A standardised approach to the world?
Ikea in China
Professor Ulf Johansson
Department of Business Administration
Lund University
Sweden
Assistant professor Asa Thelander
Department of Service Management
Campus Helsingborg
Lund University
Sweden
Introduction
Retail internationalisation is not a new topic. Rather, it is one of the most discussed topic in retailing in the last 10-20 years. The themes on these topics have varied. Much of the literature focuses on direction of internationalisation as well as modes of internationalisation (e.g. Alexander, 1990; 1997; Bengtsson et al, 2000; Brown & Burt, 1992; Burt, 1991; Dawson, 1994; McGoldric & Davies, 1995; Pellegrini, 1991; 1994; Salmon & Tordjman, 1989; Sternquist, 1998; Treadgold & Davies, 1988; Williams, 1992; Wrigley & Lowe, 2002; Gielens & Dekimpe, 2001; Vida, 2000; Gripsrud & Benito, 2005). Some parts of this literature is fairly descriptive in its nature, trying to describe the patterns and modes of internationalisation following the more general literature on international business (e.g., Johanson & Widersheim-Paul, 1975; Johanson & Vahlne, 1977; 1990). In recent years, as it seems clear that retail internationalisation does not follow a linear success model but rather is a process of entry and withdrawal, failures in internationalisation also has become a major theme (e.g., Burt et al, 2003; 2004; Jackson & Sparks, 2005; Mellahi et al, 2002; Burt et al, 2005).
A theme that dominates the literature on international marketing is the question of standardisation and adaptation of marketing activities from a company point of view (e.g., baek, 2006; Levitt, 1983; Theodosiou & Leonidou, 2003, Szymanski & Bharadwaj, 1993; Lim, Acito & Rusetski, 2003) or from a consumption point of view (e.g., de Mooij, 2000; 2004; 2005; de Mooij & Hofstede, 2002). This discussion has not really penetrated the field of retailing. With a few exceptions that are mainly general discussions on the subject (e.g., Martensson, 1981, Salomon & Tordjman, 1989, Treadgold, 1991), there is not very much research in this area. This is a strange shortcoming as the literature on retailing seems to follow that of international marketing in general to a large extent.
Despite the fact that research on failures in international retailing argues that the former patterns of internationalisation no longer are true (e.g., Burt, Dawson & Sparks, 2004), it seems clear that Asian markets are a fairly late interest for European retailers - and that some of these markets does not give the easy successes expected early on. These markets are argued to be distant in several senses (Dupuis & Prime, 1996; Evans, Treadgold & Mavondo, 2000; Evans & Mavondo, 2002) compared to the origin of many of the retailers active there. This is something that seems especially true for the Chinese market, the focus of this paper.
China is indeed a huge consumer market of 1,3 billion consumers with large potential demand for foreign retail. However, due to low (but growing) domestic income this is still a low price market, with a price level that is hard to beat for many foreign retailers. The average after-tax household income is RMB 4486 per month in 2004.
However, this is a misleading figure as the average income is Shenzhen (the wealthiest city in China) is RMB 8727 per month and for Shenyang in western China it is RMB 2978. (Garner, 2005) Still, the Chinese middleclass is growing by 10 million Chinese every year (Doctoroff, 2005) and there seems to be a growing demand for foreign products. The urban middle-class is sometimes defined as consumers earning more than RMB 100 000 per year and together they command 10% of the urban disposable income (The McKinsey Quarterly, 2006a). While RMB 100 000 does not sound very much, when buying parity is accounted for it is equivalent to 40 000 $ (The McKinsey Quarterly 2006h). With growing incomes lifestyles and lifestyle consumption is getting more and more important among Chinese consumers, not least the younger middleclass (Schmitt, 1997). Others contend that foreign firms should not be seduced by the mirage of middle-class markets in China: they are not rich in a western sense. China should be treated as a mass market characterised by low incomes (Walters & Samiee, 2002).
At the moment private housing in China is booming (Lewis, 2005), which may be of relevance for several European retailers active on the Chinese market. This is due to that the government's housing policy around 1998 changed and onwards meant that the state no longer had to provide accommodation to its people through an employee's work unit. Chinese buy empty shells (apartments) with a need to buy everything to the new home, creating big demand for home furnishing.
Ikea, the Swedish home furnishing retailer is present in China since 1998. The company have three stores today (2006) but the plan is 10 stores by 2012. While the first two stores are joint ventures (to comply with regulations in place until 2004 and the inclusion of China in WTO) the new store in Guangzhou is wholly owned, which is how Ikea will operate in China in the future. So far the China expansion has been fairly slow by Ikea standards - three stores in 8 years - but the company views it as successful. After a fairly slow start Ikea has seen big growth in China; between 2004-2005 sales grow by 50%. Still, with a turnover of approximately 120 Million $ in China, the business does not make a profit. But, Ikea management insists, that is soon to happen.
Asia (including Australia) only accounts for 3 % of Ikeas turnover, while Europe has a share of 81% (and North America 16 %) (Ikea corporate web page 2006-08-09). Still, Asia and indeed China is a big sourcing market for Ikea. Asia accounts for 30% of Ikeas sourcing with China being the biggest individual sourcing market for Ikea with 18 % of total sourcing (Ikea corporate web page 2006-08-09).
One of the things that make Ikea stand out among global retailers is the - alleged - standardised approach to every market it enters. It looks and operates the same in every market markets. Or does it? Existing analyses of Ikea marketing strategy are either fairly old (Salmon & Tordjman, 1989) or are often done from a very general perspective (Salzer, 1994; Martensson, 1981; 1987), with little emphasis on marketing activities in specific countries and also with lacking understanding of what standardisation and adaptation might mean in a retail perspective. More recent studies (Edvardsson & Enquist, 2002; Edvardsson et al 2006) have a distinct service management perspective rather than overall marketing strategy perspective.
Also, China is something different. It is a culturally different market and Ikea has failed in Asia before. During the 70ies and part of the 80ies, Ikea tried to enter Japan, but the Japanese did not woe to the flat packages and the DIY at that point in time. Also, as mentioned before, price is a big challenge for retailers entering the Chinese market is to beat the China price, i.e., being able to have a price in the China market. For Ikea, with its emphasis on prices, low prices on the China is a big challenge.
There is also, among academics, increasing argument that one key success factor in international retailing has been adaptation of marketing strategies, rather than standardisation (e.g., Cui & Liu, 2004; Dawson & Mukoyama, 2006; Rundh, 2003; Samiee, The McKinsey Quarterly, 2004b; 2006f; 2006g; Yip & Luk, 2004). This seems to be especially true for internationalisation in Asia and in China indeed. So where does that leave Ikea and its business model? Is it something that works in Europe and the US but Ikea, like other retailers, have to adjust their strategies to the very demanding and different Asia markets?
The aim of this paper is to analyse the Ikea marketing strategy for China, in the context of standardisation and adaptation of marketing activities. The paper builds on both primary and secondary data and starts by reviewing some of the literature on the retail marketing mix in general and in the light of special conditions on the Chinese market. The cultural factor is also discussed before describing and analysing Ikea's approach to the Chinese market. The paper ends with some conclusions, where Ikeas approach to China is compared to that of Ikea in the rest of the world.
