IKEA- Expansion to Brazil

IKEA A better everyday life Arup Sarkar (063010 Nitin Shivnani (063033) Ritu Aggarwal (063041) Mansee Saxena (063024) Shivna Jain (063050) Sunny Kadian (063055)

About IKEA

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Founder Ingvar Kampard Swedish furniture retailing giant Selling Scandinavian lifestyle at asian prices 237 stores in 35 countries Estimated value- 28 billion Euros Parent of IKEA companies is Ingka Holdings which is a dutch company Franchising model

Highlights Product Differentiation: High functionality, Excellent quality Durability and good designing

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Cost Leadership Centralised control High product standardisation with some local variations Economies of scale, Subcontracted manufacturing, High sales volumes at low margins, Integration of consumers in the value chain, Compact packaging so as to reduce cost of inventory

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Target customers: Young low to middle income family one who can become a pro-sumer.

IKEA sells Scandinavian lifestyle to its customers Two way value system which integrates with suppliers on one end and customers on the other.

PESTLE Analysis Political Factors: · The political system of the country is Federal Republic based on a parliamentary democracy with three independent branches: executive, legislative, and judicial. · The president is at the same time the Head of the State and of the government.

· The political system has been stable since 1985 and the elections are democratic. · The legal reforms progress very slowly and the rule of law is weak as demonstrated by the high prevalence of violent crimes. · The degree of corruption is very high. · Brazil is a part of MERCOSUR, the goal of which is to create a free trade area between MERCOSUR’s members - Argentina, Brazil, Paraguay and Uruguay.

PESTLE Analysis Economic Factors: · The Brazilian economy is one of the largest in the world and Brazil is one the big emerging markets. · The Brazilian economy suffers from instability and was deeply affected by the crises in the Asian and Russian markets resulting in a devaluation of the currency in 1999. This had a serious effect on furniture imports. · Interest rates in Brazil are high (approx 18.4% p.a.) and discourage demand for bank loans. · The inflation rate in Brazil is also quite high. · Measures are being taken to further liberalize trade and investment policies. · The appreciating Brazilian real has decreased the competitiveness of its exports.

PESTLE Analysis Social Factors: · Major end users of furniture will only purchase from well-known and reliable suppliers. · A physical presence in the market increases the end user’s trust in the supplier’s commitment and facilitates the sale. · After-sales service, technical assistance and availability of replacements parts are important factors in the purchasing decisions.

· Interior decorators and architects are considered as decision makers as they represent the only ones who recommend brands and styles to end users. Technological Factors: · The Brazilian furniture market’s increasing exports require production to be tailored to satisfy market niches and produce differentiated products. This demands an increase in investment in design and development. · The current investments in such technologies are significantly smaller compared to countries such as the United States, Italy and Germany. · Brazil is also importing state-of-the-art equipment such as wood drying machinery and finishing machinery to address quality issues mandated by foreign markets.

PESTLE Analysis Legal: · Brazil has a tariff-based import system and import tariffs are levied ad valorem on the CIF value of the imports. · Import tax for furniture varies from 5 - 15%. · An Industrial Products Tax (IPI) is also levied on most domestic and imported manufactured products. The rate of the tax varies by product and is based on the product’s CIF value plus duties.

· License regulations for imports are very strict although attempts are being made to simplify the process for obtaining import licenses. · The legal minimum wage of 200 reals (US $57) is lower in Brazil than in Europe, and the relatively cheaper work-force will help IKEA in reducing costs. Environmental: · Brazil has 4.6 million hectares of planted forests and the wood from these forests is used mainly in the production of furniture, pulp and paper. · The majority of forests are located in the south of country which also contains the most important markets of Brazil. · There have been a few conflicts in Brazil regarding forest destruction and a significant number of people are fighting against companies that encourage forest destruction.

PORTER'S FIVE FORCES Threats of new substitutes (LOW)

Threats from new entrants (LOW)

Rivalry from competitors (HIGH)

Bargaining power of suppliers (LOW)

Bargaining power of buyers (HIGH)

Threats from new entrants – LOW • New entrants have to establish a vast supply chain and create a unique brand name. • The furniture market is already highly competitive. • Huge Capital is needed. Threats of new Substitutes – LOW • There is no specific product that can be a substitute for the furniture but IKEA at least, have to keep up with the latest trends, to avoid becoming out of style. • Only the changes in the raw material used like plastic, wood, metal , etc. according to the customers preferences. • Problems faced due to distribution channel.

