What do Swedish meatballs and Scandinavian style furniture have in common? Most people will say ‘IKEA’ and that’s correct. IKEA, the largest retailer of home furnishing known for its flat-pack furniture, reported its revenue increased by 11.2% to 31.9 billion euros in 2014-15 and has 384 stores in 48 countries. How does IKEA manage the distribution and logistics of this massive number of stores?
Distribution System and Logistics
IKEA’s value proposition is to design and offer functional furniture with innovative design and low prices. To achieve this objective, most parts of the furniture are designed to be self-assembled to reduce storage requirement and transportation cost. Secondly, IKEA focuses on optimising its supply chain by collaborating with global manufacturers on bulk production to decrease cost and maintain high quality standards (Baumann 2005, p.25). Lastly, IKEA’s distribution centres are strategically located along highways, railway tracks or near ports to facilitate transportation of goods from manufacturers (Maloney 2002).
Generally, furniture is a specialty purchase which requires more thoughts and customer’s involvement on product assessment. Therefore, selective distribution channels via IKEA stores have been established to provide customers with physical retail experience and furnishing ideas through showrooms (Iacobucci 2013, p.130).
The Ikea Model
IKEA started the product franchise model which enables multisite expansion to achieve business sustainability (Iacobucci 2013, p.138). Although majority of the stores are being controlled by IKEA Group, franchising has given 12 other companies the opportunity to own and operate IKEA stores globally.
The model is beneficial to franchisor and franchisee as it allows expansion based on established business solutions using other people’s capital (Du Toit 2005, p.26). Under the franchise system, IKEA provides retailers with access to IKEA trademarks, product ranges and proven retailing solutions in return for royalties (3% of sales) and customers’ feedbacks from retailers (Kowitt 2015, p.172).
IKEA Group adopts pull strategy on its self-managed stores by providing price discount and loyalty points to customers while the push strategy such as quantity discount is being implemented on franchise outlets (Iacobucci 2013, p.131).
Have you ever walked into an IKEA store to purchase an item but ended up with a trolley of things?
IKEA is truly gifted with creativity in its store layout design that aims at capturing shoppers’ interest. The stores are equipped with amenities such as daycare, restaurants and inspirational showrooms which keep shoppers occupied whole day including napping on the display furniture.
Besides selection of location, place marketing strategy emphasizes the importance of adopting customer-centric approach in promoting the place (Teller et al. 2010, p.126). Therefore, IKEA’s main aisle has been designed to curve every 50 feet to engage customers’ interests. Additionally, lightweight items in the market hall are jumbled in bins to create impression of volume and inexpensiveness to influence buying behaviour.
Catalogue is a popular source of home furnishing inspiration and offers a broad range of experiential values and visual appeal to consumers (Mathwick, Malhotra & Rigdon 2001, p.51). As suggested by Kushwaha and Shankar (2013, p.83), traditional channels such as stores and catalogues generate higher monetary value for low risk utilitarian product category such as home furnishing.
IKEA has broaden its realm of multichannel marketing to include the convenience of online purchasing to provide product information and create awareness. The complementary effect of web channel enhances overall hybrid shopping experiences of customers who prefer a blend of multiple channels (Cao 2012, p.1001).
Challenges and Adaptation
IKEA’s adaptation of strategy in China has paid off with huge import tax savings when it relocated the production facility of major items to China.
However, its cultural adaptation in Saudi Arabia was heavily criticized over the removal of women in their catalogues and this discriminatory action has stirred political controversy.
As IKEA expands its empire to create ‘better everyday life for many people‘, it struggles to maintain the Swedish culture at the heart of the business model and corporate values.
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