Monday, June 25, 2012

Maeve Dineen: Irish retailers have much to learn from 'category killer' IKEA -

IKEA's latest set of results makes for fascinating reading. The Dublin store saw its profits fall 40pc to €6.8m -- but the company still posted a turnover of €102.8m last year, which means that we were spending about €2m a week at the Swedish superstore.

That is a lot of flat-pack furniture to come out of one, admittedly huge, shop. Even in the middle of the worst recession this country has experienced in generations, the equivalent of 50 cent per adult is being spent in the Ballymun shop every week.

IKEA's success is universal. The UK-based research company Mintel calculates that IKEA has 9.6pc of the market share, despite only having 18 stores in the UK. It has also found that more than one-third of British families have bought items from IKEA in the past three years and more than two-thirds visit the shop more often than they go to church.

How do they do it? The answer is a combination of sales techniques that run the gamut from the good and bad to the ugly. Let's take three of each.

The good:

IKEA offers fantastic service compared to almost any rival. The assistants rarely sit around looking bored and being rude. The stores are warm and the displays are excellent.

The prices. There is no doubt -- IKEA is cheap and we all need value at the moment.

Design. Most Irish people live in modern and small houses that were built in the past few years. IKEA focuses on furniture for small spaces and devotes a lot of the store to storage solutions. The furnishings are funky and bright and a million miles away from the faux Georgian fare found in many Irish stores.

The bad:

Quality. Too often, this is patchy. But as the saying goes: you get what you pay for.

Warehouse shops. Building huge warehouses on the edge of motorways makes commercial sense for companies, but not for society. If every shop did the same thing, we would end up living in Los Angeles, without the weather or the film stars.

Queues. The generally good service breaks down here and means that a visit can end on a low note. A survey carried out in the UK showed that one in three couples has a row when they go to IKEA. It's easy to see why.

The ugly: IKEA has brought tax avoidance to an art form. The Swedes may have some of the best social services in the world, but IKEA's founder lives far away from high-tax Sweden, in Switzerland.

Slave labour: IKEA has used it. It developed links with the communist German Democratic Republic in the 1970s, opening manufacturing facilities which used political prisoners to construct sofas. It is currently investigating reports that it used political prisoners in Cuba to make products.

The meatballs. Disgusting. Enough said.

IKEA is often called a category killer because it destroys almost all competition for 50km in any direction. Like it or not, Irish companies are going to have get used to competing with the likes of IKEA in future because the memorandum of understanding dictated by the troika includes provisions for more superstores like IKEA. This will present enormous challenges to many Irish retailers that have been protected from the sort of extreme competition posed by giant rivals.

These are already tough times for Ireland's brave retailers. Every report predicts consumer demand will shrink again this year and many economists, including the ESRI, are beginning to believe that spending habits are changing for good. With customers losing their jobs or emigrating, Irish retailers are badly placed to resist foreign companies with deep pockets, but the lessons from IKEA are stark.

By failing to meet the demand for well-priced furniture that reflects 21st-Century expectations, many retailers left themselves vulnerable when the inevitable challenge came.

Retailers who suspect they are also vulnerable to the arrival of a category killer on these shores should start thinking now about how to hang on to their customers.

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