Bargaining Power Of Suppliers – HIGH • Many suppliers who can set the same standards needed by the company • Low pricing policy of the company , changes in prices of raw material effects more in the profit margins than the labor cost • Do not own its own manufacturing facilities • Growing bargaining power can become the threat on the profit margins Bargaining Power Of Buyers – HIGH

• Customers have to assemble the parts of the furniture. • Changing demand patterns Rivalry from competitors – HIGH

• Competitors offers different styles and functionality • Conrin targets a new low cost in terms of furniture line; • Crate & Barrel offers a furniture in a box which is subject in higher prices • Ethan Allen aimed at a more up scale market • Wal-Mart is equipped in a big box furniture that is categorized under the general store must have-items, but don’t have much of a style

5 C’s Analysis

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Company Collaborators Customers Competitors Culture/ Context

SWOT Analysis Strengths

Weaknesses

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•Assembling furniture yourself may be unappealing to certain groups of consumers. •Relatively few locations. •Store layout – a hassle for those who want a particular item only. •Swedish designs may not appeal to all markets. •Advertising doesn’t appeal enough to target market (young people). •Furniture is not built to last a lifetime.

Powerful brand image. Wide range of products and styles. Swedish designs. Cheap and affordable. Furniture is easy to assemble and ship. One stop shopping. Friendly atmosphere/store layout. Facilities: restaurant/day-carecenter. Strong global sourcing capabilities

SWOT Analysis Opportunities

Threats

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• Indirect threat from Wal-Mart, Home Depot, etc. •global downturn •Market forces – More competitors entering the low price household and furnishings markets. .

Untapped markets. Educating customers on IKEA through advertisements. Increase online sales and internet purchases. Using its popularity among young people to expand to the college market. Existing stores are few and large. New stores can be many and few

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Hierarchical Entry Mode Alternatives

Entry Strategies

Should IKEA penetrate the South American market by establishing a shop in Brazil No, IKEA should not set a shop in Brazil, it should follow the following strategies: ➢ Licensing:

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As Ikea is a big international company, it can choose to put in place a licence since it can make heavy resource commitments in foreign markets. Indeed, licensing is nowadays a quick and easy way for organisations to enter a new market. Firstly, as the company’s main objective is the reduction of its costs in order to sell its products at low prices, this strategy requires only a little investment and reduces the transportation costs (which are huge because of the distance between Brazil and Sweden). Licensing will allow the company to not pay all the taxes for the importation. Indeed, in Brazil, there are taxes on the importation which is the VAT (most of products are subjected to a tax ranging between 18% and 25%).

Contd… ➢ Contract manufacturing: This strategy could be a good solution for Ikea to implant itself in Brazil. Indeed, as the company’s first objective is the reduction of its costs, this mode of entry allows the elimination of the transportation costs. As the labour costs are low in Brazil, there is no need to invest in a plant overseas. This allows the company to not pay all the taxes linked with the importation of products. As Ikea has its own policy of distribution and marketing, contract manufacturing enables the firm to keep that control. This strategy offers flexibility i.e. if IKEA is not satisfied with the quality of the products, it can choose another manufacturer.

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Consequently, contract manufacturing and licensing are such two solutions for IKEA to enter the Brazilian market all the more since these strategies allow a product adaptation to the local trends which is critical to IKEA’s success as Brazil is culturally very distant from Sweden.

IN THE LIGHT OF THE POLITICAL AND ECONOMIC SITUATION IN SOUTH AMERICA, OUTLINE THE SOURCING CONCEPT THAT SHOULD BE IMPLEMENTED IN THE SOUTH AMERICAN MARKET As there are no major distribution chains in Brazil, this represents a niche for IKEA which can be fulfilled by it. Leveraging its vast experience in other markets in the world we suggest that IKEA follow the following strategy:

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Acquire a local chain and accelerate its expansion Give complete freedom to the local chain for its activities while constantly monitoring the quality of products and the functioning so as to maintain a level of standard It should take advantage of the furniture market power in Brazil by manufacturing its product in Brazil. In fact, Brazil has developed an important furniture sector across the years and it will be a real opportunity to get one’s supplies from Brazilian manufacturers. By this way, IKEA will answer to the demand of local product purchasers IKEA should pay heed to the experiences of previous MNCs, because it can prevent IKEA from committing big mistakes

Slides presented by : • Shivna Jain - Introduction, Highlights. • Sunny Kadian - PESTEL Analysis. • Ritu Agarwal - Porter’s 5 Model , 5 C’s Analysis. • Mansee Saxena - SWOT Analysis. • Nitin Shivnani - Hierarchical Entry Mode Alternatives , Entry Strategies. • Arup Sarkar - Related questions.

Thank You!