter of 2009, the biggest year-on-year decline in 51 years. According to the Bureau of Economic Analysis, the US economy declined at a staggering rate of 6.1% in the first quarter of 2009. The US economy recorded a negative growth of more than 6% for two consecutive quarters in 60 years. Amidst the recession, declining income and increasing unemployment, consumers had lesser disposable income and were more vigilant of spending. A large chunk of Ikeas customers are usually shopping for furniture for the first time. The number of these first time buyers declined because the general economic conditions were unfavorable for constructing new homes. Ikea too felt a pinch from the general weakness in its major marketsthe percentage of regular visitors at Ikea stores declined from 6.3% in 2008 to 5.1% in 2009. Also, the group executed its expansion plans at a slower pace. The economic slowdown has reduced demand for Ikeas core product, furniture and has prevented Ikea from recording a stronger topline growth. Barriers to enter lucrative growth market The foreign investment policies in India squashed Ikeas plan to set up retail operations in the country. Although Ikea intends to strengthen its sourcing relationship with India, the group has decided to discontinue plans to expand its retail operations in the country. Earlier in 2009, Ikea cancelled a $1 billion investment plan to start retailing in India after the Indian government refused to raise the 51% foreign ownership cap on single-brand stores to full ownership. As a result, Ikea is denied a share of the lucrative Indian consumer market. Against a backdrop of weak/cautious economic outlooks in major global regionswhich has also impacted Indias GDP, India recorded a GDP of 6.75% in 200910 and is expected to record 8% in 201011. Though the Indian residential sector (including new homes which is an end market for Ikea) did face the impact of slowdown, it has been showing revival signs since June 2009; it is

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SWOT Analysis

expected to drive growth in Indian real estate sector in 2010. The US, on the other hand, recorded the lowest number of new homes sold in 2009 (at 374,000 unitsa 23% decline over 2008) since the government started keeping a record since 1963. The scenario in the US is expected to improve in 2010 but the figures as latest as November and December 2009 indicate a shrinking of the new homes market. Ikeas decision to stay away from the Indian sub-continent will close one avenue of recording stronger top line growth in the short to medium term. Unfavorable market trends Furniture and homeware specialists such as Ikea are threatened by non-specialists such as grocers who increased their non-food product portfolio to appeal to the customer willing to trade-down. Non-specialists such as grocers benefit from varied product mixes at the expense of traditional specialist retailers. The economic downturn and its adverse impact on discretionary demand accelerated this trend. The Big Fourparticularly Tesco through its Extra stores and Asda through its Supercentreshave driven this trend through the creation of strong non-food offers. Grocers non-food ranges benefit from a high volume of footfall to their core food and grocery categories, allowing them to be extremely price competitive. The expanding non-food offering of grocers is in direct competition to Ikeas product portfolio and will force Ikea to work harder at attracting customers.

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