Extended Essay in Business & Management

To what extent was IKEA’s change in its marketing mix effective in increasing sales in the Chinese
furniture market?

Candidate Number: 006879-0003

Word Count: 3990

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TABLE OF CONTENTS

Introduction…………………………………………………………………………………………3

Methodology…………………………………………………………………………………………3

Background…………………………………………………………………………………………5

IKEA’s Standard Marketing Mix in Europe………………………………………………………….5

Competition & Market Perception Map……………………………………………………………6

Problems of IKEA’s Marketing Mix in China………………………………………………………8

PEST Analysis of IKEA in China……………………………………………………………………9

Changes in IKEA’s Marketing Mix…………………………………………………………………11

Efficacy of New Marketing Mix……………………………………………………………………13

Conclusion…………………………………………………………………………………………14

Bibliography………………………………………………………………………………………15

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INTRODUCTION

Since the company’s founding by Ingvar Kamprad in 1947, IKEA has become the world’s largest
furniture retailer and one of the biggest multinational companies today. Standing by their vision “to
create a better everyday life for the many people” through offering low-priced high quality furniture
products, IKEA has expanded to over 340 stores in 28 countries.

During its entry into the Chinese furniture market in 1998, Swedish furniture giant IKEA struggled
to achieve positive financial results. An inadequate understanding of the local Chinese furniture
market and an ineffective marketing mix that proved to be effective in Europe but not in China
prevented the company in gaining a strong foothold in the Chinese furniture market. (Prange, 2016)

For much of its marketing operations, IKEA is well-known for its standardized marketing strategies
which the company employs in the markets it operates in all around the world. IKEA stands out
among other global retailers by applying a standardized approach to every market it enters. (Burt,
2011). IKEA is able to effectively apply the same set of marketing strategies in different European
markets as there are relatively little differences in the culture, lifestyle, and preference in these
markets. Whereas compared to an Asian market such as that of China, the differences in culture and
preferences are relatively more distant.

This initial failure prompted the company to reposition itself in the market and gain a competitive
advantage, but the company could only achieve this by rethinking its standardized marketing
strategies. As a result, IKEA modified its marketing approach in which pre-existing standardized
marketing strategies were localized to the local Chinese market. This inevitably raises the question
concerning the extent to which IKEA was successful in increasing sales in its change of
standardized marketing strategies. Therefore, the research question of this extended essay will be:
“To what extent was IKEA’s change in its marketing mix successful in increasing sales in the
Chinese furniture market?”

METHODOLOGY

To specifically respond to the research question, which is to answer the extent to which the
marketing strategies of IKEA changed from the standard used in Europe and to those used in China,
the analysis was broken down into three main parts:

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 1. Discussion on the standardized marketing strategies of IKEA in European markets and in the
Chinese market.

2. Assessing the condition of the Chinese furniture market and the market position of IKEA

3. Evaluating the marketing mix and strategies used to increase the sales performance of the
company and re-position itself in the Chinese furniture market.

After discussing these parts, the effectiveness of IKEA’s marketing strategies in increasing the sales
in China will be evaluated using data of IKEA’s sales following the company’s change in marketing
strategies.

Source Information to Obtain

Case studies For the specific historical details regarding IKEA's
marketing and re-positioning strategies in entering the
Chinese market
IKEA company website For IKEA's company statistics
Business and Management (IB) For theories, concepts, and models that I can then
textbooks apply to the analysis of marketing strategies
Online databases For relevant statistics and information about IKEA

All of my resources will be from secondary sources as there are numerous factors in IKEA’s
marketing strategies that may have contributed in its successful entry into the Chinese furniture
market. These sources gave much information regarding IKEA's marketing strategies and mix in
operating within the Chinese market, and to demonstrate how and to what extent that the company
adjusted them from previous ones, the marketing strategies and mix used in the Chinese market
were compared and contrasted to those used in European markets to which the company is more
accustomed and familiar with compared with other foreign markets such as China.

MODELS AND THEORIES USED

Most of the theories used in this extended essay comes from the Marketing unit. I will specifically
look into the 4 P's of marketing, namely the aspects of place, price, promotion, and product in order
to make sense of the marketing strategies that were utilized by IKEA used in China. I will also be
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using models in marketing such as the market map to pinpoint and analyze IKEA’s initial and
current brand perception in the Chinese furniture market that influenced its sales performance. The
PEST analysis will be utilized to identify the external factors that influenced the specific changes in
the company’s marketing strategies to improve sales performance.

