A fine balance: Will an omni-channel strategy power IKEA's growth?

Topics IKEA

IKEA says it is in India for the long haul
Swedish giant IKEA’s maiden store in Hyderabad has been a Covid-19 casualty with footfalls halving to two million this year (its financial year ends in August). But the furniture and furnishing conglomerate has seen a surge online — it has had 25 million visitors online this year from Hyderabad, Mumbai and Pune against 10 million the previous year.  

After waiting patiently for more than 12 years to ride out the multiple policy changes in foreign direct investment in single-brand retail and new clauses on sourcing, IKEA said it is in India for the long haul. Having celebrated its second anniversary in August, IKEA has armed itself with a war chest of over 1.5 billion euros, some of which has already been invested, to rejig its strategy significantly.

Peter Betzel, CEO of IKEA India, says the aim is to make India one of the conglomerate’s top five markets over the next eight or 10 years. Contrast this with its cautious plans in 2016 when IKEA spoke of setting up 25 stores by the end of the decade.

More immediately, the furniture retailer, famous for its DIY range, has targeted to cumulatively attract over 100 million visitors (currently over 40 million) either through stores or via an online presence by the end of August 2022.

Simultaneously, it is working on models to enter smaller cities. The cornerstone of this ambition is to move to an omni-channel strategy, where online will play a key role in driving new consumers to IKEA. Already, 85 per cent of its visitors have had their tryst with IKEA through the online platform. At the same time, the company will build more of its big, iconic stores (30,000 square metres with the entire range of products, café, consultants, large parking spaces) in Bengaluru and Gurugram. 

But the momentum will not stop there, as the original plan had indicated. IKEA is now working on smaller format stores within city centres that are more accessible to consumers who lack the time to travel to the mega stores on the outskirts (typically the only areas where large land parcels are available). The size of these stores range between 5,000 and 10,000 square metres and will have limited offerings on display (two locations have been identified in Mumbai). 

A third format that the group is planning to introduce is the “Ingka Centres” or shopping malls anchored by an IKEA store. Globally, these shopping malls range from 20,000 to 250,000 square metres and include other lifestyle-oriented shops, restaurants, entertainment centres and movie theatres. The group is scouting for properties in all its earmarked cities.

Many real estate experts point out that this is the right time to look for retail space with many financially strapped shopping malls, facing falling rentals, looking at a sell off. “There are over 650 large malls with over 100,000 square feet [30,480 square metre] in the country and about half of them are in Delhi, Gurugram, Mumbai and suburbs and in Bengaluru. Many are looking to sell at a discount to tide over their financial burdens,” said a senior executive of a real estate consultancy company.

The fourth channel, which is online, is already showing huge numbers. But that will act as a complement to the brick-and-mortar strategy given that touch and feel is the key to making a sale. The plan is to test the complete omni-channel strategy in Mumbai and then replicate it in other cities.

The switch from a mega-store strategy to a multipronged one is dictated by the structure of the market. Estimates by Technopak put India’s annual furniture and furnishings market at $35 billion, of which furniture accounts for the bulk ($28 billion). Yet the share of modern retail in this segment is just $2 billion (FY20 figures). So there is a large market to be converted from the unorganised sector at a certain price value. And Betzel says that affordability is a key plank for its products.
Also, competitors in the branded segment have not been able to scale up. “Pepperfry and Urban Ladder started the omni-channel trend with display centres in selected locations. The challenging part is building the supply chain for an array of products from big furniture to consumables, small durables to table lamps. Most of the Indian organised retailers lack the depth of product differentiation or product offer,” says Ankur Bisen, senior vice-president, Technopak Advisors. Big stores such as Home Store have a broad range of products but lack differentiation. IKEA, he says, has both range and differentiation and that is where it scores.

To do so, IKEA is building on its local supply chain, not just to conform to the foreign direct investment policy requirements but also to lower costs. It has over 50 vendors in the country, and 20 per cent of the products in its store are “made in India”. The target is to reach 50 per cent in a few years. It is also working with over 1,200 local artisans who are making special collections for IKEA’s global stores. And the group has taken up new categories like furniture, mattresses and sofas to be built with local vendors where IKEA provides expertise and help in exploring sources like wood or sustainable raw materials such as bamboo. 

Sustainable production is crucial to IKEA’s strategy, Betzel says. For instance, in Hyderabad and Mumbai solar panels on rooftops will generate renewable power and the target is by 2025, IKEA India will use 100 per cent renewable energy; some13 per cent of home and parcel deliveries are done through electric vehicles.

IKEA understands well that only the surface of the market for furniture has been scratched in India. That is why it is not going too fast to scale up stores. But the big test will be how it balances its e-commerce channel and its traditional physical stores.

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