Country Market Report Outline: IKEA
IKEA is a large multinational group of companies that focuses on providing its customers with high-quality furnishing products. The uniqueness of the retailer company lies in producing furniture, which can be easily arranged by consumers at home. It also manufactures appliances and home accessories and supplies the production through stores, IKEAs catalogs, via the web and apps, as well as directly to homes.
Ingvar Kamprad founded the company in 1943 in Sweden, and for September 2016, the IKEA runs 389 stores in more than 48 countries all over the world. The company was internationalized in 1963, when the first stores in Norway and then in 1969 in Denmark were opened (IKEA official website, 2016).
The initial strategy of the company was to supply quality well-designed furniture at prices lower than its competitors did. The cost-cutting methods in logistics and retail trade helped to achieve this concept. On the other hand, it faced some problems when tried to enter the market and apply standardization in the US. The IKEA had to change the strategy according to the local needs, because consumers had different preferences. For example, they wanted to buy larger beds and closets. Thus, the company had to transform its strategy and apply the differentiation principle. (Chu, Girdhar, & Sood, 2013).
Franchising a subsidiary company in Argentina will be a successful market entry step. This country is rich in natural resources; it also has qualified workforce and a large customer segment. The franchise mode of entry is the best solution because of import restrictions and a unique market niche of the company. Due to the demand of target audience, a key product line should include home furniture and children appliances. The major distribution channels are direct selling, home delivery, and personal outtake. The pricing strategy provides customers with high-quality goods at prices lower than the other furniture sellers do. The main promotion means are television and Internet advertising.
In order to enter the market of a new country, the strategic managers of the IKEA have to consider its social, political, and economic factors. Due to its large amount of natural resources and qualified workforce, Argentina is a country for the potential IKEAs franchise. Argentina is the worlds 25th largest economy and the second largest in South America. There are also rich sources of natural gas that makes the country attractive for investors, regardless of the high level of governments intervention into the private sector. Although the purchasing power of Argentinas consumers is expected to decline, the country tends to enter the period of stable growth, owing to the flow of investment.
On the contrary, there are some trade restrictions and risks, which are necessary to consider. The most influential among them are high inflation rate (over 20 percent), volatility of government policy, and legal risks (BMI Research, n. d.). The country has a membership in such mighty organizations as Organization of American States, the Inter-American Development Bank, Latin American Integration Association (ALADI), and MERCOSUR. Argentina was a founder member of the United Nations in 1945. As opposed to the General Agreement on Tariffs and Trade, Argentina joined the World Trade Organization in 1995. Moreover, it is a member of the Group of 15 (G15) and the Group of 20 (G20). Having recovered from the economic crisis (1998-2002), the financial system of Argentina bases on the exchange rate regime of managed floating without a predefined path for the exchange rate. This is a policy of a monetary aggregate, which lies in using regulative instruments with an aim to achieve an intended growth rate of the monetary aggregate (International Monetary Fund, 2006). In 1992 the last Peso, positioned at the market as the Peso Convertible, was introduced. At that time a fixed exchange rate between the Central Bank of Argentina and the United States was 1 USD = 1 Peso; this agreement expired in 2001. From 2002 to 2008, the rate fluctuated between 3 pesos per the United States dollar, 4 pesos in 2009-2011, 6 pesos in November 2013, and 6.5 pesos per dollar during December 2013. In October 2014, the exchange rate was approximately 8 pesos per dollar, by February 2015 it constituted 10 per USD and till December in changed into 13 pesos per 1 USD (Trading Economics, 2016).
As the latest currency forecast indicates, the Argentinean Peso will be traded at 15.50 by the end of November. In a year, the analysts expect it to grow to 15.96 and from 2015 to 2020 Peso will reach the 18.42 mark. In 2014 the value of royalty and license fees of Argentina reached 129544481.8 (BoP; US dollar). There is also a tax benefit for making a franchise agreement with the trade authorities in Argentina. It allows the local Argentinian company to pay a lower withholding rate on royalties and other fees (Trading Economics, 2016). Therefore, it would be better for the IKEA to establish a subsidiary company and pay the taxes under its name. The population still feels the outcomes of the recent crisis, so the appropriate pricing strategy should offer high-quality products at lower prices than those of the competitors. After the productive transformation was conducted in 2008, the furnishing business in Argentina started to recover. Until now there are nearly 2,600 companies, functioning in this area, but almost 90% of them are small. Their production process does not develop efficiently, and the marginal price is more expensive than in such multinational companies as IKEA (Trading Economics, 2016). The country has a strong potential in the forestry industry and positions itself as a wood exporter with a high value-added production. That is why buying materials from the local companies will be the best variant for the IKEAs subsidiary.