Background

This significant difference in market and cultural conditions was a major concern to the company
when deciding whether the company should expand to China or not. Former IKEA China president
Ian Duffy stated that IKEA’s concept of delivering low prices and high quality products to the many
seemed to be a successful “universal formula” in gaining a foothold in the markets it enters around
the globe, but the company’s underwhelming sales performance in China disproved this belief.

Ultimately, IKEA initiated its very first retail operations in Shanghai, China in 1998.
Unsurprisingly, unprecedented conflicts with cultural differences in its expansion prompted the
company to deviate away from such standardization and, rather, adjust its marketing strategies and
marketing mix in relation to the market conditions of China that ultimately lead to its successful
entry into the Chinese furniture market and the successive sales growth experienced by the
company in the following years. The specific changes in marketing strategies that lead to this
success and the specific market conditions will be discussed later in the essay.

IKEA’s Standardized Marketing Mix & Strategies in Europe

The marketing mix is a set of factors that can be manipulated by a business to influence consumers
to buy the business’ products or services. It can be broken down into the 4P’s of marketing namely,
the product, place, price, and promotion. To understand the extent to which IKEA changed its
marketing mix from European markets to that of China, a background of the company’s
standardized marketing mix and strategies in European markets would be required. While operating
in European markets, IKEA adopted the following standard in its marketing strategies and mix:

With regards to the company’s products, IKEA’s wide range of products is the company’s main
unique selling proposition. In all countries, a single IKEA store provides a range from 8,000 to
10,000 products depending on the size of the store (Miller, 2004). The company takes pride in their
product range that is “wide in function” and “wide in style”, and is confident that customers will
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find everything they need to furnish their homes and that it has furniture styles for everyone. Its
wide range of products has 23 categories ranging from Outdoor furniture, Baby and Children’s
Products, TV and Media Furniture, just to name a few (ikea.com).

In terms of place, IKEA strategically positions its brick-and-mortar stores in sub-urban and less
urbanized places outside city centers where the cost of rent and land purchases are significantly
lower compared to that of the land in highly urbanized cities. Despite being located outside city
centers, IKEA stores in Europe are still highly accessible to customers since many customers
possess their own personal vehicles which enables them to travel farther distances and generally
increase their range of mobility (Chu, 2013).

To achieve its mission statement “to create a better everyday life for the many people”, IKEA gives
great priority in ensuring the affordability and low prices of their products. For example, IKEA
surprisingly offers its third lowest price range for its products in its stores in Germany despite the
country having one of the strongest economies in Europe (Phillips, 2012).

With regards to the company’s promotions, IKEA is mostly known for its distinguishable IKEA
catalogue print-outs that promote the company’s wide range of products. An estimated 70% of their
marketing budget is allocated for the production of their catalogue print-outs alone with 38 different
editions in 17 languages for 28 countries (Kornienko, 2017). Over 200 million copies of its
catalogue are printed every year, being distributed more than both the bible and the Quran
(Walgrove, 2014). Another characteristic feature of IKEA’s promotion strategy is their use of
experiential marketing. IKEA makes use of experiential marketing through their characteristic
showrooms that display their products in the context of daily life, allowing customers to interact
with the products in the showrooms (Pratap, 2017).

Competition & Perception Map

In the Chinese furniture market, IKEA had to compete with a host of competitors which included
both local and International furniture businesses (Prange, 2016), therefore the competitors present in
the Chinese furniture market are worth analyzing and assessing.

According to a study conducted B&Q and OBI appeared to be the most prominent and strongest
international competitors while Markor Furniture International and Qumei Group were the most
competitive local furniture brands in China (Prange, 2016). Using descriptions of these companies

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in the study, a perception map of these companies in China alongside the perception of IKEA by
Chinese locals was made in order to make sense of the marketing strategies IKEA undertook in
response to its low competitiveness it had in its initial entry in China.

