Ikea’s entry into south america

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Ikea’s Entry Into South America

Executive Summary

Ikea seeks to continue expanding its retail presence around the world through worldwide franchising of the Ikea concept. We propose an immediate expansion of Ikea into South America, specifically a storefront in Brazil. Using a balanced scorecard approach we address the primary issues in such an expansion. We also believe Brazil is a logical candidate for longer term expansion on the manufacturing (sourcing) side of Ikea and provide supporting analysis for such expansion.

Although we have limited access to actual Financials, we believe the initial investment required to be about $20 million. Sales estimates exceed $70million per year. Since costs should also be typical of other sites around the world, expected earnings after tax are 8% of sales.

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In addition to the need for access to capital, a well-located site for retail activity must be secured. This site would be at the edge of Rio de Janeiro or Sao Paulo near highway access.

Marketing Strategy: "All marketing is based on the IKEA business idea: We shall offer a wide range of home furnishing items of good design and function, at prices so low, that the majority of people can afford to buy them" Although Brazilian customers are used to negotiating on price, we feel a fixed price retail store will do well since the prices are low, and the shopping experience is primarily self-service.

Most of the over 6000 products will continue to be produced in Asia and Europe. All products will continue to come through Ikea’s distribution channel. Since the majority of furniture comes in a flat package, the distribution method has been proven to be cost effective. The possible need for regional distribution center is a risk factor that would increase investment required.

The regulatory environment in Brazil allows foreign investment and the repatriation of profits. With respect to people, Ikea has a strong culture. Ikea is a value driven company that values hard work. About 400 Employees will be hired for the first Ikea Brazil store. Training is available through Ikea University, which is uses traveling instructors and on line training materials. Overall Brazil looks like an attractive entry point into the South American furniture market.

Background

Founded in the late 1940’s by Ingvar Kamprad created the concept of IKEA, a furniture company that provided quality fashionable furniture at prices everyone can afford. Although its business model at the time was much different then the mega stores today, this fundamental approach to furniture has remained the same.

Despite its very risk-adverse nature, IKEA became the first furniture company to expand internationally. High bulk to value, high transportation costs, and susceptibility to damage are all issues IKEA was able to overcome with its innovative approach of selling furniture collapsed flat boxes.

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