IKEA Swot Analysis

COMPANY PROFILE

Ikea Group

REFERENCE CODE: 6878C795-4BCB-4C85-A319-6F33C508FD80PUBLICATION DATE: 30 Apr 2012www.marketline.comCOPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED.

TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

Ikea Group Page 2 MarketLine

Ikea GroupTABLE OF CONTENTS

COMPANY OVERVIEW

Ikea Group (Ikea or the group) is an international home products retailer that sells furniture,accessories, and bathroom and kitchen items. As of August 31, 2011, the group had a total of 287stores in 26 countries, most of them located in Europe, North America, Asia and Australia. IngkaHolding BV, which is wholly owned by Stichting Ingka Foundation, is the parent company for theIkea group of companies. The foundation is owned by the Kamprad family. Ikea is headquarteredin Delft, the Netherlands and employs 131,000 people.

The group recorded revenues of E25,173 million (approximately $34,960.3 million) during the financialyear ended August 2011 (FY2011), an increase of 6.9% over FY2010. The operating profit of thegroup was E3,592 million (approximately $4,988.6 million) in FY2011, an increase of 12.4% overFY2010. The net profit was E2,966 million (approximately $4,119.2 million) in FY2011, an increaseof 10.3% over FY2010.

KEY FACTS

Ikea GroupHead OfficeOlof Palmestraat 1NL 2616 LN DelftNLD

46 709 936376Phone

31 15 215 3838Fax

http://www.ikea.comWeb Address

25,173.0Revenue / turnover(EUR Mn)

AugustFinancial Year End

131,000Employees


Ikea GroupCompany Overview

SWOT ANALYSIS

Ikea is an international home products retailer that sells furniture, accessories, and bathroom andkitchen items. The groups emphasis on providing home furnishing products at low prices has beenthe main reason for the wide spread customer acceptance of its products.This, in turn, has facilitatedIkeas growth in various geographies. However, barriers to entry in lucrative markets such as Indiareduce the opportunities for the group to expand its geographic presence and facilitate top linegrowth.

WeaknessesStrengths

Customer perception of Ikea indicatesshortcomings in convenience, quality andservice

Significant market presenceImproved range, price, ambience, layout,and facilities at Ikea win customer loyalty

Increasing instances of product recallsFocus on sustainability

ThreatsOpportunities

Barriers to enter lucrative growth marketExpansion into the growing Indonesianmarket Unfavorable market trendsIncreasing online sales Anti-dumping duties in the US on furniture

made in ChinaIncreasing labor costs in Europe

Strengths

Significant market presence

Ikea is one of the largest furniture retailers in the world. The group sells approximately 9,500 homefurnishing products in about 287 stores in 26 countries / territories. Apart from this, Ikea has 29trading service offices in 25 countries, and 26 distribution centers and 11 customer distributioncenters in 16 countries. The groups emphasis on providing home furnishing products at low priceshas been the main reason for the wide spread customer acceptance of its products which, in turn,has facilitated its growth in various geographies.

The group designs, manufactures, transports, sells and assembles its merchandise to minimize costat each level. To help keep prices low, the group ensures that the production equipment and rawmaterials are used efficiently. Customer involvement also contributes to low prices. Ikea relies oncustomers to choose, collect, transport and assemble Ikea products themselves and offers homedelivery services at an additional cost. Over the past 10 years, Ikea has lowered its prices by 2% to3% per year, on an average. The groups low cost proposition is central to its product offering and


Ikea GroupSWOT Analysis

also a key driver for customers. In FY2011, Ikea stores had a total of 655 million visitors and thegroups websites attracted 870 million visitors.

Thus, powered by low prices Ikea has come to hold a strong market presence which gives the groupconsiderable bargaining power and an advantage in terms of higher customer recall.

Improved range, price, ambience, layout, and facilities at Ikea win customer loyalty

The improved range, price, ambience, layout, and facilities at Ikea have been driving loyalty for Ikeain the UK market. According to a study (report released in March 2011) conducted by Verdict, theretail arm of Datamonitor, Ikeas loyalty score for the range criterion was 82%, much higher than thesector average of 54.2% in 2011. In comparison, the groups close competitors such as Argos andAsda scored 48.4% and 52.2%, respectively, on product range.The groups loyalty score with respectto the price parameter was 68.6% in comparison with the industry average of 54.2% in 2011. Similarly,for ambience, layout and facilities too, the group had loyalty scores much above the sectors averages.Nearly 91.6% of Ikeas main users prefer to shop for homewares only at the groups stores.