Changes in the governmental and law systems in the country hugely affect the business area. There are three main risks on the macro level: import restrictions that are not transparent and are often misused; increase in the exchange rate, which may cause further devaluation; and high level of nationalization. On the micro level, there is a risk of the decrease in purchasing power that appears due to the inflation (38% in 2016); the outflow of qualified workforce; as well as growing public and private account deficit (55% in 2016), which will not reduce in a short term (BMI Research, n. d.).
In the rate of Ease of Doing Business Argentina takes 121st place among 189 countries. One of the reasons for it is a complicated construction process that involves a long time, needed for getting the required permits, (341 days) and 21 procedures that are necessary to fulfill. The other influential factor is the process of registering property. In Argentina it takes 55 days on average and the quality of land administration is poor. When entering the furnishing market in Argentina, the IKEA should consider difficulties of the building process, the excessive level of tax rates, and long time needed for enforcing contracts (World Bank Group, 2016).
Corruption in Argentina is one of the most urging problems. During the period from 1990 to 2013 it constituted $6.2 billion country losses. High level of corruption affects the quality of services, namely in education, health, and transporting spheres. One of the most urgent measures, applied by the government through adopting an appropriate law, is making the information accessible and open. The other changes should concern the improvement of judiciary system, control mechanisms, and hiring processes. The main challenges the IKEAs business may face include non-developed judiciary system, insufficient law security of property, and difficulties in staff recruitment (Transparency International, 2016).
When developing a business model for a company, it is necessary to explore cultural peculiarities and differences of a host country. Argentina is a traditional country with its own rituals, customs, and cultural norms that affect the business area. One of the main tendencies in culture is individualism. It prevails over the group work and Argentina is the most individualistic country of all the Latin states. The other common features are high power distance and masculinity dimension. Executives and staff also appreciate certainty and try to avoid ambiguous situations.
In order to develop an efficient strategy of doing business, managers of the company have to be familiar with consumer values. The most common among them are relationships in professional and personal use, strong family culture, as well as precise attention paid to appearance and general look. Hofstede scores support all cultural dimensions that are mentioned above. The indexes of Uncertainty Avoidance, Masculinity and Indulgence (people enjoy their leisure time and have a positive attitude towards life) occupy the highest positions (ITIM International, n. d.).
The furnishing industry in Argentina is rapidly growing due to a sufficient supply of natural resources. That is why the IKEA should explore local competitors and develop a successful entry mode strategy. The local market is full of small manufacturing companies that are mainly family-owned. Since 2001 the furniture industry has maintained 60 percent of the growth rate due to an increased demand for the local market and government support. The domestic furniture market consists of two parts. The first part contains products made under the license of international leaders, while the second segment includes only Argentine goods.
Major local competitors for the IKEA are Mogano, Urgen Pet, Donna, and Oz Trade Solutions. Their main advantages include a sufficient supply of raw materials and a fixed adaptation to the needs of the consumers. However, the quality of the manufactured goods is low and therefore not relevant to the price. Due to this fact, standardized production and cost-effective producing processes represent the IKEAs competitive advantages. After the crisis, the level of furniture market substitution has remarkably grown. The country mainly imported furniture from Brazil and China. Due to the complaints of the Argentine Chamber of Wooden Industry, in 2009 the government introduced import restrictions, and, comparing to year 2008, the total amount of furniture import was reduced by $49 million. The amount of the imported goods has decreased, but the global furniture exporters from Brazil (Agroindustrial Iguatemi, Bisbati BR UP International) and China (Chang Yang Bathroom Co., Ltd, Gasg Sanitary Wares Co., Ltd.) still were the main representatives of Argentinas furniture import (Furniture market report, n. d.). Their main strengths include a fixed corporate image and a large number of loyal clients at the Argentine market. However, they have restricted the amount of imported production, so the IKEA can produce it and sell directly in the country.
