Should IKEA focus more on online than city-centre stores?
The Retail Bulletin and ResearchFarm have teamed up to bring you an insider view into IKEA and the way in which online retail will reshape its business model.
ResearchFarm’s Shammi Luhar writes that it will be crucial for IKEA to alter their traditional business model, in the face of strongly growing e-commerce and online competition in the furniture market. While IKEA currently plans rapid out-of-town store expansion, the retailer should arguably focus more on online and to a lesser extent on city-centre stores. Clearly, IKEA needs to maintain its position as the reference point for furniture shoppers in the bricks and mortar world but it should also invest in website development, online service expansion and integrating the sales channels.
The world’s leading furniture retailer, with sales of €27.5bn (to August 2012), is targeting annual growth of 10% over the next decade. The IKEA board intends to increase like-for-like sales by 5% from the existing store estate and to open new stores to deliver a further 5% growth in sales. The company plans to amass 500 stores worldwide by 2020, compared to its current 338. The report shows that overemphasis on store expansion is the wrong route for IKEA to go down.
Crucially, e-commerce in the furniture market is growing at a rapid rate, with IKEA experiencing a 25% growth in total online sales in the UK in the last year. IKEA’s online store is only available in 12 of the 40 countries in which it has a presence. In the countries where online shopping is available, only a select product range is displayed and the potential of mobile applications is not yet exploited. Therefore, Luhar continues, “were IKEA’s online sales to double from the current level of 2% of total sales and keep their strong sales momentum, this would all but cover the 5% growth targeted from new store openings, sharply reducing the need for costly new store development.”
There are three main issues IKEA needs to tackle to ensure a smooth transition to a true multichannel business.
• Firstly, IKEA must strategically integrate online operations into the existing physical store model to drive up footfall and offer complementary growth through services such as Click and Collect.
• Secondly, IKEA must improve their last mile fulfilment. Currently the retailer does not offer a competitive home delivery service like Amazon and eBay, and still charges customers according the weight of their order. In Germany, IKEA’s most important market, pureplay competitors such as Home24 already offer a completely free delivery service.
• Finally, in order to slash delivery times, IKEA’s supply chain is in urgent need of revision. To cut costs and keep inventory levels low, closer cooperation between production stages and more real time data mining will be necessary.
Although the online store is of massive significance for IKEA’s future growth plans, physical store expansion plans remain critical further afield. Shammi adds: “Opportunities to expand the racecourse store model into emerging markets must not be missed, as there are large levels of untapped demand in the Indian and Chinese markets”.
Back in Europe, the current decline of the high street is putting downward pressure on real estate prices in city centres, opening up another opportunity for new store development and format diversification such as IKEA’s city centre stores. IKEA already have city centre stores in Hamburg and Coventry and such ventures give the retailer scope and potential to better target the range and recreate a new outlet type, where more accessory items are sold.
The internet will affect IKEA’s business model in other ways too. The soaring ownership of tablets means that the retailer’s app offer needs an overhaul and the catalogue needs to become entirely digital. A transactional service, encouraging customers to purchase goods using an IKEA app should also include a mobile payment option, so customer would be able to use IKEA’s in-store Wi-Fi to cut checkout-waiting times.
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