Company Country Brand Perception

B&Q Great High quality, stylish, low-priced
Britain
OBI Germany High quality, fully assembled, high-priced
Qumei Group China High quality, medium to high-priced
Markor China High quality, low to medium-priced
Furniture
International
IKEA Sweden High-quality, DIY assemble, high-priced (extreme)

Source: Prange, 2016

Figure 1. Perception Map

(Based on Prange, 2016)

From the perception map, it becomes apparent that relative to other large furniture businesses in
China, IKEA has not been living up to its desired position in the market as the provider of low-
priced high quality furniture. Even worse, IKEA’s prices were much higher than that of competitors’
and the typical Chinese customer had a significantly lower purchasing power compared to their
European counterparts.

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Problems with IKEA’s Marketing Strategies in China

With regards to the product range of IKEA, the company could afford to standardize their product
range in European markets given the similarity in lifestyle and preferences of customers in those
markets. IKEA’s standardized product range only differs in 10% of the countries it operates in with
the other 90% of countries being offered the same product range (maakentingu., 2011).

In China, however, the same product range could not be applied as the living spaces in China were
drastically different from the typical spaces found in Europe. For example, when IKEA first opened
in Shanghai in 1998, the company realized that the standard-sized beds that were sold in most of its
European markets were not suitable to the cramped apartment living spaces that most of Shanghai’s
population were accustomed to (Pan, 2015). These finer details with regards to the specific market
peculiarities were not considered by IKEA and thus losing the marketability of certain product lines.

In China, IKEA recognized the popular use of public transportation by Chinese customers, as
opposed to the frequent usage of personal vehicles in European and US markets that allowed IKEA
to strategically place stores outside city centers to reduce expenses on land (Chu, 2013). As
Recognizing this overarching behavior among the Chinese population of its widespread use of
public transport, IKEA decided that repeating the same marketing strategy was risky and that
changes regarding the distribution channels were required for Chinese consumers to conveniently
access stores and improve marketability of products.

For IKEA’s targeted market segment, which was China’s middle class majority, the “low” prices
that IKEA marketed was actually much higher than that of other competing furniture brands. For
example, a sofa sold at RMB3,299 in IKEA was priced around RMB1,800 to 2,500 at a regular
store, such as the OrientHome or the ThirdRing furniture in Beijing (Wei, 2007). Furthermore,
IKEA failed to realize that the purchasing power of the middle class of China was much lower than
the purchasing power of middle class societies in European markets (Prange, 2016).

The upper class minority also shared the same distaste for the marketed “low” prices that IKEA
emphasized in their marketing campaigns and tools. The reason behind this distaste is the embedded
cultural belief among the rich of China that price of products is greatly attributed to the quality of
that produced, so for IKEA to market their products as having low prices only lead to the image that
IKEA products had low quality. Hence, this lead to many upper-class Chinese consumers to
disassociate themselves from IKEA products.
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In most markets such as those in Europe, IKEA utilizes its product catalogue as a main marketing
tool. However, in China the product catalogues only gave competitors the chance to steal product
ideas and make similar ones or knock-offs. These knock-offs would then be easily be sold at the
fraction of IKEA’s prices, significantly posing a threat to the sales and profits of IKEA.

Ulf Smedberg, an IKEA China marketing manager stated that the problem with IKEA’s catalogues
was that it was fairly easy to view and plagiarize. A number of local furniture stores even use
IKEA’s own product catalogues and tell customers that they can produce and sell the same IKEA
products at much lower costs and prices. They simply lowered the price, changed the product name,
slightly modified the design and sold the product as their own, posing as a serious threat to the sales
performance of IKEA (Li, 2007).

PEST Analysis of IKEA in China

Given the problems faced by IKEA in the ineffectiveness of their standard marketing strategies in
the Chinese furniture market, it would be essential to note the relevant external factors that were
taken into account when making adjustments and changes in their marketing mix. The PEST
analysis, namely the analysis political, legal, social, and technological factors is essential in seeing
how some external factors lead to specific changes in the marketing mix.

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 Political

During the 1980s, China started developing and improving on intellectual property legislation, but
the actual implementation and enforcement of copyright laws and intellectual property rights
became a difficulty for the Chinese government to do (Defrancesco, 2012). Despite these attempts
to create new copyright laws, China is still considered as a hotbed for copyright law
infringements, with the country consistently being in the top three countries with the highest
copyright piracy rates (Goff, 2017).