In the UK retail market, it is becoming very difficult for specialists to find relevance as grocers andmass merchandisers expand to capture a share of the homewares. Thus, shopping experiencefacilitated through improved range, price, ambience, layout and facilities could be one suchdifferentiating factor for specialists which can give them a competitive edge. The fact that theconsumers have scored Ikea high on loyalty based on the above mentioned criteria indicates theimportance of these factors while consumers make shopping decisions. Improved price perceptionand shopping experience will increase footfall which gives a scope for increasing the customer base.Ikeas clearly superior shopping experience and price range offered will therefore enable it todifferentiate from other competitors and also drive loyalty in a market where the customer is morefickle than ever.

Focus on sustainability

In response to pressures on global retailers to co-exist with the environment, Ikea has been workingtowards sustainability since 1990 when the group developed its first environmental policy. Ikeassustainability initiatives focus on five areas: offering a sustainable range of products, reducing carbonfootprint, turning waste into resources, reducing water footprint, and social responsibility. In orderto focus on manufacturing sustainable range of products, in FY2010, Ikea introduced the SustainabilityProduct Score Card (SPS). SPS helps the group to develop more sustainable home furnishingproducts. The score card reflects sustainable aspects throughout the lifecycle of a product such astype and amount of raw material used, manufacturing, distribution, product quality, product use andrecycling potential at the end of its lifetime.

The group has been reducing its carbon footprint by using renewable energy. In FY2011, 51% ofthe group's energy requirements were met using renewable sources.The group expects to increasethis to 7080% by 2015. Solar photovoltaic (PV) systems have been installed in 40 IKEA units witha further 84 approved for installation. Ikea owns 60 wind turbines and six are under construction.Upon completion of these six turbines, together these will generate equivalent of 15% of the electricity



consumed by the group. Furthermore, during FY2011, energy efficiency across all Ikea storesimproved by 4% as compared to FY2010, helping the group save E6.2 million (approximately $8.6million). The group has also taken several initiatives with respect to waste management. Many ofthe groups stores offer customers the facility to return and sort waste for recycling. The group hasalso started investigating the opportunities to facilitate full recyclability of different materials used inits products. In order to reduce its water footprint, the group ensures that most of its suppliers,primarily based in South Asia, make use of biological water treatment plants. For this, the groupprovides its suppliers with specialists and external consultants, who, in turn, assist the suppliers toupgrade their water treatment plants and also provide technical knowhow. The groups socialresponsibility initiatives cover three key areas: co-workers, suppliers, and communities. Ikea hastaken up several measures to ensure the well being of these groups.

Ikeas strong focus on sustainability enables it to create goodwill and strengthen its brand value.

Weaknesses

Customer perception of Ikea indicates shortcomings in convenience, quality and service

Ikea has not been able to perform well on criteria such as convenience, quality and service offeredat its stores in the UK. As a specialist, these are the areas in which the group is expected to excel.According to the UK Customer Insights report on IKEA by Verdict, Datamonitors retail arm, releasedin March 2011, Ikeas loyalty score for convenience offered by its stores was 12.8%, much lowercompared with the sector average of 28% in 2011. The groups performance with respect to qualityand service offered also remained low. Ikeas loyalty score on the quality and service criteria totaled14.1% and 3.9% in comparison with the sector averages of 17.7% and 10.6%, respectively, in 2011.Poor performance with respect to convenience, quality and service offered can act as disadvantagefor the group as the competition in the UK market is intensifying, and results in reduced customerspending at its stores.

Increasing instances of product recalls

Ikea has been registering increasing instances of product recalls lately. In January 2011, the grouprecalled Rund Hand Made Glass Mug after receiving a report of laceration injury. In the followingmonth, Ikea recalled Sniglar crib 70x132 for repair. In March 2011, Ikea recalled Forsta coffee/teamaker as pressure from the metal holder on the glass pot can cause it to break unexpectedly whenhot water is added or the press is operated, posing a burn and laceration hazard. In October 2011,the group recalled its BUSA childrens folding tent as the steel wire frame of the tent could break inuse. In November 2011, the group recalled its PAX AURLAND glass mirror door as the mirror glasscould detach unexpectedly from the wardrobe door. In January 2012, the group, in cooperation withthe US Consumer Product Safety Commission, voluntarily recalled for repair the ANTILOP highchair as the high chair restraint buckle posed a fall hazard.

Such product recalls not only affect the brand image of the group but also result in loss of sales.