The furniture business of the company will have a country-of-origin advantage because the Swiss quality is appreciated all over the world, so the parental company will implement its best practices, when developing a business in Argentina.
Mode of Entry
After considering all the issues mentioned above, one can conclude that the most appropriate mode of entry for the IKEA into the Argentinian market will be franchising, which means the establishment of the wholly owned subsidiary. The reasons for it areremarkable import restrictions, sufficient supply of raw materials from the local companies, and high in quality but low in cost production of the IKEA. Additionally, the company often uses the franchise model when internationalizing abroad and it has a long history of applying franchises (IKEA official website, 2016).
The major benefits of the chosen strategy will include getting acquainted with the target consumer group and its tastes, as well as diversifying the product line because of low-cost manufacturing and a unique market niche, occupied by IKEA due to production of home-assembled furniture. On the other hand, the established subsidiary company will face such disadvantages as local competitors, high taxes, and different cultural dimensions. In order to avoid uncertainty and profit deficit, the companys managers should accustom own business to the needs and traditions of the local market, reduce the extra money spending, and consult with the local juridical body about the peculiarities of doing business in Argentina. Overall, the best solution for the IKEA at the international market is to establish the producing company in a target country and purchase the materials from the local manufacturers in order to avoid high taxation and import restrictions. Moreover, the IKEAs executives need to design a successful mitigation strategy, so that they can prevent the potential risks such as a high level of uncertainty, dependence on one local supplier, and currency devaluation. The measures of prevention include finding an open informational system for both the customers and investors, cooperating with a few local markets on wood supply, and withholding the capital in dollar currency.
It is necessary for IKEA to define its target consumer group in a chosen country. The largest consumer segment in Argentina is people between 30 and 59, who still make money and can afford buying new furniture. This segment would be a target group. It is also important to consider a high level of digitalization in the country, where 28 million people out of 42 million of the overall population use the Internet. Thus, the operational managers have to divide the product supply into few channels: directly from the shops, via the Internet, and through web applications. Nearly 88 percent of the Internet users have Facebook accounts, so placing advertisements on this social network would be quite a successful marketing step. Digital marketing campaign (Search Engine Optimization) should base on the usage of the top search engines in Argentina. According to the official statistics, Google covers 94.54 percent that constitutes the biggest part. The other engines are Bing (2.04%), Yahoo (1.34%), and Babylon (1.07%) (Globalization Partners International, 2014).
As far as the main target consumer group is considered, a product line in the target countryhas to include home furniture, office equipment, and dishes. The manufacturing companies in Argentina are small and privately owned. Therefore, the inclusion of equipment production into the assortment would be unprofitable. Due to the fact that the middle-aged adults prevail over the other age categories and baby-boomers constitute 21 percent of the population (Globalization Partners International, 2014), home furniture, especially appliances for children and laundry goods, should be the main line of production.
The company guarantees the delivery of high-quality goods. In case of any misconception or defect, it offers a warranty for two or more weeks, depending on the type of a product. If customers have any additional questions, they may contact the company via the e-mail (IKEA official website, 2016). Due to the fact that more than a half of population regularly uses the Internet, there is no necessity to change the warranty system.
The key for the branding policy in Argentina lies in providing customers with high-quality commodities and goods at an affordable cost, because the main purpose of consumers is to choose a better product at a low price. Cutting expenses on the transportation of materials and removing the retail traders from the supply chain will help to promote cost reduction.
The pricing strategy should base on the average income of the population. In Argentina, it is evidently smaller than at home country, so the IKEA has to make the prices lower in order to increase the purchasing power of the consumers. The main companys competitors sell goods worse in quality at a higher price. Thus, the IKEAs pricing strategy provides it with a competitive advantage.
There are many advertising agencies in Argentina, which can be used by the IKEA. Although printing media is the most popular method because of the peculiarities of the target audience, the company also needs to focus on television and internet channels of advertising. In order to choose a reliable advertising agency, the company can address the Argentine Association of Advertising Agencies (Argentina trade promotion and advertising, 2016).