This lack of intellectual property rights in China made it easy for local companies and small
furniture retailers to copy the designs of IKEA products. This caused a backlash effect of the
distribution of their catalogue, as it became a “cookbook” for other manufacturers to copy (Wei &
Zhou, 2007).
Economic

Economic reforms in the late 1970s such as trade liberalization and market structure reforms in
China allowed the Chinese economy to grow, with gross domestic product (GDP) values
increasing rapidly as a result of these economic reforms. This growth in GDP values is shown in
Figure 2 below.

Figure 2. GDP of China (1999-2017)

Based on Figure 2, it can be seen that the purchasing power of the Chinese population has been
generally increasing even from 1999 to 2004 as indicated by the increasing GDP per capita
values. 10
 Social

There was already an existing demand for foreign, particularly Western-styled, products in China.
Chinese consumers favor western styles and often try to emulate them in many areas in their life
including furnishings. Since the resulting trade liberalization in China during the early 1980s
which opened up greater opportunities for foreign exchange of goods, it became apparent that
there has been a growing demand and preference of Chinese consumers of Western products
(Fenton, 2014).

With regards to the living conditions of the average Chinese consumer, more specifically their
living spaces, the average living space of an individual in China is approximately 32.9 square
meters, with Shanghai having a surprisingly lower average living space per person of 24.16 square
meters (GBTIMES, 2015).

In terms of mobility and transportation, most Chinese prefer to use public transport such as metro
lines and railways as their main modes of transport, with China ranking only 73rd in 192 countries
with the highest vehicles per capita (MEPPRC, 2017).
Technological

Technological advancements in the 1980s resulted in the rise of e-commerce platforms online. In
China, the most apparent form of technology that became the staple for promotions were
microblogging websites such as Weibo and Wechat (Madden, 2011).

IKEA’s Changes in Marketing Mix

Reducing product range (product)

As Ian Duffy, CEO of IKEA in the Asia-Pacific region said after this change in product range, the
aim of IKEA in its localization in China is to appeal to customers’ tastes and preferences. As a result
of the adverse effects of the standardized product range not being appropriate to the Chinese market
due to cultural and lifestyle preferences, IKEA selected only 7,500 out of the 10,000 items that
suited the lifestyle preferences of Chinese consumers (Prange, 2016). This was in response to the
limited average living space per person in China as shown in the PEST analysis. For example,
IKEA observed that most Chinese consumers in Shanghai mostly live in cramped apartment spaces,
so in response to this IKEA Shanghai limited its product sizes and significantly cut down the variety
of products being offered, focusing mostly on small to medium sized products that would be
suitable to these cramped living conditions.

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Strategically placing stores near metro networks (place)

Recognizing the overarching behavior among the Chinese population of its widespread use if public
transport rather than using private vehicles or cars as shown in social factor of the PEST analysis,
IKEA situated its stores and outlets along the outskirts of cities which are linked by metro networks,
rail, and other modes of public transportation in order to make stores more accessible to Chinese
consumers. As a result, foot traffic in IKEA stores experienced an increase of 25%, meaning that
stores are now more accessible to Chinese customers. On an average day, the IKEA store in Beijing
has 28,000 visitors and on the weekends 30,000 to 32,000 visitors (Hatton, 2013).

Significantly lowering prices (price)

Since the standard prices that were perceived as low in European markets were perceived as high by
middle-class consumers in China, IKEA had no other choice but to drive down prices to stay true to
their brand image as a company that provides low priced high quality furniture and to be
competitive against other local and international brands (e.g. B&Q, Markor, Qumei, etc.). Since
2000, IKEA in China reduced its prices by more than 44%. For instance, IKEA dropped the price of
its “Lack” table from 120 RMB to 39 RMB (Prange, 2016). This big drop in prices was possible
due to the fact that 60% of IKEA products are manufactured in China, reducing tariff rates and other
transportation costs. According to the Chinese Business Review, IKEA’s China sales rose 35 % in
2003 after lowering prices nearly 10 %. and sales were up 50 % in the first three months of 2004
(Miller, 2004).