Opportunities

Expansion into the growing Indonesian market

The Indonesian economy, Southeast Asias biggest economy, with its strong growth has beenattracting a lot of businesses lately. The countrys gross domestic product grew by 6.5% in 2011,the highest growth rate in recent times, according to industry estimates. The rising middle class hasbeen considerably contributing to the consumer spending, accounts for 60% of gross domesticproduct. The low interest rates are encouraging spending by consumers. The country also is theworlds fourth most populous nation. Therefore, such encouraging trends are attracting retailers toexpand into the country. Ikea plans to enter Indonesia in 2014 after signing a franchise agreementwith PT Hero Supermarket.

Therefore, the strong economic growth coupled with positive demographic trends are expected tohelp Ikea establish its business in the country and generate incremental sales.

Increasing online sales

The online retailing has been increasing across Europe and the US. According to industry estimates,the total online retail sales accounted for 17% of the total UK retail market.The UK consumers spent68 billion ($105.5 billion) in online shopping in 2011, an increase of 16% over the previous year.In the US too, online retail sites have been emerging as an important channel for customers to shopfor their requirements. Although online retail sales in the US recorded a low growth rate of 1.4% in2009, they still contributed 4% of the total retail sales. According to the US Department of Commerce,the US online retail sales reached $193.4 billion in 2011, an increase of 16.2% compared with theprevious year. Further, in 2011, e-commerce accounted for 4.6% of the total retail sales in the US.

To benefit from this trend, Ikea has also started transacting on its website, www.Ikea.com. In 2011,Ikea websites had 870 million visitors. A focus on online retail will open up another channel to reachcustomers who prefer to research for options and shop online. A stronger push to online retail wouldalso solve part of the problems faced by customers who are forced to go out-of-town for shoppingat Ikea. Ikea can thus reach out to the increasing number of customers who are looking forconvenience in their shopping experience and also enhance its presence over the internet to drivetop line growth.

Threats

Barriers to enter lucrative growth market

The foreign investment policies in India squashed Ikea's plan to set up retail operations in the country.Although Ikea intends to strengthen its sourcing relationship with India, the group has decided todiscontinue 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 was denied a shareof the lucrative Indian consumer market.The retail industry in India is large owing to a large populationand is set to grow as several factors contribute. Strong underlying economic growth, populationexpansion, increasing wealth of individuals and the rapid construction of organized retail infrastructureare key factors behind the forecast growth. Thus, Ikeas lack of presence in the Indian retail marketwill close one avenue of recording stronger top line growth in the short to medium term.

Unfavorable market trends

Ikea is a retailer of furniture and accessories. Furniture and homeware specialists such as Ikea arethreatened by non-specialists such as grocers who increased their non-food product portfolio toappeal to the customer willing to trade-down. Non-specialists such as grocers benefit from variedproduct mixes at the expense of traditional specialist retailers. The economic downturn and itsadverse impact on discretionary demand accelerated this trend. Tesco through its Extra stores andAsda through its Super centers have 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 grocerycategories, allowing them to be extremely price competitive. The expanding non-food offering ofgrocers is in direct competition to Ikea's product portfolio and will force Ikea to work harder at attractingcustomers.

Anti-dumping duties in the US on furniture made in China

The regulations regarding anti-dumping duties in the US have become stricter. In 2005, the USDepartment of Commerce (DOC) implemented high rate of duties on bedroom shipments from China.The move was in response to a government antidumping investigation that found that the US furnituremanufacturing industry was being injured by low priced Chinese made bedrooms. Duties rangingfrom zero to 216% were imposed on manufacturers, but were actually paid by importers, therebyincreasing the price of their products. A major portion of the groups products are sourced fromChina. Thus, various anti-dumping duties in the US market against the furniture made in China canadversely affect the group's cost and profitability.

Increasing labor costs in Europe

The cost of labor in Europe is rising fast as wage-earners try to keep up with inflation. According toEuroStat, hourly labor costs in the euro area (EA17) increased by 2.8% in the year up to the fourthquarter of 2011, compared with 2.6% for the previous quarter. In the EU27, the annual increase was2.7% up to the fourth quarter of 2011, compared with 2.6% for the previous quarter. For full year2011, hourly labor costs increased by 2.8% in the euro area and by 2.7% in the EU27, comparedwith 1.5% and 1.7%, respectively, in 2010. Increase in the labor cost in the group's key markets inEurope could impact its financials. The group's business is labor intensive in nature. Any increasein minimum wage rate increases its operating cost and could pressurize the operating profit of thegroup.



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IKEA Swot Analysis

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