“IKEA and emerging market strategy: Can IKEA adapt its unique service

experience to India?”

By Tom McNamara and Irena Descubes

The ESC Rennes School of Business

Working Paper – October 13, 2014

IKEA, the world’s largest furniture retailer, is known for its reasonably priced functional
furniture that incorporates minimalist Swedish design. The company is also known for the
grand safari that it forces visitors to go on every time they enter one of its cavernous stores.
But many people believe that this is what makes shopping at IKEA such a unique service
experience. The fact that customers must navigate their way through a tortuous maze
(exploring every nook and cranny of the store in the process) in order to find the items they
want, then carry them to the checkout counter, haul them to their cars, unload and drag the
items into their homes, and then assemble them with cartoon like directions, only seems to
make the service experience all the more endearing. How else would you explain the fact that
almost 775 million people visited IKEA in the last year alone, and that its catalogue, with 210
million copies being distributed annually, is twice as popular as the bible?

Ikea has over 360 stores spread out over roughly 50 countries. 2013 was a record year for
profits, with global sales coming in at almost 28 billion euros. While Europe makes up about
70% of IKEA’s sales (1 in 10 European homes contain something that was bought at IKEA),
the company has seen strong growth in North American, China and Russia. But the company
is looking to expand further afield into new geographic locations in the search for even more
growth. The company wants to approximately double sales by 2020. One logical area to find
new opportunities is in emerging markets.

Recently, IKEA announced that it has plans to expand into India. And while the potential for
over 1 billion new customers is attractive, there is also a whole host of serious challenges that
the company must face. One is IKEA’s commitment to offering almost the exact same
selection of items, at comparable prices, no matter where a store is located. Another is
IKEA’s insistence that customers have the same service experience in all countries.

But according to IKEA’s head of design, Mr. Marcus Engman, the company is facing
somewhat of an existential crisis. Thanks to increased travel, increased immigration and
emigration, and increased communication due to the internet, a question can be asked. What
exactly is “Scandinavian” and just what type of image, and service experience, is IKEA
hoping to create and maintain?

Service at IKEA

IKEA, while being a world famous retailer of household furnishings, sees itself as a service
company, providing customers a unique and memorable shopping experience. The company’s
goal is to “create a better everyday life for the many people,” which it tries to do by providing
highly functional quality furniture at a low price. A major factor in how IKEA manages the
way customers encounter and experience its service is in the configuration of its stores.
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Visitors must embark on a winding journey which unfolds as you follow arrows marked on
the floor and that takes them through all parts of the store. It is not a voyage for the faint of
heart! But there is a scientific method to IKEA’s madness. As people travel through the store
they are forced to interact with the items that are offered for sale and have an “experience” in
what marketing people call IKEA’s “servicescape.” It is interesting to note that when IKEA
first started its “natural tour” concept in which customers were obligated to experiencing the
store, the average facility was 19,000 square meters in size. Today, the average IKEA store is
twice as big, averaging 40,000 square meters of surface space. The benefit to the way IKEA
configures its servicescape is that shoppers are encouraged to physically interact with the
items for sale, easily imagining what they would look like in their own home or apartment.
Aiding all of this are what is known as “experience rooms” strategically located throughout
the store. These simulated rooms and small apartments allow customers to actually see what
an item might look like in their home before they purchase it. While extremely practical, these
mock ups also allow for a greater emotional experience as well as customers physically
interact with the items. The concept of experience rooms was extended to the kitchen with
IKEA’s innovative “kitchen planner” which allows you to use a computer to input actual
measurements from your home in order to see a virtual version of what a kitchen will look
like before you buy it. Another value adding service provided by IKEA is a smartphone app
that allows you to see, again, in virtual reality, what an item would look like in your home
before you buy it. These additional features provide customers with what experts call a
“hyper-real” experience, which only adds to the impact of IKEA’s overall service experience.

From the minute you enter an IKEA store, the company does everything possible to try and
engage you in a relationship. Part of this relationship, the company believes, is allowing you
to explore its stores at your own pace. Another part is offering reasonably priced meals and
play areas for children. The objective is not so much to make a one off sale, but rather to
create a pleasant service environment, clearly showing IKEA’s value proposition.

IKEA has a loyal and broad customer fan base, with many appearing to be almost in love with
the company. For some strange reason, forcing shoppers to engage in forced labour at its
stores appears to be the basis for this “love affair.” When you shop at IKEA you are
intimately involved in almost every facet of the purchase, from finding the item, getting it
home and then finally assembling it yourself (usually with horrible directions). This
investment in time and labour has led to something known as the “IKEA effect.” That is to
say, people appear to have an increased (irrational?) personal attachment to the things that
they buy at IKEA thanks to this increased personal involvement. The fact that shoppers are
co-creating the value with IKEA through their involvement and work only seems to enhance
the service experience, and thus make it easier to develop these relationships. It is in the
successful management of these relationship building interactions and experiences that IKEA
appears to excel.

The fact that IKEA is capable of outsourcing a large part of its transport and production
operations to willing customers (in effect, a form of free labour) is a key component to the
company’s business model and success, as well as how the company is able to offer low
prices and still make a profit.