Emphasis on microblogging websites (promotion)

Instead of enforcing copyright regulation that would probably prove ineffective in China, IKEA
instead of placing emphasis on its printed catalogues for promotions, turned to Weibo and China’s
other microblogging websites for its main mode of promotions given their rise in China as a staple
for business promotions following technological advancements described in the PEST analysis. By
utilizing microblogging websites, IKEA was able to promote to a wider set of audiences and
lessened tendencies of idea theft. The microblogging sites even provided for a platform for
consumers to voice out complaints and increased direct interactions between the company and the
customers.

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Efficacy of New Marketing Mix

Since implementing its new marketing mix and strategies in China in 2002, IKEA’s yearly sales
revenue increased throughout the next years. Figure 3 below from the International Statistics Center
presents the sales revenue statistics of IKEA in China from the start of 2002 to the end of 2008.

Figure 3. IKEA China Sales Revenue (2002-2008)

(International Trade Center, 2011)

Unfortunately, sales revenue values for the years 1998, when IKEA first entered the Chinese
market, up until 2001 were not publicized, but sales revenue growth were indicated by the
Shanghai-based newspaper the DongFang Daily. According to their statistics, “From 2000 until
fiscal year 2005, the sales revenue of IKEA China increased by over three-fold”, showing that the
sales revenue greatly increased since the time the company drastically changed its marketing
strategies.

The graph shows that the IKEA sales revenue has continuously been increasing since 2002. From
the data and information so far, there is an evident correlation between IKEA’s change in marketing
mix and strategies and the company’s ever-increasing sales performance in China. However, there
could have been a host of factors that could have contributed to the sales revenue growth.

Firstly, as identified in the economic factor of the PEST analysis, the economic growth of China
since the 1980s have lead to the increasing GDP per capita, increasing the purchasing power of the
average Chinese consumer and hence could have contributed to the increased sales of the company
as customers could afford to spend more money than before.

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Secondly, the number of stores the company has distributed all over the country may have
contributed as well when IKEA decided to expand its brick-and-mortar stores around the country,
increasing the number of profit centers that expanded the company’s geographical reach. Despite
this, there is also evidence as to how the number of stores was not the main driver of sales
increases.

IKEA China currently has 24 stores across China. From 1999 to the end of 2004, there were only
two IKEA stores, namely in Shanghai which opened in 1998, and in Beijing which opened in 1999.
The third IKEA store only opened in 2005 in the city of Guangzhou. Although that the number of
IKEA stores remained constant from the years 1999 to 2004, based on Figure 2 the sales revenue
was still increasing, with sales revenue growth rates even peaking during the end of 2004. This
shows how IKEA’s increases in sales revenue was not a necessarily a result of its continued
expansion in China with its increasing number of stores, although its recent increases sales revenues
in China since 2005 have been accompanied with increases in the number of stores. Hence, it can be
said that the change in marketing mix and strategies contributed significantly more than the just the
number of stores the company expanded to.

Conclusion

To answer the research question “to what extent was IKEA’s change in its marketing strategies
effective in increasing sales revenue in the Chinese furniture market,” this paper took into
consideration both qualitative and quantitative factors that affected IKEA China in 1998, the year of
its entry into the Chinese furniture market, up until 2004 when IKEA had only 2 stores in China.

Because of the unfavorable brand perception of IKEA among Chinese consumers of IKEA as a
foreign luxury brand compared to other furniture retailers, the company evaluated all the external
factors in the PEST analysis that may have contributed to their underwhelming sales and
implemented a new marketing mix which deviated away from that of European markets but proved
to be effective as the company’ sales revenue increased subsequently, even when the number of its
stores and outlets in China remained the same from 1999 to 2004. However, it was noted that the
increasing purchasing power of Chinese consumers as indicated by the increase in GDP per capita
may have also significantly contributed to the increasing sales performance of IKEA throughout the
years.
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All in all, the ability of IKEA to take into consideration the different external factors and adjusting
their marketing mix and strategies according to these observed factors lead the company to improve
on its sales and re-position itself in the Chinese furniture market. Coupled with the increasing GDP
of China and the consequent increase of purchasing power among the growing middle class, IKEA
is most certainly set on its mission to provide low-priced high-quality furniture products for the
many.

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