Can a retail store be too popular? For IKEA in China, the answer is yes as too many customers and crowded aisles are hurting sales. Why? Over its decade there, IKEA has become an entertainment destination more than a serious furniture-shopping place.
Consumers check out displays to get ideas on how to decorate homes. Some even nap on beds. Families buy 25-cent hot dogs while kids play in the clean and air-conditioned environment. IKEA has become a mini Disneyland for cash-starved Chinese.
At first glance, packed stores would seem to translate into big growth for IKEA. Their revenue there is growing 20 percent a year and they plan to double their stores to 16 by 2015. Unfortunately, much of the growth is due to discounting and the selling of low margin products as I told CNBC anchor Oriel Morrison on a recent Cash Flow appearance.
Many consumers flocking their aisles cannot afford fat margin furniture items. Instead they take photos, or even grab IKEA catalogs, and copy products at cheap custom furniture stores. If they do spend, they buy dollar bathmats and drinking glasses. IKEA now sells coffee tables that cost less than a Starbucks latte.
Basing a sales growth model on discounting and cheap products is not a viable long-term strategy. Several hundred upper middle class consumers told my firm in interviews they are put off by IKEA’s large crowds and cheap prices. In other words, IKEA is too expensive for the majority of consumers, but too cheap for real spenders.
However, unlike Best Buy and Home Depot that failed in China because they did not adjust to consumer preferences and domestic competition, IKEA management is innovating new business models by going into real estate development to fill two weak areas in the marketplace.