IKEA pursues wrong store-based growth strategy

Feb. 8, 2013 - PRLog -- In a new report, “How will online retailing transform IKEA – 2013 a crucial year for strategic decision making”, ResearchFarm argue that the rise of e-commerce and increasingly intense online competition in the furniture sector will make it vital for IKEA to radically transform the business model and move on from the singular focus on the big out of town store. Even with today’s restricted transactional online offer, available in just 12 out of 40 countries, IKEA have attracted more website visits (1.1bn) than physical store footfall (776m store visits) in 2012, leaving a lot of scope for IKEA to convert views into online sales.

IKEA’s board has planned to grow like-for-like sales by 5% from the existing store estate and to boost sales by a further 5% through new store openings. "However, were IKEA’s online sales to double from the current level of around 2% of total sales and keep their strong sales momentum, this would all but cover the 5% growth targeted from new store openings, sharply reducing the need for costly new store development”, says Shammi Luhar, Retail Analyst and author of the report.

The company intends to amass 500 stores worldwide by 2020, compared to its current 338. The report shows that overemphasis on store expansion is the wrong route for IKEA to go down. Instead the analysts suggest stretching the online store to countries where it is not yet available, adding more of the product range to the online store and exploiting the potential of mobile applications.

There are three main issues that will need closer attention in order to ensure a smooth transition to a true multichannel business.
•   Firstly, IKEA must strategically integrate online operations into the existing physical store model to drive up footfall and offer complementary growth through services such as Click and Collect.
•   Secondly, IKEA must improve their last mile fulfilment. Currently the retailer does not offer a competitive home delivery service like Amazon and eBay, and still charges customers according the weight of their order. In Germany, IKEA’s most important market, pureplay competitors such as Home24 already offer a completely free delivery service.
•   Finally, in order to slash delivery times, IKEA’s supply chain is in urgent need of revision. To cut costs and keep inventory levels low, closer cooperation between production stages and more real time data mining will be necessary.
That said, although the online store is of massive significance for IKEA’s future growth plans, physical store expansion plans remain critical further afield. Shammi adds: “Opportunities to expand the racecourse store model into emerging markets must not be missed, as there are large levels of untapped demand in the Indian and Chinese markets”. Back in Europe, the current decline of the high street is putting downward pressure on real estate prices in city centres, opening up another opportunity for new store development and format diversification such as IKEA’s city centre stores.

The internet will affect IKEA’s business model in other ways too. The soaring ownership of tablets means that the retailer’s app offer needs an overhaul and the catalogue needs to become entirely digital. A transactional service, encouraging customers to purchase goods using an IKEA app should also include a mobile payment option, so customer would be able to use IKEA’s in-store Wi-Fi to cut checkout-waiting times.

“IKEA’s conservative attitude towards the web has resulted in lots of missed sales, and online expansion is the future for the retailer, hence strategic decisions taken in 2013 will be vital’, concludes Shammi.