India and Service

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In IKEA’s defense, bringing their service experience to India shouldn’t be too difficult.
Indians are used to horrible service and horrible service experiences. A recent survey by
Verint, a consultancy, showed that 74% of Indian customers reported being satisfied with a
service even when the service was terrible. But service is becoming increasingly important,
with more and more Indians reporting that they are ready to pay more for higher levels of
service. But in an effort to better understand Indian consumers and Indian tastes, IKEA has
begun sending representatives to meet Indian customers in order to better understand what
their hopes and expectations are regarding a pleasant service experience. They are even
visiting people in their homes in order to better understand what “life at home” in India is
like, and to see if it is congruent with IKEA’s understanding of what “home” is.

Recent studies have shown that Indian consumers’ attitudes about a particular store are
positively linked with the location and convenience of that store and the trustworthiness of the
staff, as well as how helpful they are. It has also been shown that Indian consumers have a
preference for larger retailers (as compared to the local “mom and pop” shops that dominate
the retail sector) in terms of cleanliness, promotional offers and the availability of exclusive
store brands, and they are becoming more conditioned to the concept of “one stop shopping”
where many of their consumer needs can be fulfilled in one store. One study found that
younger people were more likely to visit a large name brand outlet, and that those who remained
in the store for at least two hours said that shopping was a fun activity and a way to release stress.
Promisingly, this would play right into the hands of IKEA and their service experience.

The consultancy McKinsey believes that as India grows and develops, and her citizens become
more wealthy and empowered, services will become an important part of daily life. And that
while people will want to consume material goods, they will also want to improve and stimulate
their lives through daily experiences, such as visiting cafés and going to the cinema. Whether or
not Indian consumers will see IKEA’s service experience as an outlet remains to be seen.

IKEA and its India Strategy

India is a culturally diverse country home to over 1.2 billion people. Its dynamic economy is
projected to have real annual growth of almost 6% (at current rates, the country is expected to
be one of the “Top 5” economies in the world). Strong economic development over the past
decade has increased living standards and created a vibrant middle class that is hungry for
consumer goods (there are almost 30 million Indians with a disposable income of over
US$30,000). Trends such as increased urbanization and higher disposable incomes, combined
with the growing sophistication of consumers and their increased demand for foreign brands,
should only make India even more attractive in the near future.

The retail industry is an extremely important part of the Indian economy, responsible for
approximately 10% of GDP and employing almost 8% of the population. As India emerges from
the global recession and further opens and liberalizes its markets, retailing should only become
even more attractive for IKEA. The company has announced that it plans to eventually open
stores in the National Capital Region, Mumbai, Bangalore and Hyderabad, reportedly already
signing agreements with the Indian states of Karnataka and Telangana. The company is one of
the first to take advantage of a 2012 decision by the Indian government to allow 100% foreign
owned companies to do business in the country (previously, foreign companies needed a local
Indian partner). IKEA has the full support of local government officials, something extremely
important in the land once known for the “License Raj,” a term that unkindly refers to the

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tortuous process of paperwork and red tape that foreign companies had to go through in order
to do business in India.

The retail sector in India can presently be broken down into two categories; organized and
unorganized. The unorganized part is dominated by small privately owned stores, known as
Kirana shops, as well as kiosks and street vendors. The organized category is comprised of
licensed retailers (who are registered to pay taxes) and national brands. These would include large
retail chains as well as super markets and hypermarkets. Some believe that the organized portion
of the retailing sector is only responsible for 20% of the sales volume. The retail sector in India is
expected to be worth US$ 675 billion by 2016. Its fractured and disorganized nature means that it
has huge potential for consolidation or entry by an outside player.

IKEA’s strategic initiative in India is expected to result in an investment of about 1.5 billion
euros, with each store requiring about 80 million euros to open (and taking about three years
from the time a location is identified until the time the doors are ready to be opened). The
company also plans to source a lot of material locally, creating a boon for local suppliers, this
in addition to the material that they already buy (India has been a source of material to IKEA
for over 25 years). Chief Executive Officer (CEO) Mr. Peter Agnefjall is coy about IKEA’s
strategy, saying that the company is still in the process of “defining the entry plan” with
regard to India. He says that he is “focusing on existing stores and markets,” but it is clear that
IKEA sees a huge potential in the Indian market. A company executive was quoted as saying,
“India is an important market for IKEA. In India and we are currently defining the entry plan.
The most important priority is to find the right location for our stores at the right price in
major cities, with easy access to public transport and a good road network.” The first store is
expected to open sometime in 2016 (rumours have it that it will be located in the city of
Hyderabad).

Thanks to the effects of globalization, Indian consumers are increasingly being influenced by
western culture, with signs that they are trying to emulate western lifestyles (this is true even
for Indians who have not travelled abroad). Shopping centres, large departments stores and
hypercentres are becoming ever more common, with studies showing that Indians have a
growing “predisposition towards foreign brands” (PTFB) and are increasingly ready to use
their credit cards and to make “impulse” purchases. More and more, shopping is being viewed
as an enjoyable pastime rather than a chore that must be endured. It also appears that younger
people (primarily between 16 and 35 years old) are more concerned with the acquisition of
material goods than older people. This can only be a good thing for IKEA in a land where an
estimated 50% of the population is below the age of 25. But it remains to be seen if Indians
are open to IKEA’s service experience of wandering around their enormous stores for hours,
performing unpaid labour and putting together items with instructions that have no words

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